Harel v. Deputy Minister of Revenue (Quebec), 77 DTC 5438, [1977] CTC 441, [1978] 1 SCR 851

SUPREME COURT OF CANADA

Harel v. Deputy Minister of Revenue (Quebec), [1978] 1 S.C.R. 851

Date: 1977-06-24

J. Camille Haret Appellant;

and

The Deputy Minister of Revenue of the Province of Quebec Respondent.

1977: February 9; 1977: June 24.

Present: Ritchie, Pigeon, Dickson, Beetz and de Grandpré JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR QUEBEC

Tax law — Personal income tax — Payment in recognition of long service — Sick leave plan — Accumulation of unused days — Payment made in accordance with a collective agreement — Special assessment rate — Provincial Income Tax Act, R.S.Q. 1964, c. 69, s. 45, replaced by An Act to Amend the Provincial Income Tax Act, 1965 (Que.), c. 26, s. 12.

Upon his retirement in 1968 appellant received $11,958.30, which represented the cash value of sick leave that appellant had not used during the years he was employed by the police force of the City of Montreal. The sick leave plan under which he received this money had begun simply as a practice, but at the period in question, it was dealt with by a clause in the collective agreement. In order to reduce the impact of taxation on this payment, appellant sought to avail himself of the provisions of s. 45 of the Income Tax Act but this was not allowed by respondent, who regarded the money as income earned in 1968 and assessed appellant accord­ingly. The Provincial Court, emphasizing that s. 45 applied to payments made under a collective agreement, found in favour of appellant since such payments do not necessarily have to be made in a spirit of gratitude but rather must take the employee into account. The Court of Appeal reversed this decision, maintaining that the payment constituted deferred salary.

Held: The appeal should be allowed.

The word "reconnaissance", which is found in s. 45 of the Income Tax Act, must be read in conjunction with its English equivalent of "recognition". The payments covered by s. 45 must take the employee's long service into account, but they may be made either in gratitude for these services or in accordance with a collective agreement. Although the Act contains no definition of such "long services", evidence concerning them was presented in the Court of first instance: an. employer. does in fact receive longer services from an employee

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who is not absent than from one who is absent quite often. In view of' the particular historical development, respondent's administrative policy, which is not contrary to the Act, may be used to support this interpretation of a provision which, from respondent's point of view, is ambiguous at best.

Choquette v. The Queen, [1974] 1 F.C. 580; Henry v. Arthur Foster, Henry v. Joseph Foster and Hunter v. Dewhurst (1932), 16 T.C. 605; Molleur v. M.N.R. (1965), 65 D.T.C. 5166; Pouliot v. M.N.R. (1954), 54 D.T.C. 407; The Commissioners for special purposes of the Income Tax v. Pemsel, [1891] A.C. 531; Protestant Old Ladies' Home v. Provincial Treasurer of Prince Edward Island, [1941] 2 D.L.R. 534, referred to.

APPEAL from a decision of the Court of Appeal of Quebec[1] reversing a judgment of the Provincial Court allowing the taxpayer's appeal and cancelling the assessment established by the Minister pursuant to the Income Tax Act. Appeal allowed.

Jacques Monette and André Poupart, for the appellant.

Gaétan Ouellet, Pierre Fortin and François Tremblay, for the respondent.

The judgment of the Court was delivered by

DE GRANDPRÉ J.—Appellant was employed by the City of Montreal as a police officer from 1930 to 1968. He retired in July 1968, shortly before reaching the age of sixty, when his retirement would have become mandatory. From the time he entered the City's employment, appellant was cov­ered by a sick-leave plan that allowed him to be absent from work because of illness for fifteen days a year without losing any of his salary, and to accumulate unused sick leave from year to year.

At first this was a practice established by the City, but later the plan was dealt with by a clause in the collective agreement. Similarly, the plan at first stipulated a ceiling of 180 days' sick leave, but this ceiling was abolished in 1960. As a result of this plan, therefore, appellant received upon retirement the sum of $11,958.30. On his 1968

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income tax return appellant sought to avail himself of the provisions of s. 45 of the Income Tax Act, R.S.Q. 1964, c. 69, to reduce the impact of taxa­tion. Respondent disagreed with this view and assessed appellant as if the full amount of $11,958.30 were income for the year 1968. The Provincial Court agreed with appellant, but the Court of Appeal set aside this judgment and main­tained the assessment: hence the appeal at bar.

Section 45 of the Income Tax Act reads as follows:

In the case of a lump sum payment to an employee or former employee, out of or pursuant to a pension fund, or upon retirement of an employee in recognition of long service, or made by an employer to an employee or former employee, upon or after retirement, in respect of loss of office or employment, or a lump sum payment made as a death benefit, the payment so made in a taxation year may, at the option of the taxpayer, not be included in computing his income; but, in such case, he shall pay, in addition to any other tax for the same year, tax on such payment at a rate equal to the proportion that the aggregate of taxes otherwise payable by the employee or former employee for the three years preced­ing the taxation year concerned, is of the aggregate of his income for those three years.

