Re The Crown in right of Ontario (Ministry of Citizenship) and Ontario Public Service Employees' Union (Grinius)

[Indexed as: Ontario and O.P.S.E.U. (Grinius), Re] Ontario, Crown Employees Grievance Settlement Board, B.B. Fisher, G. Majesky, D. Montrose. July 24,1995. *

SUPPLEMENTARY AWARD concerning damages. R. Wells, for the union. J. Knight, for the employer.

SUPPLEMENTARY AWARD Facts and issues This case involves the determination of whether or not a reinstated grievor is entitled to additional compensation due to the extra tax paid as a result of receiving his reinstatement compensation in one tax year as opposed to over several years.

• Received September 27, 1995.

The agreed facts are as follows: 1. Klevas Grinius ("Grinius") was dismissed by the Ministry of Citizenship (the "Ministry") on June 15, 1990.

2. By order dated June 25, 1993, the Grievance Settlement Board ordered that Grinius be reinstated with a 30-day suspension substituted for the dismissal.

3. As confirmed by the supplementary award of the Grievance Settlement Board dated January 31, 1994, Grinius was paid in 1993 the gross amount of $117,311. As further confirmed by the supplementary award of the Grievance Settlement Board the payment of $117,311 included the sum of $110,778 for back wages allocated as follows: 1990 $20,947

1991 $20,523 1992 $49,258 1993 $20,040 4. Deductions for income tax purposes were taken from the payment made in 1993. The amount deducted was approximately $50,000.

5. Had the employment of Grinius continued without interruption (save for the 30-day suspension) through 1990, 1991, 1992 and 1993, that income would have been taxed at a lower marginal rate and in total, over the four years, Grinius would have paid income taxes, both federal and provincial, in an amount between approximately $11,000 and $19,000 less than the amount he actually paid as a result of receiving the funds in one lump sum in 1993.

6. In 1994 the chartered accountant who prepared Grinius' tax return sought to have the Ministry provide amended T4

Supplementaries from the Ministry to permit the refiling of Grinius' tax returns to seek to have the income received in 1993 attributed back to the appropriate taxation years for

1990 to 1993.

7. A review of the Income Tax Act, S.C. 1970-71-72, c. 63, leads to the conclusion that an employer is obliged to issue a T4 indicating the remuneration from employment paid to an employee in the year. The legislation does not contemplate an employer issuing a T4 for any other amount and, therefore, the Ministry could not provide Grinius with T4s for 1990, 1991, 1992 and 1993 which did not represent the actual amounts paid to him in those years. Further, the Ministry is under an

obligation to issue a T4 in the year in which the damages were paid which represent the total amount paid to Grinius in that year (1993).

The grievor is asking for two additional payments: (a) An award equal to the actual amount of extra tax he has paid because he received four years of income in one year, rather than over four years.

(b) In recognition that the award in (a) will also be taxable, an additional amount to be awarded to compensate for the tax payable on (a) so that the net effect of the payment would be that, after paying taxes on this supplemental amount he is left with an amount equal to (a). This payment can be referred to as the "gross up".

It should be noted that the grievor was unable to utilize the provisions of the Income Tax Act which allows a terminated employee to put sums determined to be a "retiring allowance" directly into an R.R.S.P., thereby making the payments not taxable in the year of receipt. This was because the grievor's employment was not terminated, rather he received this money as

a result of his reinstatement.

Union's argument The union's argument is actually quite simple and clear. As every law student learned in first year contract law, the purpose of contractual damages are to put the innocent party in the same position he or she would have been had the contract not been breached, subject to the requirement that the heads of damage must be reasonably foreseeable at the time of the breach.

Applying that principle to this case, the following facts would seem to be relevant:

(a) It is admitted that had the collective agreement not been breached, the grievor would have received employment income as set out in para. 3 of the facts, rather than one lump sum payment in 1994.

(b) As a consequence of this breach, the plaintiff has had to pay more income tax. (c) As the grievor was dismissed on June 15, 1990, it was certainly reasonably foreseeable at the time of termination that the grievor would file a grievance, that the final determination of the issue would not take place in 1990, that grievor would be reinstated with back pay and that he would receive two or more years' income in one year.

