Schwartz v. Canada, [1996] 1 S.C.R. 254

Alan M. Schwartz Appellant

v.

Her Majesty The Queen Respondent

Indexed as: Schwartz v. Canada

File No.: 24093.

1995: October 6; 1996: February 22.

Present: La Forest, L'Heureux‑Dubé, Sopinka, Gonthier, McLachlin, Iacobucci and Major JJ.

on appeal from the federal court of appeal

Taxation ‑‑ Income tax ‑‑ Computation of income ‑‑ Damages for cancellation of employment ‑‑ Employment contract cancelled by employer before employee obliged to provide services ‑‑ Whether damages received by employee taxable as income from unenumerated source or as retiring allowance ‑‑ Income Tax Act, R.S.C. 1952, c. 148, ss. 3(a), 56(1)(a)(ii).

Courts ‑‑ Appellate court ‑‑ Court of Appeal overturning trial judge's findings of fact with respect to apportionment of damages received by taxpayer for cancellation of employment contract ‑‑ Whether Court of Appeal justified in interfering with trial judge's findings of fact ‑‑ Principles to be followed by first and second appellate courts.

The appellant, a lawyer, accepted an offer of employment from a company in May 1988. The appellant was to receive a salary of $250,000 annually as well as the option to acquire non‑voting shares of the company. Both parties also agreed that he would start working upon completion of his assignment for the Government of Ontario. A few months later, the company informed the appellant that his services would not be required and offered him $75,000 in exchange for a full and final release. The appellant refused the offer. In January 1989, he withdrew from his law partnership and commenced a new employment. Following negotiations, the appellant reached a settlement with the company which agreed to pay him $360,000 as damages plus $40,000 on account of costs. The Minister of National Revenue assessed the damages as constituting a "retiring allowance" taxable under s. 56(1)(a)(ii) of the Income Tax Act. The Tax Court of Canada set aside the Minister's assessment. The trial judge held that the damages were not a "retiring allowance" within the meaning of s. 248(1) of the Act. He also held that the damages were not "income from employment" under s. 3(a) of the Act, finding that there was no evidence indicating any allocation of the settlement amount and that the damages had been received in a small part, if any, for loss of income for future services and to a larger part, according to the evidence, for embarrassment, anxiety and inconvenience. The Federal Court of Appeal agreed with the trial judge that the damages did not constitute a retiring allowance but overturned his findings of fact relating to apportionment because he had omitted to consider relevant documentary evidence ‑‑ two letters from the parties' solicitors ‑‑ which was contradictory to the testimonial evidence given by the appellant. The court preferred the documentary evidence over the appellant's testimony and held that, on a balance of probabilities, $75,000 had been allocated for loss of salary, $267,000 for loss of the stock options, and $18,000 for embarrassment, anxiety and inconvenience suffered by the appellant. The court held that compensation received by a person for the failure to receive a sum of money which, if it had been received, would have constituted income from employment, should be treated, for tax purposes, in the same way as if the sum of money had been received instead of the compensation. Accordingly, the court concluded that the damages relating to lost salary and stock options were taxable under s. 3(a) of the Act as income from employment.

Held: The appeal should be allowed.

Per La Forest, L'Heureux‑Dubé, Gonthier and McLachlin JJ.: A first appellate court can only intervene in a trial judge's findings of fact where it can be established that he made a palpable and overriding error which affected his assessment of the facts. A clear omission of evidence by the trier of fact is the kind of error that can and will justify a reassessment of the balance of probabilities taking into consideration the omitted elements by the appellate court. In order to disturb the trial judge's findings of fact, however, the first appellate court must come to the conclusion that the evidence in question and the error made by the trial judge in disregarding it were overriding and determinative in the assessment of the balance of probabilities with respect to that factual issue. When a second appellate court agrees with the ground upon which the first appellate court intervened, the second appellate court can substitute its own assessment of the evidence for the first appellate court's. The first appellate court is not in a more advantageous or privileged position than the second appellate court in assessing the evidence and thus there is no reason why a second appellate court should show deference towards the first appellate court's assessment of the balance of probabilities. If the ground upon which a first appellate court relies to intervene is, in the opinion of a second appellate court, ill‑founded, the trial judge's findings will be restored.

While the Minister should not have the burden of presenting, in every case where the apportionment of a general award is at issue, specific evidence amounting to an explicit expression of the parties' intention with respect to that question, there must be some evidence, in whatever form, from which the trial judge will be able to infer, on a balance of probabilities, which part of that general award was intended to compensate for specific types of damage. Here, the letters from the parties' solicitors, considered in the global evidentiary context of this case, are insufficient to serve as a basis for such an inference. These letters establish that in arriving at the final settlement amount, the parties considered losses of salary and stock options, but they do not constitute evidence as to what portion of the amount was allocated to such losses. The Federal Court of Appeal was thus wrong in concluding that the trial judge had failed to consider contradictory evidence and in interfering with his findings of fact regarding the apportionment. The court's conclusions as to the appellant's credibility ‑‑ as opposed to those arrived at by the trial judge ‑‑ also constitute in the present circumstances unjustified and inappropriate intervention by an appellate court on a matter which is at the core of a trial judge's duties. Since there is no evidence tending to establish specifically what portion of the amount was allocated to which head, the damages received by the appellant cannot, in whole or in part, be found to be taxable under s. 3(a) of the Income Tax Act as income from the employment contract.

Taxability in this case should be assessed pursuant to the retiring allowances provisions of the Act. While s. 3(a) of the Act contemplates the possibility that income arising from sources other than those enumerated in s. 3(a) and in Subdivision d of Division B of Part I of the Act may nonetheless be taxable, to find that the damages received by the appellant are taxable under the general provision of s. 3(a) would disregard the fact that Parliament, in amending the Income Tax Act in 1983, has chosen to deal with the taxability of such payments in the provisions relating to retiring allowances. Such an approach would amount to giving precedence to a general provision over the detailed provisions enacted by Parliament. This would be inconsistent with basic principles of interpretation.