The payment received by appellant was made in accordance with article XXI of the collective agreement between the City and the Brotherhood of Policemen of Montreal for the period from December 1, 1966 to November 30, 1968. The relevant clauses read as follows:

[TRANSLATION]

Article XXI—PAY IN CASE OF ILLNESS

21.00 Officers of the Police Department who are cov­ered by this agreement and who are absent because of illness will receive their salary in full for a total of fifteen (15) working days in any one fiscal year. After the accumulated sick days to which the officer is entitled have elapsed, he will receive half his salary for a period of sixty (60) additional days, and this period may be extended by the Executive Committee upon the recommen­dation of the director of the Department.

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21.02 However, the period of fifteen (15) working days referred to in clause 21.00 is cumulative, inas­much as days of absence allowed in this way that are not used during a given fiscal year are added to the period of fifteen (15) days for the follow­ing fiscal year and credited to the officer con­cerned, so that the period during which he is entitled to his full salary while absent because of illness is increased by that number of days. The director of the Department shall determine the number of days accumulated to the credit of each police officer by taking as a basis the number of sick days remaining to his credit on May 1, 1945, taking into account the changes that have occurred since that date.

21.04 At the time of his retirement, resignation, dismis­al or death, each police officer or his beneficiar­ies shall be paid for all sick days remaining to his credit at the rate used to calculate his last pay cheque.

The Provincial Court set aside the assessment for reasons which I will take the liberty of summa­rizing as follows:

(1) the payment received by appellant is not deferred salary;

(2) section 45 applies to payments made under a collective agreement as well as to payments resulting from ,the paternalism of the employer;

(3) section 45 does not apply, only to payments made in a spirit of gratitude, since the mean­ing of the section is dictated not by the word "reconnaissance'' but by the word "recogni­tion" used in the English version: the former is merely a translation of the latter;

(4) section 45 applies in the case at bar, since the payment took account of the fact that Harel gave "long service", in that he "was present at work rather than absent because of illness, as he could have been without losing any of his salary".

The Court of Appeal, as I have already men­tioned, did not share these views. After emphasiz­ing that the payment constituted deferred salary which the City was obliged to pay, Turgeon J.A., speaking for the Court, dismissed Harel's claim that the payment was made in recognition of long service. He also refused to accept the proposition

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that the payment was made in respect of loss of office or employment.

It is my opinion that the appeal should be allowed.

It is important first of all to find out the reason why the legislator does not prescribe the same rate of taxation for ordinary income and for the income described in s. 45. Until relatively recently, sick-leave benefits were not cumulative and had to be converted into money immediately. At the end of the year, therefore, the taxpayer who had not used up his annual allowance of sick leave received a relatively small amount of money that did not attract a very large amount of tax. With the development of the concept illustrated in art. XXI of the collective agreement involved in the case at bar, the taxpayer accumulates his sick leave ben­efits instead of immediately converting them into money, with the result that at the end of his employment he receives a considerable sum. Since income tax rates are progressive, it goes without saying that in the absence of a statutory provision such as s. 45 the tax collector would get a much larger proportion of the money received by the taxpayer in lieu of sick leave than he did previous­ly when this benefit was converted into money immediately. In order to avoid taxing these lump sum payments too heavily the legislator provided a special form of taxation constituting an averaging rate. It was in 1946 that the federal legislator first acknowledged the problem, and when the first provincial income tax act was adopted in 1954 it adopted the same concept. This is the background against which the wording of s. 45 must be examined.

First of all, it should be remembered that appel­lant does not maintain that the $11,958.30 received by him do not constitute taxable income. He merely submits that the tax on this taxable income should be computed not according to the rules covering current income such as salaries, dividends and so on but according to other rules laid down in s. 45. Appellant emphasizes that this section is found not in the divisions of the Act that

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deal with the computation of income or of taxable income, but in Division V, which deals with the computation of tax.

What are these rules? Obviously there must be a lump sum and it must be paid upon retirement; these two conditions are clearly present in the case at bar. The real debate concerns the other two conditions: recognition of long service or consider­ation of loss of office or employment. Since I accept appellant's views on the "long service" aspect of the question, I will not deal with the second aspect.

I have no hesitation in accepting the opinion of the trial judge that the meaning of the word "reconnaissance" is not limited to the concept of gratuitousness, but that the word must be read with its English equivalent of "recognition". The payment must take long service into consideration but it is not necessarily intended to express grati­tude for such service. In other words, the rule in s. 45 applies not only when the employer is free to recognize or not recognize the employee's long service, but also in all cases where the payment is made in accordance with a collective agreement. I see no reason to limit the application of the special tax rate provided for in s. 45 to the case of an employee benefiting from the paternalism of the employer, when the obvious goal of the legislator is to permit averaging in the increasingly frequent cases in which employer and employee agree to establish a fund of sick days that can grow from year to year. If respondent were correct, the application of s. 45 would become more and more limited as the extent to which employer-employee relations are governed by collective agreements increased. Such a reading of the legislation seems to me to be contrary to the objective being sought.