The concept of a gross up for income tax consequences in a damage award is certainly well-known in tort law. For instance, the Supreme Court of Canada in Andrews v. Grand & Toy Alberta Ltd. (1978), 83D.L.R.(3d)452, [1978] 2 S.C.R. 229, [1978] 1 W.W.R. 577, held [at p. 474] that awards under the Fatal Accident Act "should reflect tax considerations, since they are to compensate

dependants for the loss of support payments made by the deceased. These support payments could only come out of take-home pay, and the payments from the award will only be received net of taxes ...". Similarly, the Supreme Court of Canada in Watkins v. Olafson (1989), 61D.L.R.(4th)577, [1989] 2 S.C.R. 750, [1989] 6 W.W.R. 481, held that in determining the quantum of a lump sum payment for future care, a gross up should be provided so that the net amount after taxes is sufficient to satisfy the future care needs of the injured party. A similar analogy can be applied to the cases involving interest

on damage awards in reinstatement cases. In Re Air Canada and Canadian Air Line Employees' Assn. (1981), 29 L.A.C. (2d)142(P.C. Picher), the arbitrator dealt with the argument as to whether

or not arbitrators had the power to award interest. At p. 153, the following comment on the guiding principle was stated as follows:

The Court has emphasized that the object of awarding such damages is to put the aggrieved party into the position he would have been in if there had been no violation of the collective agreement. Rather than restrict the nature of the damages that it, the Court, concluded the collective agreement, though silent, contemplated and that an arbitrator, therefore, had implicit if not express authority to award, the Supreme Court has provided as a general guideline the "make whole" principle of the law of contract. The limitation to the application of this principle is that it not alter the terms of the collective agreement.

Union counsel agreed that in keeping with the "make whole" principle, the grievor should be awarded the gross up for excess

income tax. The actual issue in this case has only been addressed in an extremely limited number of labour arbitration cases. In Re Pacific Western Airlines Ltd. and Canadian Airline Employees Assn. (1982), 7L.A.C.(3d)340 (Larson), the reinstated grievor made a claim identical to that being pursued in this present case. At p. 346, the arbitrator made the following comments:

We also reject the claim for losses to the grievor in respect of higher taxes on the grounds that liability was not proven. It may well happen that the grievor will be required to pay higher taxes but that is subject to proof. We

therefore think it appropriate to deal with this claim strictly on the basis of an onus which has not been discharged.

In Re Canada Post Corp. and C. U.P.W. (Beale) (1989), 6 L.A.0 (4th) 232 (T.A.B. Jolliffe), the issue was addressed in the following

fashion at p. 241:

I also agree with Mr. Tait's position that all things considered any compensation related to the grievor having to liquidate $3,000 R.R.S.P. contributions in order to pay for a recently taken vacation does not meet the foreseeability test and should not be considered a heading of damages. Likewise the fact that the grievor will receive her monetary compensation package lump sum, putting her in a higher marginal tax bracket is, in my view, too remote a heading of damages. I know of no cases where an employer has been directed to pay additional compensation because of the tax ramifications of a lump sum payout and am not prepared to find that heading a foreseeable consequence of the discharge.

In Re Canada Post Corp. and C. U.P.W. (Winlaw) (1993), 36 L.A.C. (4th) 216, arbitrator T.A.B. Jolliffe revisited the same issue, and had the following comments at pp. 218 and 236:

The second issue pertains to the union's concern that the compensation payment to the grievor occurred over two months in June and July, 1991, resulting from the reinstatement order given on December 6, 1990, and following the parties' negotiations on the appropriate figure. As a result of the timing of the payment, she received the entire amount in 1991 being the year in which she was returned to her employment, the grievor has encountered certain adverse tax consequences. In this regard the union argues against a ruling which I previously made in another case Beale, supra, where at p. 241 I stated that the fact the reinstated employee received her monetary compensation package lump sum, thereby putting her in a higher marginal tax bracket, was in my view too remote a heading of

damage. I stated in my ruling that I knew of no cases where an employer had been directed to pay additional compensation because of the tax ramifications of a lump sum payment and I was not prepared to find it a foreseeable consequence of the discharge so as to qualify as a compensable heading of damages. Essentially, the union asserts that in light of its additional argument on the issue which it is now prepared to make, I should change my view. The corporation on the other hand accepts as reasonable the ruling I made some years previously in Beale. I must say that whereas in Beale this issue was presented in somewhat cursory fashion the parties have now had the opportunity to fully present their argument complete with an abundance of case-law, some of it quite recent. The corporation asserts also that in any event I am without jurisdiction to consider this second issue inasmuch as the compensation figure has been settled. Now the evidence.

Likewise consideration and inclusion of the tax ramification issue can hardly be considered fundamental. At present in compensation matters it is an emerging issue perhaps, but only arguable at best as a legitimate heading of compensatory damages. The corporation has not paid it in the past.