The damages received by the appellant cannot be considered a "retiring allowance" within the meaning of s. 248(1) of the Act ‑‑ and therefore are not taxable under s. 56(1)(a)(ii) ‑‑ because they were not received "in respect of a loss of . . . employment". When one considers the ordinary meaning to be given to the words found in the definition of “employment” in s. 248(1), a distinction must be made between the start of the contractual relationship agreed upon by the employer and the employee and the moment, according to the terms of the contract, at which the employee is bound to start providing services to the employer. The statutory requirement that one must be “in the service” of another person to be characterized as an "employee" excludes any notion of prospective or intended employment. An employee is thus only "in the service" of his employer from the moment he becomes under obligation to provide services under the terms of the contract. It follows that "loss of employment” cannot occur before an employee becomes under obligation to provide services to his future employer because he cannot, before that moment, be "in the service" of that employer.

Per Sopinka, Iacobucci and Major JJ.: On a plain meaning, s. 56(1)(a)(ii) of the Income Tax Act does not provide for the taxation of settlements for loss of intended employment. As well, there was no factual foundation on which to argue that the settlement could be taxed under s. 3(a) of the Act as income from the employment contract. It is, however, unnecessary and undesirable in this case to answer the question of whether s. 3(a) permits taxation of unenumerated sources of income. If this Court intends to conclude that s. 3(a) should be applied literally, and permit taxation on income from any source, it should only do so in circumstances which warrant such a decision because such a result is of fundamental importance. Moreover, so deciding can be viewed as a marked departure from previous tax jurisprudence.

Cases Cited

By La Forest J.

Referred to: The Queen v. Atkins, 1976 CanLII 1161 (FCA), 76 D.T.C. 6258, aff'g 1975 CanLII 1100 (FC), 75 D.T.C. 5263; The Queen v. Pollock, 1984 CanLII 5799 (FCA), 84 D.T.C. 6370; Stein v. The Ship "Kathy K", 1975 CanLII 146 (SCC), [1976] 2 S.C.R. 802; London & Thames Haven Oil Wharves, Ltd. v. Attwooll, [1967] 2 All E.R. 124; The Queen v. Manley, 1985 CanLII 5497 (FCA), [1985] 2 F.C. 208, leave to appeal refused, [1986] 1 S.C.R. xi; Krivy v. Minister of National Revenue, 79 D.T.C. 121; Girouard v. The Queen, 80 D.T.C. 6205; Beck v. Minister of National Revenue, 80 D.T.C. 1747; Grozelle v. Minister of National Revenue, 77 D.T.C. 310; Specht v. The Queen, [1975] F.C. 150; No. 45 v. Minister of National Revenue, 52 D.T.C. 72; Larson v. Minister of National Revenue, 67 D.T.C. 81; Jones v. Minister of National Revenue, 69 D.T.C. 4; Clarke v. Edinburgh and District Tramways Co., [1919] S.C. (H.L.) 35; Dorval v. Bouvier, 1968 CanLII 3 (CSC), [1968] S.C.R. 288; Beaudoin‑Daigneault v. Richard, 1984 CanLII 15 (SCC), [1984] 1 S.C.R. 2; Laurentide Motels Ltd. v. Beauport (City), 1989 CanLII 81 (SCC), [1989] 1 S.C.R. 705; Lapointe v. Hôpital Le Gardeur, 1992 CanLII 119 (SCC), [1992] 1 S.C.R. 351; Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377; Fletcher v. Manitoba Public Insurance Co., 1990 CanLII 59 (SCC), [1990] 3 S.C.R. 191; Chartier v. Attorney General of Quebec, 1979 CanLII 17 (SCC), [1979] 2 S.C.R. 474; Demers v. Montreal Steam Laundry Co. (1897), 1897 CanLII 57 (SCC), 27 S.C.R. 537; Jack Cewe Ltd. v. Jorgenson, 1980 CanLII 177 (SCC), [1980] 1 S.C.R. 812; Curran v. Minister of National Revenue, 1959 CanLII 98 (SCC), [1959] S.C.R. 850, aff'g 1957 CanLII 812 (CA EXC), 57 D.T.C. 1270; Canada v. Fries, 1990 CanLII 48 (SCC), [1990] 2 S.C.R. 1322, rev'g 1989 CanLII 9437 (FCA), [1989] 3 F.C. 362; The Queen v. Savage, 1983 CanLII 32 (SCC), [1983] 2 S.C.R. 428; Québec (Communauté urbaine) v. Corp. Notre‑Dame de Bon‑Secours, 1994 CanLII 58 (SCC), [1994] 3 S.C.R. 3; Stubart Investments Ltd. v. The Queen, 1984 CanLII 20 (SCC), [1984] 1 S.C.R. 536; The Queen v. Golden, 1986 CanLII 50 (SCC), [1986] 1 S.C.R. 209; Johns‑Manville Canada Inc. v. The Queen, 1985 CanLII 43 (SCC), [1985] 2 S.C.R. 46; The Queen v. Imperial General Properties Ltd., 1985 CanLII 7 (SCC), [1985] 2 S.C.R. 288; Bronfman Trust v. The Queen, 1987 CanLII 76 (SCC), [1987] 1 S.C.R. 32; McClurg v. Canada, 1990 CanLII 28 (SCC), [1990] 3 S.C.R. 1020; Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103; R. v. Zeolkowski, 1989 CanLII 72 (SCC), [1989] 1 S.C.R. 1378; Thomson v. Canada (Deputy Minister of Agriculture), 1992 CanLII 121 (SCC), [1992] 1 S.C.R. 385; Symes v. Canada, 1993 CanLII 55 (SCC), [1993] 4 S.C.R. 695; Thibaudeau v. Canada, 1995 CanLII 99 (SCC), [1995] 2 S.C.R. 627; Canada v. Antosko, 1994 CanLII 88 (SCC), [1994] 2 S.C.R. 312.

