T-632-73
Charles A. Specht (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Collier J.—Vancouver, January 30
and February 25, 1975.
Income tax—United States citizen—President of Canadian
company—Agreeing to resign office—Receiving annual pay
ments from company for five years—Returning to United
States and accepting employment—Continuing on Board of
Canadian company—Whether assessable as non-resident for
annual payments—Income Tax Act, ss. 31, 31A; Canada—
U.S. Tax Convention Act, 1943, S.C. 1943-44, c. 21,s. 2, and
Sch.; (Convention) Art. VI A and Protocol, s. 7.
The plaintiff, a citizen of the United States, was president of
a large Canadian company from 1963 to 1968 under a contract
of employment providing for an annual salary of $120,000 and
provision for his retirement on pension. In 1968 he was asked to
vacate the office of president and accept another position in the
company at the same salary. After his refusal to do so, the
parties reached an agreement, under which the plaintiff was to
resign as a full time employee, continue as a director for the
time being and receive $40,000 a year for five years, whether or
not he accepted employment elsewhere. Resigning as company
president, he returned to the United States and became presi
dent of a company there. He resigned as a director of the
Canadian company in 1972. A payment to him of $40,000 in
1969 was included in his U.S. tax return and, under protest, on
a Canadian tax return. The Minister's assessment of the plain
tiff for income in that amount was affirmed by the Tax Review
Board. The plaintiff appealed.
Held, allowing the appeal, the assessment relied on section
31A of the Income Tax Act and particularly on paragraph (d),
covering a payment on or after the taxpayer's retirement in
respect of loss of office or employment. But the plaintiff did not
go into "retirement" from his occupation with the Canadian
company or his occupation as a business executive. The ques
tion of his "retirement", in the sense of withdrawing from his
employment at a stipulated age or in the sense of withdrawing
generally from his occupation as a business executive, had been
dealt with in the contract of employment. Under the subse
quent agreement, what the plaintiff did was to resign his office.
The payments agreed upon were not made in respect of the
"loss of office or employment". A compromise was reached,
under which the benefits or pension rights otherwise payable
under the contract of employment were reduced to five years,
at the figure stipulated. The assessment should be set aside as
falling outside the provisions of section 31A. The same result
followed under the Canada-U.S. Tax Convention. If the plain
tiff had remained with the Canadian company until retirement
at 65, any payments to him under the contract of employment
would have been in the nature of a "pension" within Article VI
A of the Convention, as well as a payment within section
31A(c)(i) of the Income Tax Act. Instead of the right to
lifetime payments, the plaintiff agreed to accept periodic pay
ments, in consideration of a smaller total amount over a shorter
period of time.
Curran v. M.N.R. [1959] S.C.R. 850, applied. Jackson v.
M.N.R. [1951] Ex.C.R. 52, distinguished.
INCOME tax appeal.
COUNSEL:
J. Barbeau and G. Sutherland for plaintiff.
T. E. Jackson, Q.C., for defendant.
SOLICITORS:
Barbeau, McKercher, Collingwood & Hanna,
Vancouver, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
COLLIER J.: The Minister of National Revenue
assessed the plaintiff's income tax for the year
1969 on a total amount of $40,000 received by
him, a non-resident, in that year from a Canadian
company. The plaintiff's position is that the
monies received were a "pension" within Article
VI A of the Canada-U.S. Tax Convention, and
therefore exempt from taxation in Canada. The
Tax Review Board confirmed the Minister's
assessment. This appeal followed.
The plaintiff is a business consultant and execu
tive. He was born July 30, 1914. He is and has
always been a citizen of the United States. Prior to
September 1963 he had been president and chief
executive officer of a large American company.
On September 5, 1963 he became president and
chief operating officer of MacMillan, Bloedel and
Powell River Limited ("MacMillan Bloedel") a
large well-known Canadian company. A written
employment contract was entered into. The
preamble sets out that the plaintiff was president;
that "The Company desires that Mr. Specht shall
continue in its employ in the capacity of President
or such other capacity or capacities as the Com
pany may from time to time deem to be in its best
interest"; that the plaintiff was prepared to agree
he would retire at 65, he would not terminate his
employment without the consent of the Board of
Directors, and after termination he would not
engage in business or be employed without Mac-
Millan Bloedel's consent and approval.
The mutual covenants in the contract did not
refer to any particular office or position held or to
be held by the plaintiff. Generally speaking, the
term "employment" was used. The salary to be
paid was not set out.
I summarize the main covenants.
