Date: 20010103
Docket: 1999-1239-IT-I
BETWEEN:
JACQUES HENDLISZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Judgment pronounced orally from the bench on March 30, 2000 in Montreal, Québec)
Lamarre Proulx, J.T.C.C.
[1] This is an appeal by way of the informal procedure concerning the 1994 taxation year.
[2] The issue is to determine whether the forgiveness of an Appellant’s debt in the amount of $25,000, granted in 1994 to the Appellant by his former employer, was made to reimburse him of economic losses or was a benefit received by the Appellant in respect of an employment, within the meaning of section 6 of the Income Tax Act (the "Act").
[3] The Appellant’s representative submitted that the forgiveness was made to reimburse the Appellant for losses that he incurred on a Montreal house by taking employment with a Toronto medical institution. The Respondent’s representative submitted that the amount of $25,000 was the forgiveness of a loan owed by the Appellant to his former employer and as such was an employment benefit pursuant to paragraph 6(1)(a) and subsection 6(15) of the Act.
[4] The witnesses were, for the Appellant’s part, the Appellant and his wife, Ms. Sandra Hendlisz, and for the Respondent’s part, Ms. Johanne Soucy, an appeals officer.
[5] The Appellant explained that in 1991, while he was a general director of a hospital in Montreal, he was recruited by Baycrest Centre for Geriatric Care. A former colleague, a Mr. Herbert, was president and chief executive officer of this institution. He was the one who wanted him most particularly although the board of directors of this institution wanted the recruitment to be formally made by a recruiting agency.
[6] The Appellant stated that the negotiations were to the effect that the moving costs as well as the losses on the sale of the property would be reimbursed. When the contract was signed however, only the moving costs were included. The Appellant suggested that Mr. Herbert then assured him that these losses would be taken care of, by way of bonuses or otherwise. (I open a parenthesis here to say that a bonus has to be included in the calculation of income).
[7] The Appellant produced as Exhibit A-1, a letter sent to Revenue Canada on the Appellant’s behalf. It includes a) the original listing at a price of $519,000. This listing bears the date of May 20, 1991; b) the reduced listing at a price of $429,000, which is undated and; c) an accepted counter-offer made on October 9, 1991 for the price of $385,000 with occupancy January 1992. The Appellant said that the fair market value was the value written down in the original listing. In the Notice of Appeal it is stated that the fair market value had been estimated by the Appellant. Losses would have been incurred on the difference between the amount shown in the original listing and which is submitted as the fair market value and the sale price. Otherwise, in actual costs the Montreal house was purchased in 1981 for $150,000 and was sold in 1992 for $385,000.
[8] The employment began in August 1991. The employment agreements were not produced. The employment was terminated on May 28, 1992. The severance agreement dated October 28, 1992, was produced as Exhibit A-2. Paragraph 4 of this agreement states that the loan for the mortgage on the Toronto house is extended to November 27, 1993. At that time, the entire amount becomes due and payable. In this severance agreement, there is no mention of reimbursement of losses regarding the Montreal house. There is no such mention either in the release attached to this agreement. These documents are signed by the Appellant and the former employer.
[9] The Appellant and his wife related that after that agreement, Ms. Hendlisz phoned the president of the board of directors and submitted to him that the family had suffered great losses from this employment situation and that it would only be reasonable and decent that they not be asked to repay the amount of the loan. It is further to this phone conversation that the agreement on the mortgage loan extension arrangements was reached. The Appellant produced it as Exhibit A-3. It is dated March 9, 1994. This is the document evidencing the forgiveness. It states in part the following:
1. The term of the Mortgage Loan is extended to November 27, 1994.
2. If paid on or before November 27, 1994, Baycrest will accept $75,000 together with interest accrued since November 27, 1993 at the rate applicable prior to November 27, 1993 in full payment of the Mortgage Loan obligation.
3. If not paid on or before November 27, 1994, the full principal amount being $100,000, together with interest accrued since November 27, 1993 at the rate applicable prior to November 27, 1993 shall become immediately due and payable.
4. In the event of the sale or transfer of the property charged by the Mortgage Loan, the Mortgage Loan shall become immediately due and payable.
These amended terms are extended to you by Baycrest ex gratia to assist in your situation. No obligation to provide these amended terms is admitted or acknowledged and no further extension of the term of the mortgage loan will be granted.
[10] Exhibit A-5 is a letter dated December 2, 1994 acknowledging receipt of a payment in the amount of $75,000 on a $100,000 mortgage loan.