If, as I believe, s. 45 applies to all cases in which a lump sum is paid to an employee at the time of his retirement, whether because of the employer's good will or because of his contractual obligations, there remains only to determine whether, in the case at bar, this payment took into account appel­lant's long service. The expression "long service", is not defined in the Act and we must give it a meaning. As I have already mentioned, the trial

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judge emphasized, on the basis of the evidence, that an employee who remains at his post instead of being absent because of illness for fifteen days a year is in fact giving longer service to his employer than his fellow employee who is more often absent. It is recognition of this constant presence that the collective agreement seeks to quantify by means of a simple system of accumulating the sick days not used by the employee in the course of his career.

The employer derives an immediate benefit from the fact that the employee is seldom absent from work, and this is true whether he is a good employee or a poor one. In either case it is a benefit for the employer, who receives longer service from those employees who are not absent because of illness than from the others who are. The employer therefore is justified to bind himself, by contract, to take the regular attendance of an employee into account when such an employee leaves his service. The expression "long service" in itself therefore applies equally to each year of employment and to the whole of the employee's career. According to the terms of the collective agreement, the benefits of art. XXI are not reserved only for good employees, since employees who are dismissed are also entitled to them. For the purposes of the special tax computation found in s. 45, however, the legislator recognizes only one kind of long service: that which is taken into account by the employer at the time of retirement.

The Court of Appeal expressed the opinion that three decisions supported respondent's theory. With respect, I am unable to share this view since these decisions deal with questions of a very differ­ent kind. In Henry v. Arthur Foster, Henry v. Joseph Foster and Hunter v. Dewhurst[2], the Court of Appeal of England and the House of Lords had to determine only whether the payment received by the employee constituted capital or income. Molleur v. M.N.R.[3], raises only one question: did the taxpayer receive money from a pension fund? The third decision, Pouliot v. M.N.R.[4], was in favour of the Minister because the money was not paid to the taxpayer in a lump sum but was

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divided into several instalments.

In this Court, respondent added to these deci­sions Choquette v. The Queen[5]. In this case too the issue was very different from the one before this Court.

It therefore appears to me that the wording of the section is entirely in accordance with the spirit that guided the legislator, and I do not hesitate to conclude that the assessment should be set aside and the judgment of the Court of first instance reinstated.

If I had the slightest doubt on this subject, I would nevertheless conclude in favour of appellant on the basis of respondent's administrative policy. Clearly, this policy could not be taken into con­sideration if it were contrary to the provisions of the Act. In the case at bar, however, taking into account the historical development that I will review rapidly, this administrative practice may validly be referred to since the best that can be said from respondent's point of view is that the legislation is ambiguous.

As the Provincial Court and the Court of Appeal pointed out, the provincial income tax statute was modelled on the federal Act. It was by c. 43, s. 2 of the Statutes of Canada 1944-45, that Parliament introduced into the Income War Tax Act the concept of recognition of long service. This philosophy was further developed two years later in s. 8(2) of c. 55 of the 1946 Statutes of Canada. In 1948, the Act was completely rewritten and became c. 52 of the Statutes of Canada for that year. With some amendments, the 1948 Act became c. 148 of the Revised Statutes of 1952 and the section dealing with situations similar to the one before this Court became s. 36(1) of the federal Act.

That was the situation in 1954 when the provin­cial law closely modelled on the federal law was adopted. At that time, the provincial legislator was familiar not only with the wording of s. 36(1) of the federal Act but also, undoubtedly, with the administrative interpretation there, which was to the effect that taxpayers in Mr. Harel's situation

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could avail themselves of the averaging provided for in the section. Although the wording of s. 45 of the provincial Act differs somewhat from that of s. 36(1) of the federal Act, the concept is the same. Consequently, when c. 17 of the Statutes of Quebec, 1953-54 was adopted, the administrative interpretation of the federal Act gave it a colour that the provincial legislator could not ignore. The 1954 provincial Act became c. 69 of the 1964 Revised Statutes, and in 1965 c. 26 of 13-14 Eliz. II revoked s. 45 and replaced it with the section currently in effect. At that time, the administra­tive interpretation of the provincial Act was con­sistent with that of the federal Act, so that in 1965 a case similar to that of appellant would have been decided in his favour. This administrative interpre­tation was maintained until 1968, at which time, for reasons that have not been explained, the department reversed its policy.

Once again, I am not saying that the adminis­trative interpretation could contradict a clear legislative text; but in a situation such as I have just outlined, this interpretation has real weight and, in case of doubt about the meaning of the legislation, becomes an important factor. In order not to unduly lengthen these reasons, I will refer only to the following authorities: The Commis­sioners for special purposes of the Income Tax v. Pemsel[6], in particular at p. 591; Protestant Old Ladies' Home v. Provincial Treasurer of Prince Edward Island[7], in particular at p. 540; Kernochan—«Statutory Interpretation: An Outline of Method» (1976), 3 Dal. L. J. 333, in particular at p. 359.

For these reasons I would allow the appeal, set aside the judgment under appeal and reinstate the judgment of the Court of first instance, the whole with costs in both the Court of Appeal and this Court.

Appeal allowed with costs.

Solicitors for the appellant: Tessier, Corbeil & Bourbeau, Montreal.

Solicitor for the respondent: Gaétan Ouellet, Montreal.