Date: 20020911
Docket: 2001-4304-IT-G
BETWEEN:
DR. SYED Y. AHMAD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Miller J.
[1] Dr. Syed Y. Ahmad worked for 20 years for Atomic Energy Canada Limited ("AECL") 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, Dr. Ahmad brought an action against Ontario Hydro for inducement of breach of contract. In October 1987, he was wrongfully dismissed by AECL and received $102,000 as a settlement from AECL. In 1993, in his action against Ontario Hydro for inducement of breach of contract, Dr. Ahmad received the following award from the Ontario Superior Court:
General Damages $488,525
Libel Damages 40,000
Pre-judgment interest 388,212
Post-judgment interest 199,371
Per diem interest 6,329
[2] In July 1997, the Ontario Court of Appeal confirmed this judgment. The Minister of National Revenue reassessed Dr. Ahmad including in his income for 1997 the general damages and interest (other than approximately $45,000 of interest relating to the libel damages).
[3] The issues are:
(i) Whether the general damages are income pursuant to subsection 56(1) of the Income Tax Act as a retiring allowance, being an amount received as damages in respect of a loss of an office or employment.
I find the general damages do not fall within the definition of retiring allowance.
(ii) Whether the amount described as pre-judgment interest is brought into income as interest pursuant to paragraph 12(1)(c) of the Income Tax Act.
I find it is not interest covered by paragraph 12(1)(c).
Facts
[4] Dr. Ahmad was employed by AECL from April 1, 1967 up to the date of his dismissal on October 30, 1987. He was a scientist involved in nuclear research, specifically relating to heat transfer. He was held in high esteem by other scientists in this field.
[5] By 1974, he had been promoted by AECL to head of the engineering branch of the Chalk River Nuclear Laboratories. AECL had a long-standing business relationship with Ontario Hydro which generated many millions of dollars worth of contracts. There arose a difference of opinion between Dr. Ahmad and Ontario Hydro, arising from Dr. Ahmad's refusal to approve a subordinate's report. Dr. Ahmad maintained there was insufficient scientific evidence to support the report. The financial impact to Ontario Hydro and AECL of the report not being approved was significant. Ontario Hydro induced AECL to remove Dr. Ahmad as head of the branch in 1984. According to Dr. Ahmad, he was given a desk to sit at in a corner, though he continued to draw his salary and received raises until 1986.
[6] In August 1986, Dr. Ahmad filed an action against Ontario Hydro claiming, among other things, general damages and pre- and post-judgment interest in respect of the tort of inducement of breach of his employment contract with AECL. AECL was aware of this action at that time. It did not dismiss Dr. Ahmad but froze his salary. As he was having difficulty obtaining information from AECL to assist in his action against Ontario Hydro, Dr. Ahmad on the advice of his counsel, decided to join AECL in the lawsuit. In October 1987, he provided AECL and the Department of Justice with a draft statement of claim. Fifteen days later, AECL fired Dr. Ahmad. AECL settled the action with Dr. Ahmad by payment of $102,000. Dr. Ahmad reported this as a retiring allowance in 1987.
[7] Since 1984, Dr. Ahmad has been unable to work in his specialty of heat transfer in nuclear research. This is because the only two major players in the field are AECL and Ontario Hydro. All other companies in the area were dependent on these two, so none of them would consider hiring Dr. Ahmad. He worked for Alberta Research Council for two years between 1987 and 1989 in an area which was not his expertise. He went on unemployment insurance for one year. He then obtained employment with the government of the Northwest Territories Science Institute, a position greatly under-utilizing his capabilities.
[8] On December 24, 1993, the Ontario Superior Court found that Ontario Hydro did indeed induce a breach of contract in 1984. Justice McWilliam determined general damages based on the calculation of the present value of Dr. Ahmad's salary and pension at AECL had he remained with AECL, presuming the trend of regular increments, less the present value of his actual earnings and pension assuming he continued to work to age 65. The judge did some fine-tuning of these numbers presented by the actuarial evidence. He ultimately determined the difference was $488,525. He asked counsel to agree on the interest amounts which they determined to be $388,212 pre-judgment interest and $199,371 post-judgment interest. He further rewarded $40,000 for libel damages. The interest pertaining to the libel award was approximately $45,000.