By Major J.

Referred to: The Queen v. Savage, 1983 CanLII 32 (SCC), [1983] 2 S.C.R. 428; Curran v. Minister of National Revenue, 1959 CanLII 98 (SCC), [1959] S.C.R. 850; Canada v. Fries, 1990 CanLII 48 (SCC), [1990] 2 S.C.R. 1322.

Statutes and Regulations Cited

Act to amend the statute law relating to income tax (No. 2), S.C. 1980‑81‑82‑83, c. 140.

Income Tax Act, R.S.C. 1952, c. 148 [am. 1970‑71‑72, c. 63] (now R.S.C., 1985, c. 1 (5th Supp.)), ss. 3(a), 5(1), 6(1)(a) [am. 1980‑81‑82‑83, c. 140, s. 1(1)], (9) [rep. & sub. idem, s. 1(6)], 12(1)(w) [rep. & sub. 1984, c. 45, s. 5(2)], 56(1)(a)(ii) [am. 1980‑81‑82‑83, c. 140, s. 26; am. 1987, c. 46, s. 15], (viii) [ad. 1979, c. 5, s. 15; rep. 1980‑81‑82‑83, c. 140, s. 26(3)], 80.4(1) [rep. & sub. idem, s. 44; am. 1984, c. 45, s. 25], 248(1) "employee", "employment", "retiring allowance" [rep. & sub. 1980‑81‑82‑83, c. 140, s. 128(10); am. 1990, c. 39, s. 54], "termination payment" [ad. 1979, c. 5, s. 66(8); rep. 1980‑81‑82‑83, c. 140, s. 128(13)].

Authors Cited

Arnold, Brian J., Tim Edgar and Jinyan Li, eds. Materials on Canadian Income Tax, 10th ed. Scarborough, Ont.: Carswell, 1993.

Canada. Minister of National Revenue. Taxation. Interpretation Bulletin IT‑337R. "Retiring Allowances", November 19, 1979.

Canada. Minister of National Revenue. Taxation. Interpretation Bulletin IT‑365. "Damages, Settlements, and Similar Receipts", March 21, 1977.

Canada. Minister of National Revenue. Taxation. Interpretation Bulletin IT‑365R. "Damages, Settlements, and Similar Receipts", March 9, 1981.

Collins, Lisa M. "The Terminated Employee: Minimizing the Tax Bite". In Canadian Tax Foundation, Report of Proceedings of the Forty‑Fifth Tax Conference. Toronto: Canadian Tax Foundation, 1994, 31.1.

Gibbens, R. D. "Appellate Review of Findings of Fact" (1992), 13 Adv. Q. 445.

Goodwin, Robert B. "Personal Damages". In Canadian Tax Foundation, Report of Proceedings of the Twenty‑Eighth Tax Conference. Toronto: Canadian Tax Foundation, 1977, 813.

Hansen, Brian G. "The Taxation of Employees". In Brian G. Hansen, Vern Krishna and James A. Rendall, contributing eds., Canadian Taxation. Toronto: Richard De Boo, 1981, 117.

Harris, Edwin C. Canadian Income Taxation. Toronto: Butterworths, 1979.

Harris, Edwin C. Canadian Income Taxation, 4th ed. Toronto: Butterworths, 1986.

Hogg, Peter W., and Joanne E. Magee. Principles of Canadian Income Tax Law. Scarborough, Ont.: Carswell, 1995.

Krishna, Vern. "Characterization of Wrongful Dismissal Awards for Income Tax" (1977), 23 McGill L.J. 43.

Krishna, Vern. The Fundamentals of Canadian Income Tax, 4th ed. Scarborough, Ont.: Carswell, 1992.

MacDonald, W. A., and G. E. Cronkwright, eds. Income Taxation in Canada, vol. 2. Scarborough, Ont.: Prentice‑Hall, 1977 (loose‑leaf).

Rendall, James A. "Defining the Tax Base". In Brian G. Hansen, Vern Krishna and James A. Rendall, contributing eds., Canadian Taxation. Toronto: Richard De Boo, 1981, 59.

Scace, Arthur R. A. The Income Tax Law of Canada, 4th ed. Toronto: Law Society of Upper Canada, 1979.

APPEAL from a judgment of the Federal Court of Appeal, 1994 CanLII 3462 (FCA), [1994] 2 F.C. 720, [1994] 2 C.T.C. 99, 94 D.T.C. 6249, 167 N.R. 35, 2 C.C.P.B. 109, setting aside a judgment of the Tax Court of Canada, 1993 CanLII 17469 (TCC), [1993] 2 C.T.C. 2125, 93 D.T.C. 555. Appeal allowed.

Benjamin Zarnett and Carrie Smit, for the appellant.

J. S. Gill, Q.C., Susan Van Der Hout and Elizabeth Chasson, for the respondent.

The judgment of La Forest, L'Heureux‑Dubé, Gonthier and McLachlin JJ. was delivered by

[1] La Forest J. -- This appeal involves the issue whether compensation received by an "employee" from his "employer" pursuant to a settlement regarding liability for the employer's unilateral decision to cancel a contract of employment before the employee had become under obligation to provide services is taxable as income from an unenumerated source under the general provision of s. 3(a) of the Income Tax Act, R.S.C. 1952, c. 148 (now R.S.C., 1985, c. 1 (5th Supp.)), or, in the alternative, as a retiring allowance under s. 56(1)(a)(ii) of the Act.

