The Queen v. Blanchard, 95 DTC 5479, [1995] 2 CTC 262 (FCA)

Linden J.A.:—The issue in this case concerns whether an amount received by the respondent as a buy-out of his rights in an employee housing arrangement is taxable as income. The Crown claims it is. To ground this claim, the Crown relies alternatively upon paragraphs 6(1 )(a), 6(l)(b) and subsection 6(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), which provide:

6(1) Amounts to be included as income from office or employment -There shall be included in computing the income of the taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) value of benefits.-the value of board, lodging and other benefits of any kind whatever received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment...

(b) personal or living expenses -all amounts received by him in the year as an allowance for personal or living expenses or as an allowance for any other purpose...

(3) Payments by employer to employee-An amount received by one person from another

(a) during a period while the payee was an officer of, or in the employment of, the payer, or

(b) on account or in lieu of payment of, or in satisfaction of, an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer

shall be deemed, for the purposes of section 5, to be remuneration for the payee’s services rendered as an officer or during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or the legal effect thereof, it cannot reasonably be regarded as having been received

(c) as consideration or partial consideration for accepting the office or entering into the contract of employment, [or]

(d) as remuneration or partial remuneration for services as an officer or under the contract of employment....

I am of the view that the Crown’s argument must succeed. Because I find that paragraph 6(1 )(a) and subsection 6(3) are each sufficient to dispose of this appeal, it will be unnecessary for me to deal with the paragraph 6(1 )(b) argument.

Section 6 of the Income Tax Act was designed to supplement and broaden the notion of taxable employment income as set out in section 5, which provides that all forms of remuneration are to be included as employment income. (See MacDonald v. Canada, [1994] F.C.J. No. 378 (unreported) at paragraphs 4-6.) The notion of "remuneration", however, encompasses only those payments flowing from an employer to an employee for services rendered or work performed. It does not encompass other gains or advantages not directly classifiable as remuneration but arising, nonetheless, out of the taxpayer’s employment. To capture these items, various inclusion provisions were added. Two of those provisions concern us directly here, paragraph 6(1 )(a) and subsection 6(3).

Paragraph 6(1 )(a) is an all-embracing provision. It provides that all "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". The section casts a wide net, incorporating two broadly worded phrases. The first is "benefits of any kind whatever". The scope contemplated by this phrase is plain and unambiguous: all types of benefits imaginable are to be included. Speaking for the majority in The Queen v. Savage, [1983] 2 S.C.R. 428, [1983] C.T.C. 393, 83 D.T.C. 5409, Dickson J. (as he then was) stated that paragraph 6(1 )(a) was "quite broad" and covered any "material acquisition which confers an economic benefit". [1]

The second phrase is a group of three phrases: "in respect of", "in the course of", and "by virtue of". In Nowegijick v. The Queen, [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C. 5041, the Supreme Court of Canada explained the words "in respect of" at S.C.R. page 39:

The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.

The above comments are relevant in interpreting paragraph 6(1 )(a). Parliament, has added the phrases "in the course of" and "by virtue of", to the phrase "in respect of" in order to emphasize that only the smallest connection to employment is required to trigger the operation of the section.

Paragraph 6(1 )(a) leaves little room for exceptions, but a few have surfaced in the jurisprudence. First, reimbursements paid by an employer to an employee for expenses incurred by that employee are not taxable. They are not benefits. They do not put anything in the taxpayer’s pocket, but merely save the pocket of the taxpayer. [2] In other words, they are merely payments in an overall zero-sum transaction. Speaking to the facts underlying the case, Cullen J. in Splane v. Canada, [1990] 2 C.T.C. 199, 90 D.T.C. 6442 (F.C.T.D.), at page 203 (D.T.C. 6445) stated:

The plaintiff moved at the request of his employer, incurred certain expenses in the move, and suffered a loss. The reimbursement of these expenses cannot be considered as conferring a benefit within the terms of the Act. The plaintiff was simply restored to the economic situation he was in before he undertook to assist his employer by relocating to the Edmonton office.

Reimbursements for costs actually incurred are, therefore, not caught by paragraph 6(1 )(a).

Second, a benefit that is wholly "extraneous" or "collateral" to one’s employment, that is, one that is received in one’s "personal capacity" only, may fall outside paragraph 6(1 )(a). [3] This exception is very narrow and is available only where there is no connection or link to the employment relationship.

I now turn to applying these principles to the facts of this appeal.