[9] Issue
(i) Are the general damages received by Dr. Ahmad income pursuant to paragraph 56(1)(a) of the Act as a retiring allowance, being an amount received as damages in respect of a loss of an office or employment?
Appellant's Argument
[10] The Appellant first argues that the definition of retiring allowance has as a precondition that the amount is received "in respect of a loss of office or employment". He maintains that the amount paid was not of such a nature, but was paid because of the tortious wrong done. Next, the Appellant contends that the cause of action arose in 1984 as a result of the inducement to breach the employment contract, not by terminating it, but simply by shifting responsibilities away from Dr. Ahmad. There was no loss of office or employment. Thus, the precondition in the definition of retiring allowance has not been met.
[11] While the damages were measured by a calculated loss of earnings, this simply represented the quantification and not the nature of the award. The Appellant cites a number of cases in support of this proposition (The Glenboig Union Fireclay Co., Ltd. v. C.I.R.,[1] The Queen v. Atkins[2] and Stolte v. The Queen[3]). The Appellant emphasizes that damages awarded for the tort of inducement of breach of contract are damages at large. Justice McWilliam recognized this in his decision awarding Dr. Ahmad damages as follows:
... In view of the fact that the standard to measure damages is not the same in unlawful dismissal and the intentional tort of inducing breach of contract, I do not intend to deduct the $102,000. In any event, as Mackoff J. said in Alltrans Express Ltd. et al. v. General Truck Drivers and Helpers Local Union 213, [1982] 2.W.W.R. 533:
Damages for the tort of inducing breach of contract are said to be at large. This means that their assessment is a 'matter of impression and not addition' (or inferentially here subtraction). ... In this respect they are similar to the damages for libel ... The Court must assess a global figure approximating the harm it thinks he has suffered.
Respondent's Argument
[12] The Respondent's position was concise. The definition of retirement allowance as applicable to this case has two requirements:
(i) an amount of damages must have been received.
There is no dispute on this point.
(ii) There must be a causal connection between the receipt and the loss of office or employment.
The Respondent contends that Justice McWilliam's judgment clearly makes that connection, by his analysis of the income Dr. Ahmad would have earned had he stayed in his managerial position with AECL, versus what he actually earned or could expect to earn until age 65. This income calculation arises because, due to the Respondent, Ontario Hydro's actions led first to a demotion but ultimately to a dismissal, a loss of employment. Given that the courts have held the term "in respect of" must be given the broadest meaning (see Niles v. M.N.R.[4] and Nowegijick[5] cases), it follows that damages calculated on the basis of a loss of employment can be said to be "in respect of" of that loss of employment. There is a sufficient connection between the receipt of the money by Dr. Ahmad and his loss of employment.
[13] The Respondent also argues that there is no requirement in the definition of retiring allowance that the payment must come from the employer. The case of Overin v. The Queen[6] was given as an example of where a third-party payment was characterized as a retiring allowance. That case also suggested a two-prong test for the determination of whether or not damages constitute a retiring allowance:
(i) But for the loss of employment would the amount have been received?
(ii) Was the purpose of the payment to compensate for a loss of employment?
The Respondent suggests both tests have been met in the case before me.
Analysis
[14] As was pointed out by Justice McWilliam in his decision, there is a difference between the character of damages in a wrongful dismissal action and damages in the tort action of inducing breach of contract. The latter are damages at large, a matter of impression not addition. That difference is significant. It is presumably why Justice McWilliam did not deduct the $102,000 amount paid by AECL to Dr. Ahmad as damages for wrongful dismissal from his award of general damages in the tort action. The damages are of a different nature. The wrongful dismissal damages are clearly in respect of the loss of employment. The tort damages are not. They are in respect of the wrong done to Dr. Ahmad, not in the ultimate loss of his job, but in the stripping of his responsibilities as a nuclear researcher. The breach of the employment contract was a shift from a responsible researcher and manager to an employee without responsibilities. The damages arose from that breach.