I. Background

[2] In the spring of 1988, Mr. Schwartz, a lawyer, received a verbal offer of employment from the Dynacare Health Group Inc.'s Chairman, Albert J. Latner. The appellant accepted on the basis that the employment would begin on completion of an assignment by the appellant for the Government of Ontario, which was expected in November. Later, in May 1988, Mr. Schwartz wrote Mr. Latner a letter outlining the terms of their agreement. Mr. Latner accepted the proposed terms and signed the letter. They agreed that the appellant was to receive a salary of $250,000 annually as well as the option to acquire 1.25 percent of the existing non-voting shares of Dynacare, calculated at the date of the agreement, for the price of $0.01 per share. The agreement provided that the shares would “vest in three equal amounts [on the date of commencement of the employment and on the first and second anniversary dates]”. They also agreed that every effort would be made to minimize taxes payable by both parties. Within days, the appellant notified his partners of his intention to withdraw from the partnership at the end of his assignment.

[3] The contract was never carried out. In late September, Dynacare informed the appellant that his services would not be required. Later, the appellant received a letter dated October 6, 1988 from Dynacare's solicitors confirming the cancellation of the employment, recognizing Dynacare's contractual obligation towards the appellant and offering him $75,000 in exchange for a full and final release. The letter also made reference to the fact that the appellant had an obligation to mitigate his damages. The appellant refused the offer. He continued to practise law until he withdrew from the partnership on January 31, 1989, as he had agreed with his partners. He commenced employment with an investment firm the next day at an annual salary of $175,000.

[4] Negotiations for settlement were conducted by the parties' lawyers during the course of which two letters, later filed at trial, were exchanged. The first, dated June 13, 1989, was from Dynacare's solicitors and was addressed to the appellant's solicitors. It dealt specifically with the value of Mr. Schwartz's stock options and concluded that Dynacare considered them to be worth $267,000 for the purposes of the settlement. Dynacare's solicitors also stated that their client was “prepared to be flexible around the range of $267,000”. The appellant's solicitors replied in a letter dated June 22, 1989, expressing disagreement with Dynacare's method of calculating the value of the stock options and stating that the appellant was owed $75,000 as lost salary. That letter contained an offer to settle the dispute for $400,000 plus costs.

[5] A settlement was reached and a release was signed on August 21, 1989. Dynacare agreed to pay the appellant a lump sum of $360,000 as damages plus $40,000 on account of costs. At trial, Mr. Schwartz testified that in arriving at the amount of $360,000, losses on stock options, salary, embarrassment, anxiety and inconvenience resulting from the breach of the employment contract by Dynacare were considered, but no specific allocation among such losses was made.

[6] The respondent Crown assessed the damages as constituting a “retiring allowance” taxable under s. 56(1)(a)(ii) of the Act. The appellant filed a notice of objection, but the respondent confirmed the assessment initially made. The appellant then appealed the assessment successfully to the Tax Court of Canada, 1993 CanLII 17469 (TCC), [1993] 2 C.T.C. 2125, 93 D.T.C. 555, from whose decision the respondent appealed to the Federal Court of Appeal, which allowed the appeal, 1994 CanLII 3462 (FCA), [1994] 2 F.C. 720, [1994] 2 C.T.C. 99, 94 D.T.C. 6249, 167 N.R. 35, 2 C.C.P.B. 109. This Court granted the appellant leave to appeal the latter decision on October 13, 1994, [1994] 3 S.C.R. xi.

II. Relevant Statutory Provisions

[7] The provisions of the Act to which I will refer during the course of these reasons are the following:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;

5. (1) Subject to this Part, a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

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

(a) 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, except any benefit . . . .

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of,

(ii) a retiring allowance, other than an amount received out of or under an employee benefit plan, a retirement compensation arrangement or a salary deferral arrangement . . . .

80.4 (1) Where a person or partnership received a loan or otherwise incurred a debt by virtue of the office or employment or intended office or employment of an individual, or by virtue of the services performed or to be performed by a corporation carrying on a personal services business (within the meaning assigned by paragraph 125(7)(d)), the individual or corporation, as the case may be, shall be deemed to have received a benefit in a taxation year equal to that amount, if any, by which the aggregate of

(b) the aggregate of all amounts each of which is an amount of interest that was paid or payable in respect of the year on such a loan or debt by

(i) a person or partnership (in this paragraph referred to as the “employer”) that employed or intended to employ the individual. . . .

248. (1) In this Act,

“employment” means the position of an individual in the service of some other person (including Her Majesty or a foreign state or sovereign) and “servant” or “employee” means a person holding such a position;

“retiring allowance” means an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received

(a) upon or after retirement of a taxpayer from an office or employment in recognition of his long service, or

(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal

by the taxpayer or, after his death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer;

III. Judgments Below

Tax Court of Canada, [1993 CanLII 17469 (TCC)](https://www.canlii.org/en/ca/tcc/doc/1993/1993canlii17469/1993canlii17469.html), 93 D.T.C. 555

[8] The Crown's principal contention before the Tax Court of Canada was that the settlement amount was taxable as a “retiring allowance”. In considering this contention, Rip J.T.C.C. relied heavily on the ordinary meaning of the words of the Act dealing with retiring allowances. In his view, the ordinary meaning of the words “employment”, “office”, “employee”, “officer”, “position” and “holding” ought not be altered. The definition of “retiring allowance”, he stated, does not refer to an “intended” or “prospective” employment, and one should not read into it words that are not present there. He confirmed that finding by considering English dictionary definitions of the word “position” and the French equivalent “poste” and found (at p. 560) that an officer is “one who holds, has possession of or fills a position which grants him a right to stipend or remuneration” and that an employee is one who “occupies a position in the service of another”.

[9] The consideration of various factors led the trial judge to the conclusion that Mr. Schwartz was not an “employee” or in the “employment” of Dynacare when the cancellation of the employment agreement occurred. The appellant was still a partner in his law firm at the time. He was not performing any services for Dynacare, nor was he under any obligation to do so. He was not receiving any kind of remuneration and the directors of Dynacare had not yet appointed him. What the appellant lost when the contract was cancelled, Rip J.T.C.C. held, was not his employment or his position, but the legal right entitling him to employment in the future.