Employer's argument The employer's position focuses primarily on the fact that this head of damages has not been awarded in the past and that it is too remote. On the first point, the employer quite correctly points out that no other labour arbitrator has ever awarded this head of damages. It follows, therefore, says the employer, that it should not be awarded in this case. Secondly, the employer argues that it is not reasonably foreseeable that these losses would be incurred. In part, the employer's position is that it is not reasonably foreseeable that it would take four years to resolve this issue and thereby create such a significant excess tax burden on the lump sum payment. More-over, it was not reasonably foreseeable that the grievor would

have remained unemployed or underemployed for such a lengthy period, thereby incurring such large losses. The employer also raises the point that these damages are difficult to determine and thus will not only promote uncertainty

but also complicate the process of determining compensation in discharge cases. The employer also submitted that the issue at stake here is really one of tax unfairness which flows from the fact that the Income Tax Act does not provide for backward averaging in these situations. However, the problem should be remedied by changing the Income Tax Act, not burdening employers with the cost of this statutory unfairness.

Decision The union's position is entirely consistent with basic contract and damages theory and practice. There is no doubt that the grievor in this case has suffered a demonstrable and significant loss due to the extra tax burden as a result of receiving four years' income in one year. Although it is certainly unusual for there to be a four-year gap between the date of discharge and the date of reinstatement, it is quite reasonably foreseeable, especially in a case before the Grievance Settlement Board, to expect that the date of discharge

and the date of reinstatement would span two calendar years, thus two tax periods. It is quite foreseeable, therefore, that in almost any reinstatement case there will be a movement of taxable income from one year to another. It is common knowledge upon

the general population that Canada has a progressive tax system; therefore, it is reasonably foreseeable that combining two or more

years' income into one will likely result in a higher tax liability than if the income was spread out over the same period. The issue of reasonable foreseeability (or remoteness of damage as it is sometimes called) relates not to the quantum of damages

but to the head or type of damages. Therefore, if it is reasonably foreseeable at the time of the improper discharge that the grievor, if reinstated with back pay at a later time in another tax year, would suffer damages due to the increased tax burden, then it matters not whether the actual delay is four years instead of two, or the actual tax burden is $20,000 as opposed to $2,000. This case undoubtedly took much longer than anyone expected, and no single party is to blame. There were complex preliminary issues, numerous witnesses, extensive submissions and the like. However, as this was a discharge case, at all times it was the employer and only the employer, who could have avoided the mounting liability by reinstating the grievor. It chose, as is its right, to have the G.S.B. determine the issue; however, having done so, it should not be the grievor who suffers the extra loss because of the lengthy process.

I therefore find that this type of damages is reasonably foreseeable. The mere fact that this type of damage award has never been awarded is of little significance for the following reasons.

(a) Both counsel have been able to find only three cases where it was even raised by the union.

(b) In none of the cases was the issue squarely addressed. In the Pacific Western Airlines case, the claim was dismissed because there was no proof of any loss. In Canada Post (Beale) the issue was, in the words of the same arbitrator in the subsequent Winlaw case, "presented in a somewhat cursory matter". In the Canada Post (Winlaw) case, the issue was not awarded because the arbitrator found that the parties

had already agreed on a settlement number which included all heads of damages.

(c) As there are no previous cases which properly dealt with the issue on its merits, it is open to us and indeed proper for us to deal with this case on the basis of first principles.

(d) Obviously, if no judge or arbitrator ever did anything unless someone else had done it before, the law could never develop or deal with new situations.

The fact that these damages may be difficult to ascertain is no reason we should not try and do our best to calculate the loss. There is an obligation upon the union to present proper factual evidence and perhaps even expert evidence to prove the loss, but if they accept such an obligation to do so, this board should make the appropriate award. Perhaps as time goes on and this head of damage becomes a more commonplace award, the parties will develop short cuts and formulas to determine the loss.

We disagree with the employer that this is strictly a problem between the grievor and Revenue Canada. The employment relationship between these parties exists in the legal framework of the laws of Canada, including the Income Tax Act. It is within that existing framework that the contractual damages are calculated. If the present tax laws are such so that receiving a large

lump sum is less favourable than periodic payments, then it is proper that the employer pays the costs caused by this situation, as they caused the dismissal in the first case. If, on the other hand,

the tax law was such that it was more favourable for an employee to receive a large lump sum rather than periodic payments, it would be open to an employer to argue that it should not have to pay the employee the entire amount of his back wages, but only that amount which would put the employee in the same net tax position as if he had received his regular wages during the same period. The guiding principle with respect to compensation awards is that a reinstated employee is to be put in the same economic position he or she would have been had the dismissal not occurred. This means that the employee should not be any worse off, nor any better off, than if the dismissal had not occurred in the first place. We, therefore, find the grievor is entitled to be compensated for

the additional tax burden resulting from receiving his lump sum damage award as compared to what he would have paid had he been receiving his regular wages in the subject period. As any such payment in itself will be taxable income, this amount is to be grossed up so that the net amount is sufficient to compensate him for the aforementioned tax differential. If the parties cannot agree on the quantum of this payment within 60 days of the release date of this award, then either party may request that the registrar reconvene this same panel to

determine the sum owing, together with any interest owing on that sum. [D. Montrose dissented.]