Shaw v. The Queen – TCC: Amounts Paid by Shareholder of Employer Corporation to Former Employee Taxable

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Shaw v. The Queen[1] (August 22, 2013) involved payments by the shareholder of an employer corporation to a former employee of that corporation:

[3]            The parties submitted a Statement of Agreed Facts which reads in part as follows:

1.      At all material times, the Appellant was an individual resident in Canada and Alberta for the purposes of the Act.

2.      Prior to May of 2006, the Appellant was employed as the equipment manager for L. Robert Enterprises Ltd. (“Robert Ltd.”) in Fort McMurray, Alberta. The Appellant had held this and other positions with Robert Ltd. for at least 14 years prior to 2006.

3.      At all material times, Leo Robert (“Leo”), an individual resident in Canada, controlled Robert Ltd.

4.      During 2006, Robert Ltd. agreed to sell its business and assets (the “Asset Sale”) to L. Robert Enterprises Corp. (Robert Corp.) a newly incorporated subsidiary of CEDA International Corporation (“CEDA”).

5.      On May 1, 2006, subsequent to the Asset Sale, Robert Ltd. changed its name to 236419 Alberta Ltd. (“236419”) and ceased to carry on the business formerly carried on by Robert Ltd. For the purposes of this Statement of Agreed Facts, we will continue to use Robert Ltd. to identify 236419.

6.      Subsequent to the Asset Sale, the Appellant became employed by Robert Corp. as the equipment manager.

7.      On or about September 28, 2006, the Appellant received a letter informing him that he would be in receipt of a payment. A copy of that letter, with handwritten notations of the Appellant, was attached to the Statement of Agreed Facts.

8.      Starting in December 2006, Leo directed Robert Ltd. to make payments to the Appellant and other former managers of Robert Ltd. (the “Payments”). The Payments to the Appellant were as follows:

(a)               A payment of $47,000 on December 8, 2006;

(b)               A payment of $47,000 on January 8, 2007; and,

(c)               A payment of $46,000 on November 28, 2007.

9.      The Payments were paid out of that corporation’s shareholder loan account owed to Leo. Copies of the Shareholders’ Loan ledger of L. Robert Enterprises Ltd. showing the payments to the Appellant were attached to the Statement of Agreed Facts.

10.   The amounts in Robert Ltd.’s shareholder loan account owed to Leo were tax paid, that is the balance arose from bonuses declared to Leo, but not paid to him in cash, in previous years.

11.   Robert Ltd. did not withhold any amounts on the Payments since the Payments represented a repayment of Leo’s Shareholder Loan. In particular:

(a)               The Shareholder Loan account was reduced by amounts corresponding to the Payments to the Appellant; and,

(b)               Robert Ltd. did not claim any income tax deduction for the Payments to the Appellant.

12. On or about June 24, 2009, the Appellant received a letter informing him that he had received Payments of $140,000 in total.

[4]            The letter dated September 28, 2006 which was referred to in paragraph 7 of the Statement of Agreed Facts reads, in principal part:

The sale of the L. Robert Group of Companies to CEDA International marks a new beginning for all of us. For me, it is retirement and enjoying life in Kelowna. For you, it is a new beginning with CEDA and numerous opportunities within the group.

As a Thank You for your years of service and for helping me make the company a success, I will be rewarding you with a bonus that will be paid out to you over the next three years on the anniversary date of the sale. The bonus will be $10,000 per year of service with the company and will only be payable to you if you remain an employee of the CEDA Group. This bonus will not be taxable to you as the tax will be paid by the company.

[5]            The letter dated June 24, 2009 which was referred to in paragraph 12 of the Statement of Agreed Facts reads, in principal part:

This letter is confirmation of the bonus received from Leo Robert after the sale of the company.

The total amount paid to you was $140,000 with $47,000 paid in December of 2006, $47,000 paid to you in January of 2007 and the remaining $46,000 paid to you in November of 2007. These amounts were not taxable to you as these amounts were paid from my shareholder’s loan account on money that the tax had already been paid by the company.

[Emphasis added]

Mr. Shaw was one of nine managers who received such payments from Mr. Roberts.

The court rejected Mr. Roberts’ evidence that the payment was a gift by him to Mr. Shaw:

[15]        Mr. Robert testified that he intended the Payments to be gifts to the managers and he intended that they should not have to pay taxes on the Payments.

[16]        I note that in the letter dated September 28, 2006, Mr. Robert informed the Appellant that the Payments would not be taxable to him because the tax would be paid by the company. Although Mr. Robert disagreed with the use of the word “bonus” in this letter, he did not disagree with this statement in the letter. However, I also note that in the letter dated June 24, 2009, Mr. Robert gave a different reason for the non-taxability of the Payments.

[17]        A review of the evidence and in particular, Mr. Robert’s evidence, has led me to conclude that the Appellant did not receive the Payments from Mr. Robert because he was a friend. Rather, he received the Payments because he was a manager of Robert Ltd. at the time that it was sold. All managers received Payments that were calculated in accordance with their years of service with Robert Ltd. Mr. Robert gave the Payments to each of the managers in their capacity as employees and he did not distinguish the Appellant from the other managers.

The court held that the payments arose out of Mr. Shaw’s employment and the fact that they were paid by Mr. Roberts rather than Roberts Ltd. did not affect their taxability:

[20]        When I apply the principles outlined in Savage, Phillips and Blanchard, I conclude that the Appellant received the payment of $140,000 in respect of, in the course of and by virtue of his employment. When a taxpayer received a payment on the condition that he continue to work for a particular employer, then that payment can hardly be said to have arisen from considerations extraneous to his employment: Phillips (supra) at paragraph 19. That one manager left the CEDA group prior to the expiration of three years and he received $10,000 directly from Mr. Robert does not alter that the condition was made and adhered to by the Appellant. The September 28, 2006 letter clearly stated that the Appellant was receiving the Payment in respect of and by virtue of his employment with Robert Ltd. The Payment was received “as a thank you” for his years of service with Robert Ltd.

[21]        The fact that the Appellant was not employed by Mr. Robert when he received the Payment does not alter my conclusion. Paragraph 6(1)(a) speaks to including benefits in computing the income of “the taxpayer for a taxation year as income from an office or employment”. Although the taxpayer must be an employee or an officer, it is not necessary that he be the employee or officer of the person who bestowed the benefit at the time the benefit was given: C v Minister of National Revenue, 1950 CarswellNat 33 (TAB). All that is necessary is that the taxpayer received the benefit “in respect of, in the course of, or by virtue of an office or employment”.

This case appears to be consistent with the very broad language of paragraph 6(1)(a) of the Income Tax Act[2] which provides that “benefits of any kind whatever” are to be included as employment income if they were received “in respect of, in the course of, or by virtue of an office or employment.”

[1] 2013 TCC 256.

[2] R.S.C. 1985, c. 1 (5th Supp.), as amended.