1. The plaintiff agreed to retire at 65. An exten
sion could be mutually agreed upon.
2. If the plaintiffs employment was
(a) terminated by him with the consent of the
Board or
(b) terminated by MacMillan Bloedel (other
than for cause or pursuant to the retirement
clause) or
(c) terminated by retirement at age 65, or later
then the company was to pay a monthly sum to
the plaintiff for life. The method of calculating
this amount was set out. Loosely speaking, it
was based on '/s of his average earnings over
certain specified periods. If the plaintiff died
while in receipt of these payments, his widow,
while unmarried, was to receive ' of the month
ly sum for her life.
3. On termination of his employment, the plaintiff
was not to conduct himself or be engaged in any
activity "harmful to the interests" of MacMillan
Bloedel; he agreed to be available to give his
opinion and advice on corporate matters.
4. The plaintiff agreed, that after termination of
his employment and "while entitled to any benefit
under this agreement" not to engage in any busi
ness or take any employment without the consent
of the company. Such consent was not to be unrea
sonably withheld. This provision was to be inappli
cable if the plaintiff at any time surrendered his
rights, including those of his widow, under the
agreement.
5. If the plaintiff died while still in the employ of
the company, his widow, while remaining unmar
ried, was to be paid certain sums during her life.
6. If the plaintiff was in breach of any term of the
contract, and, on notice to remedy, failed to do so,
then the agreement was at an end and "the Com
pany shall be under no further obligation to make
any payment hereunder" either to the plaintiff or
his widow.
The plaintiff continued as president until April
30, 1968. He was a director, and a member of the
Executive Committee of the Board of Directors.
He was paid $120,000 per year. MacMillan Bloe-
del had several pension plans, schemes, or funds
covering many of its employees. The plaintiff was
not covered by, nor was he a participant in, any of
those plans or schemes. In the spring of 1968 the
plaintiff was asked to vacate the position of Presi
dent and become the Chief Financial Officer. He
refused to accept this post. He felt it to be some
thing of a demotion, and if he had accepted the
change, a black mark on his business career. When
he started with MacMillan Bloedel he had hopes
of becoming the Chief Executive Officer on the
retirement of the incumbent. Among other things,
the Chief Executive Officer had not retired when
expected. The plaintiff's salary as Chief Financial
Officer was to be the same.
As a result of the disagreement and impasse the
plaintiff and MacMillan Bloedel came to the fol
lowing agreement dated April 29, 1968 (Exhibit
2):
You [the Plaintiff] undertake to:
(a) Resign as a full time employee of the Company, effective
as of April 30. This will give you the freedom of action which
you will require in order to make other arrangements.
(b) Continue as a member of the Board of Directors and a
member of the Executive Committee until such time as you,
or the Company, may decide otherwise. You will be reim
bursed for your expenses but will receive no fees or salary for
these particular services in view of the fact that you will be
receiving $40,000 per annum for five years as hereinafter
provided. The receipt of such sum, however, does not obligate
you to remain on the Board of the Executive Committee.
(c) Provide me with an undated resignation from the Board
of Directors and the Executive Committee.
The Company undertakes to:
(a) Pay to you at the customary intervals, your salary at the
present rate to the end of August 1968, irrespective of
whether you obtain other employment.
(b) Pay you as from September 1, 1968, at the customary
fortnightly intervals, at the rate of $40,000 per annum for
the five years ending August 31, 1973, making $200,000 in
total. These amounts will be paid irrespective of whether or
not you accept employment elsewhere. In the event of your
death during such five-year period any balance remaining
unpaid of the $200,000 will be paid to your estate. In the
event of your resignation from the Board of Directors or the
Executive Committee the Company will pay to you at that
time the balance remaining unpaid of the $200,000 in such
instalments as may be mutually agreed upon. It goes without
saying that you will at all times scrupulously refrain from
disclosing any confidential information now within your
knowledge as President of this Company.
(c) Remunerate you on a mutually agreeable basis for any
special services which you may be asked to provide and
which you may be willing to undertake in the form of
consultation or otherwise.
Clause (b) of the company's undertakings was, in
September of 1968 by agreement, varied slightly
(Exhibit 3). The $40,000 payments were to com
mence January 1, 1969 and end December 31,
1973. Quarterly payments of $10,000 were to be
made.
The plaintiff testified that, while the $200,000
figure was an arbitrary one, it was intended to be a
settlement of "my pension rights". Mathematically
at least, the annual sums for five years, were
one-third of the salary he had been receiving
before his resignation, or the termination of his
employment.