[15] Given its widest meaning, the expression "in respect of" as used in the context of damages "in respect of loss of employment" would cover any damage award if there were even some connection between the award and the loss of employment. This would then, for example, pick up damages of the employee physically injured in a car accident who could no longer work. If the judge in his calculation of damages considers the loss of future employment income, then the damages could be said to be "in respect of the loss of employment". This takes the expression well beyond what I believe the context of the definition of retiring allowance supports. To be "in respect of the loss of employment" suggests to me a primary purpose test. What is the first answer that leaps to mind when asked why did the injured employer receive damages? It is not, I would suggest, because he lost his job. It is because someone injured him in a car accident. Likewise, why did Dr. Ahmad receive damages from Ontario Hydro? It is not because he lost his job. It is because Ontario Hydro wronged him in stripping him of the ability to ever conduct nuclear research.
[16] I recognize that the calculation of the damages was based on salary projections. I agree that the yardstick used for measurement of damages, as Judge Bowman put it in the Stolte case, is not conclusive evidence of the nature of the damages themselves. Where the breach of the contract induced is not the loss of employment itself, there must be some closer tie between the damages and the loss of employment than simply that the subsequent loss of employment was used to calculate the quantum of damages. The determination of how close the connection must be is best answered by a review of the two tests cited in the Overin case; the 'but for test' and the 'purpose test'.
[17] Looking first at the 'but for' test. But for the loss of employment, would the general damages have been received? The breach of contract which was induced by Ontario Hydro was not the termination of the contract. The breach was the removal of Dr. Ahmad's responsibilities vis-à-vis AECL's work for Ontario Hydro. For two years after the induced breach, Dr. Ahmad continued as an employee of AECL and indeed continued to receive salary increases. Once he commenced an action against Ontario Hydro, AECL stopped the salary increases. One year after that, and only when he commenced the suit against AECL, did AECL actually dismiss him. Had AECL not dismissed him, but continued his employment, without raises, there would certainly still have been damages for inducement of breach of contract. Dr. Ahmad could not perform the nuclear research for which he was qualified, though he would remain an AECL employee. The ultimate loss of employment would not have altered the finding that Ontario Hydro committed the tort.
[18] The Respondent contends that it would have been a Pyrrhic victory only, as Dr. Ahmad would not have received a general damages award of $488,000. The Respondent makes this contention obviously because the $488,000 was a calculation based on actual earnings versus projected AECL earnings. This was an easy formula for Justice McWilliam to follow. But, given damages for this tort are damages at large, Justice McWilliam was not limited to using this type of calculation. Who is to say what he might have assessed, had Dr. Ahmad continued with AECL though not in a nuclear research capacity. The factors then to consider would have been: Dr. Ahmad could not use his significant talents in his area of expertise, the mental and emotional toll this would take on him and of course the difference in salary between a frozen salary and the salary of someone continuing to climb the corporate ladder. I do not share the Respondent's view that the consideration of these factors would lead to a Pyrrhic victory only. Indeed, I am not at all convinced that the damages in such a scenario would be any less than those calculated by Justice McWilliam under the actual circumstances. But for the loss of employment would there still have been damages? I am satisfied there would have been. Would the damages have been the same is a more difficult issue, but I do not believe I need to reach a determination on that point. It is enough that significant damages would have arisen regardless of the ultimate loss of employment. I find therefore the first test has not been met.
[19] While it is not necessary to consider the second test, for fullness of analysis I would like to do so. Was the purpose of the payment to Dr. Ahmad of $488,000 to compensate a loss of employment? No. I have already stated my views on the purpose test though I wish to expand. The calculation in determining this amount included three years while Dr. Ahmad was in fact still employed at AECL. So, even if I accept that the method of calculation of the damages at large is determinative of their nature, clearly the full amount cannot possibly be for loss of employment, as Dr. Ahmad did not lose his employment for three of the years under consideration. However, I do not accept that the method of calculation of the damages in tort are conclusive of their nature.