The employer of the taxpayer, Eugene Blanchard, was Syncrude Canada Ltd., which operated an oil processing plant in Fort McMurray, Alberta. Blanchard, was invited to take a position at this plant. As part of Syncrude’s offer of employment, Blanchard was given the option of participating in a housing program. This program was administered by Northward, a nominee of Syncrude. The program was established to deal with the problem of inadequate housing in Fort McMurray, which was a rather remote village. It was meant to attract potential employees, like Blanchard. The program provided, among other things, for a buy-back arrangement that worked as follows. Upon the happening of any of several triggering events-one of which being the cessation of an employee’s employment-a right would devolve upon both Northward and the employee to serve notice on the other party, whereby a binding obligation on Northward to purchase and on the employee to sell would be created. This buy-back arrangement guaranteed both a housing market for the sale of employee property, if required, and a minimum price for that sale. As part of the arrangement, the employee could sell the property without having to pay a real estate commission. Blanchard became employed by Syncrude in 1978 and opted to participate in the housing program.

Six years later, in 1984, Syncrude, decided to withdraw from the housing market. To this end, it developed an Early Termination of Agreement Program (ETAP), a program which was offered to all employees who had participated in the original housing program. As part of ETAP, employees were offered a payment equivalent to the estimated real estate commission that would be payable if they were to sell their homes on the real estate market at that time. The respondent, along with many other fellow employees, accepted the ETAP offer and was paid $7,240. It is this payment that is the subject of this appeal.

The trial judge found that the payment was made:

as a result of contracts extraneous to the plaintiffs employment; contracts relating to the ownership of land which were not prerequisites of the plaintiffs employment and did not affect or change his employment.... The ETAP program and the payment did not have any connection with the plaintiffs employment other than that it was paid by an agent of the employer; it did not upgrade him or make him a more valuable employee, nor did it create an opportunity for promotion.

Counsel for the respondent agrees with this position. The payment, says counsel, was simply part of a "house deal". It arose from "a surrender of rights in contract quite apart from Mr. Blanchard’s employment". It arose, in other words, from contracts "extraneous" or "collateral" to the respondent’s employment.

In support of this claim, counsel points to several factors. He urges that the original agreement was totally separate from ETAP, and, that the latter was never contemplated at the time the original agreement was entered into. Further, the original agreement setting out the various commitments contemplated under the housing policy contained a definition of employee which included parties other than Syncrude employees. Article 4.07 of that agreement provided that, where two or more individuals constitute the "employee" for the purposes of the agreement, "the covenants of the employee as herein contained shall be deemed to be joint and several". In the present case, both Eugene Blanchard and his wife Martha signed the agreement. According to counsel for the respondent, Martha’s signature, and her resulting liability under the agreement, indicated that the contract was extraneous to Eugene’s employment. This conclusion is strengthened, he says, when one notes that the names of both Eugene and Martha appear on the land transfer certificate and the certificate of title for the house they purchased under the program, on the mortgage agreement with Northward, and finally on the master agreement through which the ETAP was put into effect. The ETAP payment was, therefore, made to the respondent and Mrs. Blanchard in their capacity as persons. Further, in theory at least, if the employment relationship ended there did not necessarily have to be a buy-back; either party had the right to insist on this but neither was obligated to. Lastly, if Blanchard had died, all his rights would flow to this wife, who was not an employee of the company.

I disagree with both the respondent’s submissions and the trial judge’s conclusion that the ETAP payment arose from factors "extraneous" or "collateral" to the respondent’s employment. There is no doubt that the payment to the taxpayer came about as part of a real estate transaction. But this transaction was not a mere "house deal", totally divorced from the employment relationship of the taxpayer, which might take it out of the reach of paragraph 6( 1 )(a). That section, if I am to respect its unambiguous wording, requires only some connection between the receipt of a payment and the recipient’s employment-nothing seems to turn on the source of the payment. It makes no difference whether a receipt arises from a land deal, a boat deal, a livestock deal, or any other type of deal, as long as the receipt is linked to the recipient’s employment.

With this in mind, I agree with the Crown’s submission that the money received by the taxpayer was connected to the respondent’s employment. The original housing policy, as the preamble to the 1978 employee agreement stated, was designed to ’’assist" Syncrude employees "to locate, finance, and enjoy residential accommodation in the Fort McMurray district". This arrangement was admitted to have been an inducement to Blanchard taking the job. This agreement further specified that if the "employment of Eugene Joseph Blanchard with Syncrude or Northward should for any reason terminate", the buy-back obligations could be triggered by either party.