[10] Rip J.T.C.C. rejected the respondent's submission that parliamentary documents and earlier cases supported its position by underlying the importance of the distinction to be made between termination of employment contracts occurring when employment had already commenced and those occurring before the employee had started providing any services to his employer. He therefore concluded that the damages were not a “retiring allowance” within the meaning of s. 248(1) of the Act.

[11] The judge also rejected the respondent's first alternative argument that if the damages were not a retiring allowance, they had been received by the appellant as a benefit by virtue of an office or employment and therefore fell within the purview of s. 6(1)(a) of the Act. He followed the Federal Court of Appeal's decisions in The Queen v. Atkins, 1976 CanLII 1161 (FCA), 76 D.T.C. 6258, and The Queen v. Pollock, 1984 CanLII 5799 (FCA), 84 D.T.C. 6370, and found that the damages received by the appellant could not be regarded as “salary”, “wages” or “remuneration” or as a benefit “received or engaged [sic] by him . . . in respect of, in the course of, or by virtue of the office or employment” within the meaning of ss. 5(1) and 6(1)(a) of the Act. He added that the fact that the appellant had not commenced employment at the time the breach occurred made the reasoning even more persuasive.

[12] Finally, Rip J.T.C.C. dealt with the respondent's argument that the damages were taxable under s. 3 as being “income from a source”, the source being the employment contract. He found that the amount received by the appellant could not be considered “income”, because the ordinary concept of income pertained to recurring receipts and did not extend to a lump sum received because a source of income had been taken away or destroyed. Consequently, in a case such as the one at bar, compensation for damages relating to future services was not to be considered “income”. He noted that in the present situation, the damages received by the appellant did not relate in any way to past services.

[13] In the course of his reasons, Rip J.T.C.C. stated (at p. 557) that there was no evidence indicating any allocation of the settlement amount and made the following finding of fact, which was disturbed by the Federal Court of Appeal and which is at issue before our Court, at p. 562:

Schwartz suffered inconvenience and prejudice when he was informed his services would not be required. He had given notice of withdrawal to his law partnership. He had to begin to look for employment. Schwartz was never an employee or officer of the purported employer. The damages he received was [sic] in a small part, if any, for loss of income for future services and to a larger part, according to the evidence, for embarrassment, anxiety and inconvenience. [Emphasis added.]

Federal Court of Appeal (Mahoney, Stone and McDonald JJ.A.), [1994 CanLII 3462 (FCA)](https://www.canlii.org/en/ca/fca/doc/1994/1994canlii3462/1994canlii3462.html), [1994] 2 F.C. 720

[14] The respondent did not argue that the damages constituted a retiring allowance before the Federal Court of Appeal. Mahoney J.A. for the court nonetheless held that he was in substantial agreement with Rip J.T.C.C.'s finding that the damages did not constitute a retiring allowance as contemplated by ss. 56(1)(a)(ii) and 248(1) of the Act.

[15] The critical issue before the Federal Court of Appeal was the Tax Court of Canada's finding of fact relating to apportionment. After stating the guidelines laid down by our Court in Stein v. The Ship “Kathy K”, 1975 CanLII 146 (SCC), [1976] 2 S.C.R. 802, Mahoney J.A. concluded that the Federal Court of Appeal was justified in overturning Rip J.T.C.C.'s finding of fact because the latter had omitted to consider relevant documentary evidence. He found that the letters dated June 13, 1989 and June 22, 1989 from the parties' solicitors were contradictory to the oral evidence on the issue of allocation and he held that, on a balance of probabilities, $75,000 had been allocated for loss of salary and $267,000 for loss of the stock options, and that there was thus no reason not to conclude that $18,000 had been awarded for embarrassment, anxiety and inconvenience suffered by Mr. Schwartz. He preferred the documentary evidence over the appellant's testimony because paragraph 4 of the May 1988 agreement, which indicated concerns by both parties regarding taxes, and the self-serving nature Mr. Schwartz's testimony raised doubts as to his credibility.

[16] The Federal Court of Appeal therefore held that the damages relating to lost salary and stock options ($342,000) were taxable under s. 3 of the Act as income from employment. It followed the English decision London & Thames Haven Oil Wharves, Ltd. v. Attwooll, [1967] 2 All E.R. 124 (C.A.), which was approved by the Federal Court of Appeal in The Queen v. Manley, 1985 CanLII 5497 (FCA), [1985] 2 F.C. 208 (leave to appeal to this Court refused, [1986] 1 S.C.R. xi), and stated, at p. 732:

Where, pursuant to a legal right, a person receives from another compensation for the failure to receive a sum of money or benefit which, if it had been received, would have been income from an employment or office, the compensation is to be treated for income tax purposes in the same way as if the benefit or sum of money had been received instead of the compensation.

The Federal Court of Appeal held (at p. 732) that the source of the appellant's right was the contract of employment, “a source of income within the express contemplation of paragraph 3(a)”, and that the $342,000 was therefore taxable as income from employment.

IV. Analysis

[17] Before this Court, the Crown argued that the damages received by the appellant were taxable in two ways. Its main contention was that the money received by Mr. Schwartz relating to lost salary and stock options was taxable as income from an unenumerated source under the general provision of s. 3(a) of the Act ‑- such unenumerated source being the employment contract terminated by Dynacare. The Crown also put forward an alternative argument, namely that the whole of the damages ($360,000) received by Mr. Schwartz were taxable under s. 56(1)(a)(ii) of the Act as a retiring allowance.