[20] The Respondent did not draw a distinction between the demotion in 1984 and the loss of employment in 1987. He characterized what happened in 1984 as a constructive dismissal and consequently, made the closer tie between damages and the loss, albeit constructive, of employment; that is, the purpose was to compensate for loss of employment. He was unable to provide me with any precedent where a court has decided that damages from a constructive dismissal, where employment actually continued, had been held to constitute a retiring allowance. I do not find this surprising. One can only imagine the Registered Retirement Savings Plan driven tax planning possibilities which would captivate the minds of this country's tax intelligentsia. A constructive dismissal, by its very term, denotes no actual loss of employment. I am not prepared to find that a breach of contract constituting a constructive dismissal, in the context of a tort action for inducement of breach of contract, is a loss of employment as contemplated by the definition of retiring allowance, where the employment continues for three years after the breach.
[21] What was the purpose of the damages award? To compensate Dr. Ahmad for the wrong done to him in stripping him of his ability to work as a nuclear researcher. The purpose cannot be simplified to a mere mathematical calculation of money lost by a loss of employment three years after the wrong committed. This is demeaning to a scientist who has already suffered the degradation and humiliation of questionable corporate action. The purpose of the damages was to provide some dignity, some respect and some justification to a scientist who stood by his ethical standards and paid a high price for it. I will not take away those restored traits from Dr. Ahmad by finding that the general damages were merely in respect of loss of employment. They represent much more. The Court of Appeal recognized this in Dr. Ahmad's appeal, when it stated:
As the trial judge noted, damages for inducing breach of contract are at large and need not be referable to actual monetary loss. Given the high professional reputation enjoyed by the respondent in the scientific community, and his stature within AECL, we believe that the assessment of damages was fair and reasonable. [My emphasis]
[22] There is a distinction between the loss of a particular job with a particular employer, which is contemplated by the "retiring allowance" definition, and the loss of a career as a nuclear researcher. The latter is a much greater wrong that falls well outside the definition of a retiring allowance.
Issue
[23] Is the amount described as pre-judgment interest caught by paragraph 12(1)(c) as interest?
Appellant's Argument
[24] The Appellant argues that interest is only exigible if there is a principal amount owing. Here, as the damages arose from a tort action, there was no debt owing until determined by a court that damages should be awarded, and in what amount. The Appellant relies on statements of Justice Thurlow in Huston et al. v. M.N.R.[7] in which he indicates that just because something is called interest, doe not make it so. Justice Thurlow went on to say:
... No case of which I am aware goes so far as to hold such an amount, call it interest or damages or compensation or any other name, to be interest or income when there was neither interest accruing in fact on the "principal" amount during the material period nor any right to the "principal" amount vested in the taxpayer during that period.
Judge Bowie of this Court referred to the Huston case in his recent decision of Coughlan v. The Queen,[8] though distinguished it in deciding pre-judgment interest in that case was interest, as it was based on liquidated amounts wrongfully withheld. The Appellant argues no such liquidated amounts wrongfully withheld exist in the case before me.
Respondent's Argument
[25] The Respondent's position is that the pre-judgment interest is a separate specifically calculated amount of interest caught by paragraph 12(1)(c) of the Act. He cites section 128 of the Ontario Court of Justice Act as supportive of his position that the amount is appropriately characterized as interest. Section 128 reads:
128(1) A person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest thereon at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order.
[26] He also relies on comments in the Federal Court of Appeal expropriation case of Shaw v. Canada[9] to suggest that if an amount is calculated as a discrete sum, it is not merged in the total compensation paid. Finally, he relies on Judge Bowie's finding in Coughlan that an amount awarded as interest on liquidated amounts wrongfully withheld represent interest, not incremental damages.
Analysis
[27] Can an amount labelled "interest" be something other than interest? Certainly. The Minister has acknowledged such in IT-365R2 where it is stated:
Where an amount in respect of damages for personal injury or death has been awarded by a Court or in an out-of-court settlement, no part of such amount will be income to the recipient even though the amount includes or is augmented by an amount which, pursuant to the terms of the Court order or the settlement agreement, is referred to as interest. ...
What is termed "interest" is not interest for purposes of paragraph 12(1)(c). In the case before me, the Court has not brought into income the amount called interest on the libel damages. Again, an acknowledgement that not all payments called interest are interest for purposes of paragraph 12(1)(c). A common theme in the government's treatment of these non-interest amounts appears to be that if the award itself is not taxable, the so-called interest attached to it is likewise not taxable. This is an overly simplistic response. It is necessary to delve somewhat deeper into the true nature of the pre-judgment interest in the case before me.
