October 07, 2011

Dr. Syed Y. Ahmad (Appellant) v. Her Majesty the Queen (Respondent)

Tax Court of Canada
2002 DTC 2065
September 11, 2002

(Court File No. 2001-4304(IT)G.)

Inclusions in income — Retiring allowances — Interest — Taxpayer demoted by his employer due to the interference of that employer’s major customer — Taxpayer later being awarded substantial general damages with pre-and post-judgment interest, following an action by him against the said major customer for tortious inducement of breach of contract — Whether such general damages to be included in taxpayer’s income as a “retiring allowance” — Whether the pre-and post-judgment interest to be included in taxpayer’s income as “interest” under paragraph 12(1)(c) of the Act — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 12(1)(c), 56(1)(a) and 248(1).

The taxpayer worked for Atomic Energy Canada Limited (“AECL”) as a nuclear researcher for 20 years from 1967 to 1987. In 1984 he was demoted by AECL due to the interference of AECL’s major customer, Ontario Hydro. In August 1986, he brought an action against Ontario Hydro for inducement of breach of contract. In 1987, he was wrongfully dismissed by AECL, and received $102,000 as a settlement. In August 1993, he was awarded by the Ontario Superior Court general damages of $488,525, libel damages of $40,000, pre-judgment interest of $388,212, post-judgment interest of $199,371, and per diem interest of $6,329. In July 1997, this judgment was affirmed by the Court of Appeal for Ontario. In reassessing the taxpayer for 1997, the Minister included in his income the said general damages and interest (other than approximately $45,000 of interest relating to the libel damages). The taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was allowed in part. In Overin v. The Queen it was suggested that the following two-prong test be used for determining whether or not damages constitute a “retiring allowance” as defined in subsection 248(1) of the Act: (i) But for the loss of employment would the amount have been received? and (ii) Was the purpose of the payment to compensate for a loss of employment? In the case at bar the taxpayer received damages from Ontario Hydro not because he lost his job, but because Ontario Hydro wronged him in stripping him of the ability to ever conduct nuclear research. Looking then at the test in the Overin case, but for the loss of employment, would the general damages in the instant case have been received? The answer to this question was yes. Two years after the induced breach of contract by Ontario Hydro, the taxpayer had continued on as an employee of AECL. He was only dismissed by AECL after he commenced proceedings against it on the advice of counsel, since he was having difficulty obtaining information from it for use in his proceedings against Ontario Hydro. But had he continued his employment with AECL, there would certainly still have been damages for inducement of breach of contract on Ontario Hydro’s part. And although it was not necessary to apply the second test set out in the Overin case (i.e., was the purpose of the payment to the taxpayer of $488,000 to compensate for a loss of employment?) the answer to that question was no. The calculation of this amount included three years while the taxpayer was in fact still employed at AECL. Clearly the full amount, therefore, could not possibly have been for loss of employment. In addition, the fact that this method of calculating the damages (by reference to salary) was used was not conclusive of the fact that the damages were for loss of employment. Such damages represented much more than mere compensation for loss of employment. Put another way, the loss of a particular job with a particular employer is contemplated by the “retiring allowance” definition, but not the loss of a career as a nuclear researcher. The latter was a much greater wrong that fell well outside the definition of a “retiring allowance”. As for the interest issue under paragraph 12(1)(c) of the Act, the Supreme Court of Canada established the starting point for the determination of the nature of an interest payment in Re The Validity of Section 6 of the Farm Security Act, 1944 of the Province of Saskatchewan. In that case it was held that “Interest is, in general terms, the return or consideration or compensation for the use or retention by one person of a sum of money belonging to, in a colloquial sense, or owed to, another . . .”. The case at bar, however, was concerned with damages arising in tort, and not in contract. The taxpayer, therefore, did not have any right to a principal amount which vested in him prior to judgment. Failing that, there could be no interest until judgment. The pre-judgment interest in this case, therefore, had the character of being part of the taxpayer’s damages at large, and could not be viewed as a separate income item. In view of all of the foregoing, the Minister was ordered to reassess on the basis that the general damages in issue did not constitute a “retiring allowance” under subsection 248(1) of the Act, and the pre-judgment interest was not “interest” for the purposes of paragraph 12(1)(c) of the Act.