The plaintiff in July of 1968 established resi
dence in the United States and has been a resident
there since. He disposed of his house in Vancouver
in September, 1968. He became the president and
Chief Executive Officer of an American company
following his resignation set out in Exhibit 2. He
remained a director of MacMillan Bloedel and a
member of the Executive Committee of the Board,
attending regular meetings each year, until 1972.
In that year, because of a conflict of interest, he
did not stand for re-election as a director.
In 1969, pursuant to Exhibits 2 and 3, he
received in the United States the sum of $40,000.
He included that amount in his return filed with
the income tax authorities in the United States.
He was requested to file a return in Canada in
respect of the receipt of the $40,000. He reluctant-
ly, and under protest, did so. The assessment under
appeal resulted.
In the defence it was pleaded alternatively that
the payment of $40,000 in 1969 was made to the
plaintiff by virtue of his office as a director of
MacMillan Bloedel and a member of the Execu
tive, or for his services as such, and was therefore
taxable on those grounds alone. That position was
abandoned in argument and I think rightly so. The
monies received had, on the evidence, nothing
whatever to do with the plaintiff's position as a
director or for any services he may have rendered
as a director or member of the Executive
Committee.
The defendant's main submission is that the
payment falls within section 31A of the Income
Tax Act', and particularly paragraph (d). The
plaintiff disagrees, and says that in any event, the
exemption in Article VI A of the Convention
applies. The defendant replies that the payment,
whatever it was, was not a "pension" within the
meaning of the Article and section 7 of the
Protocol.
I shall set out the relevant portions of section 31,
section 31A, the Convention, the Protocol, and the
Canada-United States of America Tax Conven
tion Act, 1943.
31. (1) For the purposes of this Act, a non-resident person's
taxable income earned in Canada for a taxation year is
(a) his income for the year from all duties performed by him
in Canada and all business carried on by him in Canada,
31A. Where, in a taxation year, a payment is made by a
person resident in Canada to an individual who is not resident
in Canada and who during the 5 years immediately preceding
the year in which the payment is made
(a) was resident in Canada, or
(b) was employed in Canada
for a period or periods the aggregate of which was at least 36
months, if the payment is
(c) a payment
(i) out of or pursuant to a superannuation or pension fund
or plan,
' R.S.C. 1952 c. 148 and amendments.
(ii) upon retirement of an employee in recognition of long
service and not made out of or under a superannuation
fund or plan,
(iii) pursuant to an employees profit sharing plan in full
satisfaction of all rights of the payee in or under the plan,
to the extent that the amount thereof would otherwise be
included in computing the payee's income for the year in
which the payment was received if the payee had been
resident in Canada throughout the taxation year in which
the payment was received, or
(iv) pursuant to a deferred profit sharing plan upon the
death, withdrawal or retirement from employment of an
employee or former employee, to the extent that the
amount thereof would otherwise be included in computing
the payee's income for the year in which the payment was
received if the payee had been resident in Canada through
out the taxation year in which the payment was received,
or
(d) a payment made by an employer to an employee or
former employee upon or after retirement in respect of loss of
office or employment,
the payment shall be deemed to be income of the payee, for the
year in which it was received, from duties that shall be deemed
to have been performed by him in Canada in that year, unless it
can be established, by subsequent events or otherwise, that the
payment was made as part of a series of annual or other
periodic payments payable thoughout the lifetime of the payee.
ARTICLE VI A.
Pensions (including Government pensions) and life annuities
derived from within one of the contracting States by a resident
of the other contracting State shall be exempt from taxation in
the former State.
PROTOCOL
7. The term "pensions" referred to in Article VI A of this
Convention means periodic payments made in consideration for
service rendered or by way of compensation for injuries
received.
Canada-United States of America Tax Convention Act, 1943
3. In the event of any inconsistency between the provisions of
this Act or of the said Convention and Protocol and the
operation of any other law, the provisions of this Act and of the
Convention and Protocol shall, to the extent of such inconsist
ency, prevail.
I find it necessary, as well, to consider other
sections of the Income Tax Act and to refer briefly
to that elusive word "income" as used in the
statute. The plaintiff and the payment made to
him are not caught by the general charging provi
sion, subsection 2(1); the plaintiff was not a resi
dent of Canada. At first blush, subsection 2(2)
does not apply; the plaintiff was not, in 1969,
employed, in the popular sense, in Canada, nor did
he carry on business here; reference however has to
be made to Division D of the Act. Section 31 is the
general section in respect of the computation of a
non-resident's taxable income earned in Canada. It
is, as applied to this case, "... his income for the
year from all duties performed by him in
Canada ...."