[28] The starting point for the determination of the nature of an interest payment is the oft-cited definition of the Supreme Court of Canada in Re The Validity of Section 6 of the Farm Security Act, 1944 of the Province of Saskatchewan:[10]
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. ...
But the definition, as well as the obligation, assumes that interest is referable to a principal in money or an obligation to pay money. Without that relational structure in fact and whatever the basis of calculating or determining the amount, no obligation to pay money or property can be deemed an obligation to pay interest.
There must be a relational structure between the interest and the principal amount. The Respondent suggests that the relationship existed from the time of the cause of action as Dr. Ahmad had a right at that point. But what right did he have? He had a right to bring an action, but I am not satisfied that prior to the judgment it can be said he had a right to compensation for his loss. Until the judgment, it had not been determined whether he had even been wronged let alone whether he had suffered a loss from such wrong, and how much that loss was worth. I harken back to Justice Thurlow's statement cited earlier suggesting there must be a right to a principal amount.
[29] Judge Bowie referred to Justice Thurlow's comments in the Coughlan case, recognizing the pre-judgment interest may or may not be income for tax purposes depending on the circumstances. In Coughlan, the right to an indemnity arose as a matter of contract, and the obligation to pay interest ran as a matter of contract from the date that Coughlan's right to indemnity arose. Coughlan had to sue on his contract of indemnity to get the amount wrongfully withheld. Judge Bowie found that the interest arising was, as such, a liquidated amount wrongfully withheld and had the characteristics of income. He went on to indicate, however, there remains a difference between pre-judgment interest on a debt or other liquidated amount wrongfully withheld on the one hand, and an award of damages on the other.
[30] I am dealing with damages arising in tort, not contract. There is no liquidated amount wrongfully withheld by Ontario Hydro that is akin to the Coughlan situation. Dr. Ahmad had to fight long and hard to prove that he had been wronged by Ontario Hydro, not by the breach of any contract with Ontario Hydro, of which there was none, but by their tortious activities. In these circumstances, I do not view Dr. Ahmad as having any right which vested in him prior to judgment to a principal amount. Failing that, there can be no interest until judgment. This position is supported by the characterization of damages in an inducement of breach of contract action as damages at large given to assessment by impression not addition. I am satisfied that the pre-judgment interest in this case has the character of being part of such damages, and not as a separate income item.
[31] I allow the appeal and refer the matter back to the Minister for reconsideration and reassessment on the basis that the general damages do not constitute a retiring allowance pursuant to subsection 248(1) and that the pre-judgment interest is not interest for purposes of paragraph 12(1)(c) of the Act. Costs to the Appellant.
Signed at Ottawa, Canada, this 11th day of September, 2002.
|
"Campbell J. Miller" |
J.T.C.C.
COURT FILE NO.: 2001-4304(IT)G
STYLE OF CAUSE: Dr. Syed Y. Ahmad and
Her Majesty the Queen
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: August 8, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge Campbell J. Miller
DATE OF JUDGMENT: September 11, 2002
APPEARANCES:
Counsel for the Appellant: Warren J.A. Mitchell, Q.C.
Counsel for the Respondent: Louis A.T. Williams
COUNSEL OF RECORD:
For the Appellant:
Name: Warren J.A. Mitchell, Q.C.
Firm: Thorsteinssons
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-4304(IT)G
BETWEEN:
DR. SYED Y. AHMAD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 8, 2002, at Edmonton, Alberta, by
the Honourable Judge Campbell J. Miller
Appearances
Counsel for the Appellant: Warren J.A. Mitchell, Q.C.
Counsel for the Respondent: Louis A.T. Williams
JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 1997 taxation year is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the general damages do not constitute a retiring allowance pursuant to subsection 248(1) and the pre-judgment interest is not interest for purposes of paragraph 12(1)(c) of the Act.
Signed at Ottawa, Canada, this 11th day of September, 2002.
|
"Campbell J. Miller" |
J.T.C.C.