[18] For the reasons that follow, I am of the opinion that the appeal should be allowed. To deal with the substance of the Minister of National Revenue's main argument, it is necessary to address the correctness of the Federal Court of Appeal's decision to overturn Rip J.T.C.C.'s finding of fact with respect to the allocation made by Dynacare and Mr. Schwartz of the compensation agreed upon. I conclude that the Federal Court of Appeal was wrong in doing so, a conclusion that is sufficient, technically, to dispose of the Crown's main argument in favour of the appellant. However, the substance of the Minister's main argument raises important questions that merit attention by this Court and it having been fully argued by the parties, I think it appropriate to deal with it on its merits. Regarding this issue, I have come to the conclusion that s. 3(a) of the Act does contemplate taxability of income arising from sources other than those specifically provided for in s. 3(a) and in Subdivision d of Division B of Part I of the Act. However, in the case at bar, an analysis of the way Parliament handled the taxability of payments such as the one received by Mr. Schwartz demonstrates that it is to the rules relating to retiring allowances that one should turn in assessing taxability. This brings us to a consideration of the Crown's alternative argument and, like the trial judge and the Federal Court of Appeal, I have come to the conclusion that the damages received by Mr. Schwartz do not constitute a retiring allowance.

[19] Before dealing specifically with the issues raised in this appeal, however, I find it advisable to consider the manner in which Parliament has historically chosen to deal with the taxability of monies received by an employee from his ex-employer as a result of the latter's cancellation of the employment contract.

A. The Historical Background

[20] The provisions on which the Crown relies in arguing that the amount received by Mr. Schwartz is taxable are all found in Part I of the Act, which is entitled “Income Tax”. Section 3 states the basic rules to be applied in determining a taxpayer's income for a given year and identifies, in para. (a), the five principal sources from which income can be generated: office, employment, business, property and capital gains. Subdivisions a, b and c of Division B of Part I contain specific provisions relating to the characterization of income as being from either office, employment, business, property or as constituting capital gains. Section 56(1)(a)(ii) ‑‑ which provides for the taxability of retiring allowances ‑‑ is found in Subdivision d of Division B of Part I, entitled “Other Sources of Income”. As noted by Professor V. Krishna, The Fundamentals of Canadian Income Tax (4th ed. 1992), at p. 525, these “other sources” relate to “certain types of income which cannot conveniently be identified as originating from, or relating to” the five sources enumerated in s. 3(a) of the Act.

[21] Initially, damages received by an employee, from his ex-employer, as a result of the latter's cancellation of the employment contract, did not constitute income from office or employment taxable under s. 5(1); nor did they constitute a retiring allowance taxable under s. 56(1)(a)(ii).

[22] On the first of these propositions, the Federal Court of Appeal, in Atkins, supra, stated that such payments did not constitute taxable income from an office or employment under s. 5(1). That was so because these amounts were not considered to be in the nature of income for tax purposes. Jackett C.J., confirming the decision rendered by Collier J. at trial (1975 CanLII 1100 (FC), 75 D.T.C. 5263), held, at pp. 6258-59:

Once it is conceded, as the appellant does, that the respondent was dismissed “without notice”, monies paid to him (pursuant to a subsequent agreement) “in lieu of notice of dismissal” cannot be regarded as “salary”, “wages” or “remuneration” or as a benefit “received or enjoyed by him . . . in respect of, in the course of, or by virtue of the office or employment”. Monies so paid (i.e., “in lieu of notice of dismissal”) are paid in respect of the “breach” of the contract of employment and are not paid as a benefit under the contract or in respect of the relationship that existed under the contract before that relationship was wrongfully terminated. The situation is not altered by the fact that such a payment is frequently referred to as so many months' “salary” in lieu of notice. Damages for breach of contract do not become “salary” because they are measured by reference to the salary that would have been payable if the relationship had not been terminated or because they are colloquially called “salary”. The situation might well be different if an employee was dismissed by a proper notice and paid “salary” for the period of the notice even if the dismissed employee was not required to perform the normal duties of his position during that period. Having regard to what I have said, it is clear, in my view, that the learned Trial Judge was correct in holding that the payment in question did not fall within section 5 of the Income Tax Act as applicable to the taxation year in question. [Emphasis added.]

The principle laid down in Atkins, which was decided by the Federal Court of Appeal in May of 1976, was therefore accepted as authoritative both by the courts and commentators (see Krivy v. Minister of National Revenue, 79 D.T.C. 121 (T.R.B.); Girouard v. The Queen, 80 D.T.C. 6205 (F.C.A.); Beck v. Minister of National Revenue, 80 D.T.C. 1747 (T.R.B.); Grozelle v. Minister of National Revenue, 77 D.T.C. 310 (T.R.B.); E. C. Harris, Canadian Income Taxation (1979), at p. 116; R. B. Goodwin, “Personal Damages”, in Canadian Tax Foundation, Report of Proceedings of the Twenty-Eighth Tax Conference (1977), 813, at pp. 820-21; also W. A. MacDonald and G. E. Cronkwright, eds., Income Taxation in Canada (1977 (loose-leaf)), vol. 2, at ¶17,521; and L. M. Collins, “The Terminated Employee: Minimizing the Tax Bite”, in Canadian Tax Foundation, Report of Proceedings of the Forty-Fifth Tax Conference (1994), 31.1, at pp. 31:18 and 31:19), although some questioned the correctness of the legal reasoning adopted by the Federal Court of Appeal at the time (see V. Krishna, “Characterization of Wrongful Dismissal Awards for Income Tax” (1977), 23 McGill L.J. 43). P. W. Hogg and J. E. Magee, in their recent textbook Principles of Canadian Income Tax Law (1995), at pp. 164-65, address this historical reality in these words:

Before 1978, if the departing employee sued the employer for wrongful dismissal and recovered damages, then the damages would be received free of tax. This was because an award of damages for breach of contract (or for a tort or other cause of action) is not income for tax purposes. This was so, even though the amount of a damages award for wrongful dismissal would be computed by reference to exactly the same considerations (that is, the amount of salary that would have been paid during a required period of notice) as would be applied to the computation of a consensual severance payment. Since court-awarded damages were free of tax, it was also held that an out-of-court settlement of a wrongful dismissal action also escaped tax.