As has been said over and over again, the statute
does not define "income". I shall assume the pay
ment in issue is embraced by the word "income",
in its widest sense and in its popular meaning 2 . For
the purposes of that assumption, I have put aside
for the moment the effect or implications of such
sections of the statute (dealing with residents) as
sections 6(1)(a)(iv) and 139(1)(ar), 6(1)(a)(v)
and 139(1)(aj), 36, and 31A 3 . ( Section 31A applies
to non-resident taxpayers). Even if the $40,000
sum can be said to be "income", the plaintiff is not
taxable on it (forgetting section 31A) because it
was not "income ... from ... duties performed by
him in Canada ...." (section 31(1)(a)).
2 I have not overlooked the line of authority summarized by
Martland J. in Curran v. M.N.R. [1959] S.C.R. 850 where he
said at p. 860:
All of these are cases in which the money payments to an
employee have been held not to constitute taxable income
because they were not made in respect of the performance of
services by the employee, but rather in order to acquire from
him rights which he had previously held against the
employer.
I have followed the direction given by Kerwin C.J. in the
same case, at p. 854, as to the meaning to be given to income:
The word must receive its ordinary meaning bearing in mind
the distinction between capital and income and the ordinary
concepts and usages of mankind. Under the authorities it is
undoubted that clear words are necessary in order to tax the
subject and that the taxpayer is entitled to arrange his affairs
so as to minimize the tax. However, he does not succeed in
the attempt if the transaction falls within the fair meaning of
the words of the taxing enactment.
3 Section 6(1)(a)(iv) requires residents to include, in comput
ing income, superannuation or pension benefits. They are
defined in section 139(1)(ar). Section 6(1)(a)(v) requires resi
dents to include, in computing income, retirement allowances.
They are defined in section 139(1)(aj). Section 36 permits a
kind of averaging in respect of, inter alia, certain payments out
of superannuation or pension funds or plans, or on retirement in
recognition of long service or in respect of loss of office or
employment.
I turn now to section 31A. This is a "deeming"
section. Certain payments made to non-residents
(which for various reasons might not otherwise be
"income") are deemed to be (under certain condi
tions) income from duties "deemed to have been
performed" by the non-resident in Canada in the
taxation year. Thus they fall within the general
charging provision of paragraph 31(1) (a). Counsel
for the defendant did not seek to bring the pay
ment in issue within any of the subparagraphs of
paragraph 31A(c). As stated early in these reasons,
the defendant contends the $40,000 sum is covered
by paragraph (d); that this was a payment made to
the plaintiff upon or after his retirement in respect
of loss of office or employment.
In my view, the payment here was not made
upon or after the plaintiff's retirement. The plain
tiff did not retire or go into retirement from his
occupation with MacMillan Bloedel within the
ordinary meaning of "retire" or "retirement".
That is, he did not withdraw from his employment
because he had reached a mutually stipulated age,
or generally withdraw from his occupation or busi
ness activity. I have obtained some assistance on
this point, in endeavouring to ascertain the ordi
nary meaning of "retirement", from dictionary
definitions:
The Shorter Oxford English Dictionary (3rd ed.
rev): "withdrawal from occupation or business
activity"
The Living Webster (1st ed.) "retire" "to with
draw from business or active life."
The contract of employment in this case (Exhib-
it 1) uses the words "retire" and "retirement" in
clauses 1 and 2. Age 65 was stipulated, but exten
sions could be agreed upon. In my view, "retire-
ment" was used by the parties in its ordinary
meaning as set out above: a cessation of or with
drawal from work because of an age stipulation or
because of some other condition agreed between
employer and employee. What the plaintiff did
here was, by agreement, resign. He did not, as I
see it, retire 4 .
Further, in my opinion, the payments agreed
upon were not made by MacMillan Bloedel "in
respect of loss of office or employment." 5 I do not
propose to attempt any all-encompassing state
ment as to the meaning to be given to that phrase.
Speaking generally, it envisages a payment made
for loss of a source of income, on or after with
drawal from usual business activity or employment
or after withdrawal by reason of the elimination or
expiration of the particular office or employment.