[11] The Appellant’s representative referred me to an excerpt of an interpretation issued by Technical Interpretation, Business and General Division, on July 23, 1992 and entitled "Relocation of Employees — Bridge Financing — Loss on old Home". It reads as follows:
It is also Revenue Canada's position that, where an employee is reimbursed by an employer for an actual loss incurred on the disposition of the old home, or where an employer guarantees to give the employee an amount equal to the amount by which the fair market value of the old home (as independently appraised) exceeds the actual selling price, such amount will not be included in the employee's income.
[12] The first part of this policy statement would be in line with the decision of the Federal Court Trial Division in Ransom v. M.N.R., 67 DTC 5235. There is no evidence in this appeal of the Appellant’s actual losses respecting his Montreal house. Regarding the second part of the policy statement, I was not referred to a court decision which would be its basis. In any event, there is no such evidence of the employer having guaranteed to give the Appellant an amount equal to the amount by which the fair market value of the old home (as independently appraised) exceeds the actual selling price. In addition, as previously noted, it does not appear that an independent appraisal was made. One must conclude regarding the evidence on the loss incurred by the Appellant on the disposition of his Montreal house that it is very vague. However, this imprecision is not the basis of the ensuing decision.
[13] The Respondent’s representative submitted that there is no evidence whatsoever that the forgiveness was made for the purpose of reimbursing losses. Rather, the evidence would indicate that it was made for the purpose of obtaining repayment of the mortgage loan and end a conflictual employment situation. She referred the Court to a few decisions of this Court, and among them to the decision in McArdle v. the Queen, 84 DTC 1251, at pages 1252 and 1253:
I am satisfied that the forgiveness of the balance of the loan was an integral part of the arrangements under which the appellant's employment with Integrated was brought to an end by mutual agreement. This means there was a direct nexus between the course of action adopted by Integrated in respect of the loan and the appellant's employment. The thing which motivated the forgiveness of the loan was the existence of the contract of employment. This brings the $14,774.72 within those provisions of paragraph 6(1)(a) of the Income Tax Act ("the Act") which require that there shall be included in computing the income of a taxpayer for a taxation year as income from employment the value of a benefit of any kind whatever received by him in the year in respect of, in the course of, or by virtue of that employment. In delivering the Judgment of the Supreme Court of Canada in Nowegijick v. The Queen, 83 DTC 5041, Mr. Justice Dickson said at page 5045:
The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.
I am also of the opinion that, in the context of this appeal, subsection 5(1) of the Act is, in all probability, duplicative of paragraph 6(1)(a) in the sense that the $14,774.72 constitutes income of the appellant for 1978 as being "other remuneration" within the meaning of subsection 5(1) which reads:
5(1) Subject to this Part, a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.
In view, however, of my express finding regarding the applicability of paragraph 6(1)(a), it is unnecessary to be definitive about subsection 5(1).
Conclusion
[14] The courts must deal with what the taxpayer actually did and not what he would like it to be. In a matter of agreements, the courts have to determine the common purpose of the parties in reaching the agreement. There is no documentary evidence suggesting that the forgiveness of the amount of $25,000 was related to losses incurred by the Appellant on the disposition of his Montreal house. There had been no undertaking given by the Appellant’s former employer to such a thing. No document executed by both the Appellant and his former employer made the slightest reference to these losses. The evidence has rather shown that the forgiveness of part of the loan was an integral part of a severance package relating to the Appellant's employment. I refer to the decision of the Federal Court of Canada in Klein v. the Queen, 98 DTC 6214. In that matter, the taxpayer's corporate employer, upon his resignation, agreed to forgive three loans owing by him totalling $145,212. That Court decided at page 6215:
...there was ample basis for him [the Judge] to conclude that the loan agreement was part of a total package in respect of the termination of the appellant's employment. ... that the loan agreement was part of a settlement involving a benefit conferred in respect of the appellant's employment.
[15] Similarly, in the present instance, the forgiveness was not made for the purpose of reimbursing any of the Appellant's economic losses, but was made as a part of a total package in respect of the termination of an employment contract. Such a forgiven amount must be included in the calculation of the Appellant's income as a benefit conferred in respect of an employment, pursuant to paragraph 6(1)(a) and subsection 6(15) of the Act.
[16] The appeal is accordingly dismissed.
Signed at Ottawa, Canada, this 3rd day of January, 2001.
"Louise Lamarre Proulx"
J.T.C.C.