http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/120140/index.do
Gaboury v. The Queen (October 1, 2015 – 2015 TCC 235, Lafleur).
Précis: Ms. Gaboury was a Court of Québec judge since 1996. In 2008 she received a retroactive salary payment of $153,375, as well as a sum of $25,473.02 from the government of Québec. She contended that the sum of $25,473.02 was not taxable. The Tax Court disagreed and found that the amount was either in the nature of interest or taxable as interest under the surrogatum principle. The Tax Court also found that the payment was not compensation for a tort. Thus the appeal was dismissed. There was no order as to costs since this was an informal procedure appeal.
Decision: This case arose out of interest paid to Ms. Gaboury arising out of a long dispute between the Government of Québec and the judges of the Court of Québec:
[16] On June 4, 2007, the Honourable Justice Claude Auclair of the Superior Court allowed the motion and ordered the Government to implement the O’Donnell Committee’s recommendations by September 1, 2007, at the latest, and to pay interest at the legal rate starting on February 1, 2002, until the payment date (the Auclair judgment). Justice Auclair acknowledged that the Supreme Court had established the principle that a court dealing with a judicial review should not intervene and that an appropriate remedy is generally to refer the matter back to the Government for reconsideration. However, since this is an exceptional situation, the judge therefore disregarded this general principle in rendering his decision.
[17] The Government did not appeal the Auclair judgment. Rather, the Government implemented the recommendations in the Report and paid interest at the legal rate starting on February 1, 2002, on the difference between the salary actually received by the judges and that proposed in the Report.
Ms. Gaboury argued that the interest payment was not taxable:
[19] The appellant included in her income the amount of interest thus received and deducted $22,290.49 as non-taxable interest, because, according to her, that amount was paid by the Government as non-taxable damages for failing to comply with its constitutional obligations regarding the appellant. That amount represents interest calculated on an amount equal to the difference between the salary recommended in the Report and the salary actually received by the appellant for the period from February 1, 2002, to June 4, 2007, that is, the date on which the Auclair judgment was rendered.
The Tax Court rejected this argument based on precedent:
[41] In Coughlan v. Canada, [2001] T.C.J. No. 449, Judge Bowie of our Court had to determine the nature of an amount received as pre-judgment interest. He quoted Justice Rand in Farm Security Act in order to determine the meaning of the word “interest”. He also referred to Huston, Whitehead and Whitehead v. M.N.R., 61 DTC 1233, in which the nature of interest paid under legislation compensating Canadians for the loss of property located abroad during World War II had to be determined. Judge Bowie made the following comments with respect to Huston:
15 In Huston, Whitehead and Whitehead v. M.N.R., Thurlow J. had to consider whether “interest” paid under the War Claims Regulations fell within the provisions of paragraph 6(1)(b), the predecessor to the present paragraph 12(1)(c). Those Regulations made provision for the payment of compensation to persons for loss of property as a result of World War II. The Regulations specifically provided that they conferred no right of payment; they simply gave authority to make a discretionary payment from the War Claims Fund. They also provided that “interest ... may be paid ...”. After considering Riches v. Westminster Bank, Glenboig Union Fireclay Ltd. v. C.I.R., C.I.R. v. Ballantyne and Simpson v. Executors of Bonner Maurice, Thurlow J. concluded that the real question to be decided is “... whether the amounts in question are of an income or a capital nature”. He concluded that in the case before him, the amounts awarded as interest, along with the compensation, were not of an income nature and, therefore, were not interest within the meaning of section 6 of the Income Tax Act. This was so because no principal sum was owing to the Appellants at any time. They had no right to compensation, and they sustained no loss of revenue for which they could be entitled to either damages or compensation. Bellingham v. The Queen is another case which demonstrates that not all statutory interest payments are received on income account. Under subsection 66(4) of the Alberta Expropriation Act, the Land Compensation Board may award “additional interest” along with the compensation and interest otherwise payable, if the expropriating authority’s proposed payment to an expropriated owner is less than 80% of the amount the Board awards for compensation. The Federal Court of Appeal held that this “additional interest”, being in the nature of a penalty imposed on the authority, does not assume the character of income in the hands of the owner.
[42] Judge Bowie found that the pre-judgment interest that was awarded as interest on wrongfully withheld determined amounts rather than as incremental damages had the character of income and was taxable under paragraph 12(1)(c) of the Act.
[43] In my view, in light of the above decisions, the amount of $22,290.49, the tax treatment of which is at issue in this case, is interest within the meaning of the Act and must therefore be included in the appellant’s income under paragraph 12(1)(c) of the Act for the 2008 taxation year. In addition, no deduction in this regard is allowed in computing the appellant’s income under the Act.
[44] Even if the $22,290.49 were determined to not constitute “interest” within the meaning of the Act, but rather constituted damages paid to the appellant by the Government, I am of the view that, based on the surrogatum principle, that amount should be added to the appellant’s income for the 2008 taxation year as special damages awarded to compensate the appellant for not being paid the additional salary provided in the Report during the period from July 1, 2001, to June 30, 2004. Thus, since the unpaid salary is a taxable salary under section 5 of the Act, the damages compensating the appellant with respect to that salary should receive the same tax treatment and are thus taxable under the Act.
Moreover the Court rejected the argument that this was a payment made as compensation for a tort:
[46] As mentioned above, the appellant stated that the Government paid her interest to compensate her for a tort, namely, the unconstitutional actions taken by the Government in drafting the First Response and the Second Response. Thus, applying the principle in Ahmad v. Canada, [2002] T.C.J. No. 471, the appellant is of the view that the amounts representing pre-judgment interest are not taxable. However, I am of the view that that decision does not apply to this case because that case dealt with damages claimed for inducement to breach a contract of employment and thus a tort, including pre- and post-judgment interest; Judge Miller of our Court found that they were general damages resulting from a tort, not from a contract, and that the pre-judgment interest was part of the damages and was not taxable under paragraph 12(1)(c) of the Act. In this case, the Government did not commit a tort; it did not meet the rationality standard in its First Response and Second Response. This cannot, in my opinion, be characterized as a tort.
As a consequence the appeal was dismissed. There was no order as to costs since this was an informal procedure appeal.