The plaintiff here, if he had remained with the
company until age 65, or later, was entitled to
certain benefits for life. They can be described in
ordinary parlance as a "pension" or as "superan-
nuation benefits". That did not happen. He was
requested to fulfill a different office or position at
the same salary. He would not agree. If the com
pany had then dismissed him for cause (as I think
it might) the plaintiff would not have been entitled
to the benefits provided in clause 2. The plaintiff
could, however, have bowed to the company's
wishes, accepted the new post and any lesser posts
the Board of Directors in the future dictated,
remained until age 65, and then drawn, for life,
sums calculated pursuant to clause 2. But one
cannot close one's eyes to the realities of power
and other struggles in the Board Room. I have
little doubt that a determined corporate manage
ment group could eventually have engineered the
termination, by the plaintiff, of his employment,
without the consent of the Board of Directors to
that termination. The plaintiff would then have
been disentitled to the benefits provided in clause
2. The other alternative in the disagreement which
had developed between the plaintiff and the corn-
' In Jackson v. M.N.R. [1951] Ex.C.R. 52 the taxpayer
endeavoured to draw a distinction between retirement and
resignation in order to escape taxation of a judicial pension. I
do not find the case of assistance because the facts and point at
issue are so dissimilar.
Retiring allowances, as defined in paragraph 139(1)(aj)
seem to be for practical purposes the same as the payments
specified in subparagraph (c)(ii) and paragraph (d) of section
31A. The cases which have considered the term "retiring allow
ance" are therefore of some assistance. If it were necessary to
decide, it is my opinion the payment in issue here was not
wholly, or part of, a "retiring allowance."
pany was for the latter to dismiss (fire) the plain
tiff (but not for cause). The company would then
have been liable to pay him (provided all other
terms of the contract were complied with) the
benefits provided in clause 2. The company did not
elect to follow this last course.
In my view, a compromise was reached the
essence of which was the benefits or "pension
rights" otherwise payable under clause 2 for life
were reduced to a five-year period. An arbitrary
dollar figure was agreed upon. The plaintiff
resigned. He did not withdraw, or retire from the
company, or generally from his business consultant
and executive occupation. His employment with
MacMillan Bloedel was terminated by consent. By
résigning, he surrendered or relinquished certain
rights, on the undertaking by him to accept, and
the undertaking by the company to pay, something
less than possible life-time benefits. The rights
under clause 2 were, to my mind, rights to a
pension payable on retirement at age 65 or later,
or when his employment with the company (under
certain conditions) earlier ceased. On that earlier
cessation or termination, there were certain
restraints and obligations placed on any future
activities by the plaintiff. In my view, therefore,
the $40,000 sum does not fall within paragraph
31A(d).
As I see it, that conclusion is sufficient to dis
pose of this appeal. The plaintiff, however, con
tends that quite apart from section 31A, the pay
ment is exempt by reason of Article VI A of the
Convention; it is a pension. I agree with that
submission.
If the plaintiff had remained with MacMillan
Bloedel and retired at 65 or later, any payments to
him under clause 2, in my view, would have been a
pension within the meaning of Article VI A of the
Convention, as well as a payment within the mean
ing of subparagraph 31A(c)(i); 6 the monies would
have been paid pursuant to a superannuation or
6 If the plaintiff were then a resident of Canada the pay
ments, in my opinion, would be "superannuation or pension
benefits" within subparagraph 6(1) (a)(iv).
pension plan. The particular plan in this case
embraced one person only, the plaintiff. It was
obviously part of the incentive for him accepting
employment in the first place, and for remaining
with the company. The employment contract pro
vided for payment of identical benefits in the event
the plaintiff ceased to be employed with the com
pany prior to age 65. (I have earlier set out those
eventualities and I am now to some extent repeat
ing some earlier remarks). Merely because the
payments might have become payable before
so-called normal retirement age, and while the
plaintiff was still able and likely to find other
employment (as permitted by the contract), does
not, as I see it, make them any less a pension, or
payments pursuant to a pension plan. The agree
ment of April 29, 1968 (Exhibit 2) was a compro
mise in respect of potential pension entitlement set
out in an individual pension scheme or plan.
Instead of the right to life-time payments, the
plaintiff agreed to accept "periodic payments in
consideration for services rendered" of a lesser
total amount, and of course over a lesser period of
time, than he might have been entitled to insist
upon. The word "pensions" as used in the Conven
tion should, I think, be liberally interpreted. In
that regard, one of the definitions of "pensions" in
The Shorter Oxford English Dictionary (3rd ed.
rev.) is, I consider, applicable to the facts in this
case and to Article VI A; "An annuity or other
periodical payment made, esp. by a government, a
company, or an employer of labour, in consider
ation of past services or of the relinquishment of
rights, claims or emoluments".
The appeal is therefore allowed. The assessment
by the Minister is set aside. The plaintiff is en
titled to his costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.