T-6252-79
Bernard N. Pollock (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Dubé J.—Montreal, September 8;
Ottawa, September 18, 1981.
Income tax — Income calculation — Appeal — Payment
received by plaintiff following his dismissal without prior
notice — Whether payment constitutes non-taxable damages
or taxable income — Whether obiter dictum of Supreme Court
binding.
R. v. Atkins 75 DTC 5263, affirmed, 76 DTC 6258,
applied. Prudential Exchange Co. Ltd. v. Edwards [1939]
S.C.R. 135, applied. Jack Cewe Ltd. v. Jorgenson [1980] 1
S.C.R. 812, considered. Davidson v. McRobb [1918] A.C.
304, agreed with.
APPEAL.
COUNSEL:
André Gauthier for plaintiff.
W. Lefebvre and J. Côté for defendant.
SOLICITORS:
Courtois, Clarkson, Parsons & Tétrault,
Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
Dust J.: The issue to be decided in this appeal
is whether the sum of $52,000—$50,000 plus
$2,000 being the value of a 1974 automobile—
given to the plaintiff following his dismissal consti
tutes non-taxable damages as claimed by him, or
taxable income as determined by the Minister of
National Revenue.
The material facts were agreed to by the parties.
The plaintiff had been an employee of GTE Syl-
vania Canada Corporation ("Sylvania") for
twenty years, without any written contract of
employment. On September 15, 1976, the plaintiff,
then Divisional General Manager, was called in by
the President of the parent company of Sylvania
and dismissed, without prior notice.
The plaintiff refused an offer of $42,500, and
consulted his attorneys. After some discussions
and representations, Sylvania agreed to pay him
the consideration in issue and he signed a Waiver
and Release forever discharging Sylvania from any
liability "by reason of his summary dismissal".
Both parties also agree that the facts in this case
are substantially similar, for income tax purposes,
to the facts in the Atkins case', wherein my broth
er Collier held that such a payment ought not to
be treated as income. That decision was affirmed
by the Federal Court of Appeal 2 . The then Chief
Justice said at pages 6258-6259:
Once it is conceded, as the appellant does, that the respond
ent was dismissed "without notice", monies paid to him (pursu-
ant to a subsequent agreement) "in lieu of notice of dismissal"
cannot be regarded as "salary", "wages" or "remuneration" or
as a benefit "received or enjoyed by him ... in respect of, in the
course of, or by virtue of the office or employment". Monies so
paid (i.e., "in lieu of notice of dismissal") are paid in respect of
the "breach" of the contract of employment and are not paid as
a benefit under the contract or in respect of the relationship
that existed under the contract before that relationship was
wrongfully terminated. The situation is not altered by the fact
that such a payment is frequently referred to as so many
months' "salary" in lieu of notice. Damages for breach of
contract do not become "salary" because they are measured by
reference to the salary that would have been payable if the
relationship had not been terminated or because they are
colloquially called "salary". The situation might well be differ
ent if an employee was dismissed by a proper notice and paid
"salary" for the period of the notice even if the dismissed
employee was not required to perform the normal duties of his
position during that period. Having regard to what I have said,
it is clear, in my view, that the learned Trial Judge was correct
in holding that the payment in question did not fall within
section 5 of the Income Tax Act as applicable to the taxation
year in question.
In so far as section 25 of that Act is concerned, on the facts,
it cannot be contended with any seriousness that the amount in
question can reasonably be regarded as falling within subpara-
graph (i), (ii) or (iii) of that section.
The appellant did not make in this Court the argument made
in the Trial Division that the amount in question was a
"retiring allowance".
With reference to the further contention in this Court that
the payment was income even if not income from an office or
employment, this contention was based upon a line of cases
which, in so far as relevant, held that remuneration for services
1 The Queen v. Atkins 75 DTC 5263.
2 The Queen v. Atkins 76 DTC 6258.
is income. In my view, such authorities have no application to
damages for wrongful dismissal.