There is more to this point of employment linkage. Article 26 of the 1978 agreement for sale between Northward and the Blanchards states:

26. This agreement is not effective unless and until the purchaser has entered into an agreement with Syncrude Canada Ltd. in the form of the "employee agreement" utilized by Syncrude Canada Ltd. as of the date of execution of this agreement.

By this article, the actual sale transaction is, in the words of Crown counsel, "inextricably linked" with the respondent’s employment. The agreement for sale is not effective unless an employee agreement has been signed. The employee agreement was offered only to employees of Syncrude, even though all employees did not avail themselves of it. The original agreement for sale, then, having acted as an inducement to Blanchard’s accepting the position, was directly linked to employment.

I shall now consider the two documents of the 1984 termination program. The transfer loan agreement of 1984 provided an accelerated closing date (November 1, 1984) and a transfer of title upon payment of all moneys due by that date. Clause 7 of that agreement stated in essence that the transfer loan agreement was valid only if Eugene Blanchard was employed by Syncrude on the accelerated closing date. The master agreement, the agreement terminating the employee agreement of 1978 and as a result of which the $7,240 amount was paid, states in clause 1 that:

1. This agreement is not effective unless and until the employee has entered into an agreement with Northward in the form of the "transfer and loan agreement" utilized by Northward as of the date of execution of this agreement....

The overall effect of these agreements is clear. A housing policy was created by the employee agreement in 1978. This policy was designed to assist the relocation of Syncrude employees to the remote and developing region of Fort McMurray. The policy also provided an incentive for such relocation: employees were offered a guaranteed housing market and price for resale, and were offered the benefit of avoiding any real estate commission that they might otherwise have had to pay. It did induce Blanchard to take the job. The policy was offered only to employees of Syncrude. It was put into effect with those employees who opted to take advantage of it through the 1978 agreement for sale. In 1984, Syncrude decided to withdraw from the housing market. To facilitate this, it drafted two agreements through which its contingent obligations would be eliminated and bought out. The validity of both agreements, the transfer and loan agreement and the master agreement, depended on both agreements being signed by the interested parties. Furthermore, the termination program effected by these agreements were offered to participants in the housing policy, which, of course, had been offered only to employees of Syncrude. But for Eugene Blanchard’s continuing employment with Syncrude, and the original deal he made as a result of this employment, the ETAP payment would never have been made. Receipt of this money, then, can only have been in respect of, in the course of, or by virtue of his employment.

In addition, this payment constituted a benefit received by the taxpayer. The payment was clearly a "material acquisition". It represented the "money’s worth" of certain contractual rights which benefitted the respondent personally in an economic manner. It does not matter that the employer may also have benefitted from the housing policy by attracting employees to its project. There was economic benefit to the employee in receiving in advance money which he may or may not have had to pay out at some time in the future. He was not merely being reimbursed for costs incurred. He did not have to account for the amount received. Here, the benefit initially took the form of a valuable contractual right, intended to induce employees to relocate to a remote region of the province, and, in fact, it induced Blanchard to do so. It may have incidentally benefitted the spouses and families of the employees as well, but this does not make it anything other than a benefit to the taxpayer. This contractual right was evaluated and paid in money under ETAP. Hence, this payment was a benefit received by the taxpayer and is taxable under paragraph 6(l)(a).

I turn now to subsection 6(3). Paraphrasing paragraph 6(3)(b) and paragraph 6(3)(c), where an amount is received by a person in satisfaction of an obligation arising out of an agreement made by that person and the payor immediately prior to, during or immediately after a period when the person was employed by the payor, that payment is deemed to be remuneration during the period of employment subject to this exception: if it is established that the amount received cannot reasonably be regarded as consideration or partial consideration for entering the contract of employment, it will not be deemed to be remuneration. This is a very broadly aimed provision that covers the present circumstances. Eugene Blanchard received a $7,240 payment while in the employ of the payor. This payment was made in satisfaction of an obligation arising out of an agreement entered into between Blanchard and the payor either at the time of or before the period of employment. This original agreement was clearly intended to induce and did induce Blanchard to accept the employment. It has not been established that this payment "cannot reasonably be regarded as having been received as consideration or a partial consideration for...entering into the contract of employment”. On the contrary, it is clear that the payment arising from the satisfaction of the obligation that arose under this agreement was received as ’’consideration or partial consideration” for entering into the contract of employment. It is, therefore, remuneration and is taxable.

This appeal will be allowed, the decision of the trial judge will be set aside, so that the reassessment will stand. In the circumstances, however, there will be no costs awarded.

Appeal allowed.