[23] The position taken by the courts towards such payments was clearly accepted by the Minister of National Revenue. In Interpretation Bulletin IT-365, dated March 21, 1977, and entitled “Damages, Settlements, and Similar Receipts”, it is stated:

Receipts in Respect of Termination of Employment

2. An amount that a taxpayer receives on the termination of his employment may consist of many components such as amounts in respect of salaries, accumulated leave credits, retiring allowances, compensation for loss of job opportunity or for lack of adequate or reasonable notice, or other similar amounts. That part of the amount that represents salary or wages that the taxpayer would have received under the contract is taxable pursuant to the provisions of section 5 of the Act. The portion of the amount that is damages for breach of contract or loss of future job opportunity is not taxable. It is a question of fact whether all or some portion of the amount received is on account of salary, retiring allowance, or an obligation arising out of an agreement. For example a taxpayer may be dismissed with proper notice and be paid “salary” (which would be taxable) for the period of notice even if the dismissed employee was not required to perform the normal duties of his position during that period. On the other hand, the fact that damages may be calculated by reference to salary that would have been payable if the relationship had not been terminated or because they are colloquially called “salary” does not alter the character of the payments to one of “salary”. [Emphasis added.]

[24] It was also settled that such payments did not constitute retiring allowances as contemplated by the Act. The definition of “retiring allowance” was different then and read:

248. (1) . . .

“retiring allowance” means an amount received upon or after retirement from an office or employment in recognition of long service or in respect of loss of office or employment (other than a superannuation or pension benefit), whether the recipient is the officer or employee or a dependant, relation or legal representative;

At that time, retiring allowances related only to payments made by an employer following voluntary cessation of employment on the part of the ex-employee or again following cessation upon the arrival of a condition agreed upon by the parties, thus excluding from the scope of the definition payments made by the employer in pursuance of a judicial order or in settlement of pending or threatened litigation following unilateral dismissal of the ex-employee. The position adopted by the courts is best explained by reference to Collier J.'s reasons in Specht v. The Queen, [1975] F.C. 150 (T.D.), where the taxpayer had received from his ex-employer a payment in compensation for the consequences of the latter's unilateral decision to terminate employment. There Collier J. had this to say, at p. 158:

In my view, the payment here was not made upon or after the plaintiff's retirement. The plaintiff did not retire or go into retirement from his occupation with MacMillan Bloedel within the ordinary meaning of “retire” or “retirement”. That is, he did not withdraw from his employment because he had reached a mutually stipulated age, or generally withdraw from his occupation or business activity. I have obtained some assistance on this point, in endeavouring to ascertain the ordinary meaning of “retirement”, from dictionary definitions:

The Shorter Oxford English Dictionary (3rd ed. rev): “withdrawal from occupation or business activity”

The Living Webster (1st ed.): “retire” “to withdraw from business or active life”.

The contract of employment in this case (Exhibit 1) uses the words “retire” and “retirement” in clauses 1 and 2. Age 65 was stipulated, but extensions could be agreed upon. In my view, “retirement” was used by the parties in its ordinary meaning as set out above: a cessation of or withdrawal from work because of an age stipulation or because of some other condition agreed between employer and employee.

Although Collier J. did not refer to any authority on the issue, his position was consistent with the jurisprudence applicable at that time; see No. 45 v. Minister of National Revenue, 52 D.T.C. 72 (T.A.B.); Larson v. Minister of National Revenue, 67 D.T.C. 81 (T.A.B.); and Jones v. Minister of National Revenue, 69 D.T.C. 4 (T.A.B.); see also Goodwin, supra, at pp. 829-32; B. G. Hansen, "The Taxation of Employees", in B. G. Hansen, V. Krishna and J. A. Rendall, eds., Canadian Taxation (1981), 117, at p. 160; and A. R. A. Scace, The Income Tax Law of Canada (4th ed. 1979), at p. 63. Collier J. reiterated his position in Atkins, and applied the reasoning laid down in Specht. The Federal Court of Appeal did not deal with the issue in its reasons because, apparently, the Crown had abandoned the retiring allowance argument on appeal: Goodwin, supra, at p. 830, and Krishna, “Characterization of Wrongful Dismissal Awards for Income Tax”, supra, at p. 53.

[25] Here again, Interpretation Bulletins offer some helpful hindsight. The Minister wrote, in Interpretation Bulletin IT-337R, dated November 19, 1979, and entitled "Retiring Allowances":

1. Amounts received by a former employee arising out of or in consequence of the termination of employment are usually included as income from that employment under subsection 5(1) alone or together with paragraph 6(3)(b) (see IT-196R), or as a retiring allowance under subparagraph 56(1)(a)(ii). One common exception is where the payment constitutes damages in respect of a breach of the contract of employment by the former employer. [Emphasis added.]

[26] Clearly then, at the end of the 1970s, it had been settled and accepted by all, including the Minister of Revenue, that damages received by an employee, from his ex-employer, as a result of the latter's cancellation of the employment contract, did not constitute income from office or employment taxable under s. 5(1) or a retiring allowance taxable under s. 56(1)(a)(ii) of the Act.

[27] This, without doubt, constitutes the mischief Parliament intended to remedy in 1979 when it amended the Act and introduced the concept of “termination payments”. Termination payments were rendered taxable through s. 56(1)(a)(viii) and were defined in s. 248(1) in the following manner:

248. (1) . . .