Naturally, I feel bound by that decision and
presumably the Crown would not have opposed the
instant appeal were it not for an obiter dictum
uttered by Pigeon J. in a recent decision of the
Supreme Court of Canada, Jack Cewe Ltd. v.
Jorgenson'. That case was not strictly an income
tax case, but dealt with the quantum of damages
payable to Jorgenson following his wrongful dis
missal. The Court referred to the Atkins case and
cast doubt as to its validity in these words (at
pages 814-816, 818-819):
I have grave doubt as to the validity of this reasoning.
Damages payable in respect of the breach of a contract of
employment are certainly due only by virtue of this contract, I
fail to see how they can be said not to be paid as a benefit
under the contract. They clearly have no other source.
In my view, the present situation with respect to income tax
on this award of "an identifiable sum for loss of earnings" must
be considered legally insecure. This Court might well disagree
with the conclusion reached by the Federal Court of Appeal in
Atkins. In this respect, I will note that in that case consider
ation appears to have been given only to the question whether
the damages for wrongful dismissal were income "from an
office or employment" within the meaning of ss. 5 and 25 of the
Income Tax Act (R.S.C. 1952). No consideration appears to
have been given to the broader question whether they might not
be income from an unspecified source under the general provi
sion of s.3.
Furthermore, it appears that damages for wrongful dismissal
are "earnings" for unemployment insurance purposes, being
defined by the Unemployment Insurance Regulations as
income "arising out of employment". In Attorney General of
Canada v. Walford ([1979] 1 F.C. 768) the Federal Court of
Appeal reversed an Umpire's decision holding that a payment
of damages for wrongful dismissal was not income. The judg
ment in The Queen v. Atkins was held not to be authority in
the interpretation of the Unemployment Insurance Regula
tions. The anomaly of considering damages for wrongful dis
missal as income for unemployment insurance purposes but not
for income tax purposes is an additional reason for doubting the
correctness of the decision in Atkins.
Counsel for the Crown invites me to consider
that obiter dictum as valid ground for ignoring the
3 [1980] 1 S.C.R. 812.
Federal Court of Appeal decision, and to leap
boldly toward the adoption of a new principle
governing the taxation of damages for wrongful
dismissal. As I informed him from the bench, I
was not about to accept that invitation.
The doctrine of stare decisis is well known. As
expounded by L.-P. Pigeon in his Rédaction et
interprétation des lois, it applies only to the ratio
decidendi, not to an obiter dictum. He wrote at
page 46:
[TRANSLATION] The ratio decidendi may be contrasted with
the obiter dictum. The latter is what a judge says in passing, or
an interpretation suggested by the judge without making a
definite ruling. It is not binding. Anything not regarded as
essential to the decision rendered is viewed as an obiter dictum.
In Prudential Exchange Company Ltd. v.
Edwards", a 1938 Supreme Court decision, Duff
C.J. quoted Lord Dunedin in support of his view
that learned dicta from eminent judges do not
constitute a binding authority. Lord Dunedin said
in Davidson v. McRobb 5 :
My Lords, I apprehend that the dicta of noble Lords in
this House, while always of great weight, are not of binding
authority and to be accepted against one's own individual
opinion, unless they can be shown to express a legal proposi
tion which is a necessary step to the judgment which the
House pronounces in the case.
Undoubtedly, the principle expounded by the
Federal Court—from both of its divisions—in the
Atkins case now lies "legally insecure" in the
present state of the jurisprudence: Its shaky posi
tion will have to be shored up, or demolished with
a final blow. Because of the doctrine of stare
decisis, the operation, be it salvage or demolition,
will have to be performed from above.
I therefore find that the sum of $52,000 consti
tutes non-taxable damages and allow the appeal.
Pursuant to prior agreement, there will be no costs.
^ [1939] S.C.R. 135.
5 [1918] A.C. 304 at p. 322.
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.