“termination payment”, for a taxation year, means an amount equal to the lesser of

(a) the aggregate of all amounts each of which is an amount received in the year in respect of a termination of an office or employment, whether or not received pursuant to an order or judgment of a competent tribunal, other than

(i) an amount required by any provision of this Act (other than subparagraph 56(1)(a)(viii)) to be included in computing the income of a taxpayer for a year,

(ii) an amount in respect of which an election has been made under subsection 40(1) of the Income Tax Application Rules, 1971, and

(iii) an amount received in the year as a consequence of the death of an employee, and

(b) the amount by which 50% of the aggregate of all amounts each of which is the amount that may reasonably be considered to be the employee's salary, wages and other remuneration from an office or employment for the 12 months preceding the date that is the earlier of

(i) the date on which the office or employment was terminated, and

(ii) the date on which an agreement, if any, in respect of the termination was entered into

exceeds the amount determined under paragraph (a) for each previous year in respect of that termination

whether the recipient is the officer or employee whose office or employment was terminated or a dependant, relation or legal representative of the officer or employee;

In Interpretation Bulletin IT-365R, dated March 9, 1981, the Department of National Revenue stated its position on termination payments and emphasized that the portion of a payment exceeding the amount to be considered a “termination payment” under s. 248(1) was considered to be a non-taxable benefit. This is consistent with the fact that before this amendment, amounts such as those received by Mr. Schwartz were not taxable under the Act.

[28] Parliament again addressed the issue in 1983 by making termination payments of this kind taxable as retiring allowances. To that end, s. 56(1)(a)(viii) and the definition of “termination payment” found in s. 248(1) were repealed, and the definition of “retiring allowance” was amended in a form that is substantially the same as the definition applicable to this appeal. The purpose of this second series of amendments was to somehow broaden the scope of the Act with respect to such payments, which became fully taxable, as opposed to the partial taxability of termination payments.

[29] As will become evident throughout these reasons, this historical perspective must be steadily kept in mind in considering the proper scope and the applicability to the case at bar of the provisions relied upon by the Minister in assessing the compensation received by Mr. Schwartz. I, therefore, turn to the specific grounds relied upon by the Crown before our Court.

B. The Taxability of the Compensation Received by Mr. Schwartz

[30] As I noted at the outset, the Minister argued that the amount of compensation relating to lost salary and stock options ($342,000) constitutes income from a source taxable under the general provision of s. 3(a) of the Act, such source being the contract of employment. I pause here to mention that what the Crown argued before us differs somewhat from the approach adopted by the Federal Court of Appeal. Mahoney J.A. found that $342,000 of the $360,000 was income from employment since it had been received by Mr. Schwartz to compensate for loss of moneys that, if duly received, would have constituted income from employment taxable under s. 5(1). Before us, the Crown did not argue that this amount constitutes income from employment. It first submitted that the application of the surrogatum principle, developed in the London & Thames case, supra, leads to the conclusion that $342,000 of the $360,000 received by Mr. Schwartz must be characterized as income from a source, since it compensates Mr. Schwartz for loss of moneys that, if received, would have constituted income from a source. The Minister then identifies that source as being the employment contract, a source other than the five enumerated in s. 3(a) and the “other sources” provided for in Subdivision d of Division B of Part I of the Act. The difference lies in the Minister's argument relating to the specific source of the damages received by the appellant.

(1) Income from a Source: Taxability under Section 3(a) of the Act

[31] In order to deal with the substance of the Crown's main argument, it is necessary to analyze the correctness of the premise on which it is based. This requires us to deal with the Federal Court of Appeal's decision to reconsider Rip J.T.C.C.'s finding regarding the apportionment that was made by the parties of the compensation received by Mr. Schwartz.

(a) The Finding of Fact

[32] It has long been settled that appellate courts must treat a trial judge's findings of fact with great deference. The rule is principally based on the assumption that the trier of fact is in a privileged position to assess the credibility of witnesses' testimony at trial. Lord Shaw thus explained the underlying principles of the rule in Clarke v. Edinburgh and District Tramways Co., [1919] S.C. (H.L.) 35, at pp. 36-37:

When a Judge hears and sees witnesses and makes a conclusion or inference with regard to what is the weight on balance of their evidence, that judgment is entitled to great respect, and that quite irrespective of whether the Judge makes any observation with regard to credibility or not. I can of course quite understand a Court of Appeal that says that it will not interfere in a case in which the Judge has announced as part of his judgment that he believes one set of witnesses, having seen them and heard them, and does not believe another. But that is not the ordinary case of a cause in a Court of justice. In Courts of justice in the ordinary case things are much more evenly divided; witnesses without any conscious bias towards a conclusion may have in their demeanour, in their manner, in their hesitation, in the nuance of their expressions, in even the turns of the eyelid, left an impression upon the man who saw and heard them which can never be reproduced in the printed page.

See also, inter alia, Dorval v. Bouvier, 1968 CanLII 3 (CSC), [1968] S.C.R. 288, at p. 293; Beaudoin‑Daigneault v. Richard, 1984 CanLII 15 (SCC), [1984] 1 S.C.R. 2, at pp. 8‑9; Laurentide Motels Ltd. v. Beauport (City), 1989 CanLII 81 (SCC), [1989] 1 S.C.R. 705, at p. 794; Lapointe v. Hôpital Le Gardeur, 1992 CanLII 119 (SCC), [1992] 1 S.C.R. 351, at p. 358; and my comments in Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377, at p. 426. Others have also pointed out additional judicial policy concerns to justify the rule. Unlimited intervention by appellate courts would greatly increase the number and the length of appeals generally. Substantial resources are allocated to trial courts to go through the process of assessing facts. The autonomy and integrity of the trial process must be preserved by exercising deference towards the trial courts' findings of fact; see R. D. Gibbens, “Appellate Review of Findings of Fact” (1992), 13 Adv. Q. 445, at pp. 445-48; Fletcher v. Manitoba Public Insurance Co., 1990 CanLII 59 (SCC), [1990] 3 S.C.R. 191, at p. 204. This explains why the rule applies not only when the credibility of witnesses is at issue, although in such a case it may be more strictly applied, but also to all conclusions of fact made by the trial judge; see Hodgkinson, at p. 425.

[33] The courts have thus adopted a general rule concerning situations where an appellate court will be justified in intervening in a trial judge's findings of fact and substituting its own assessment of the evidence presented at trial. The generally accepted formulation of the applicable standard is as stated by Ritchie J. in The Ship “Kathy K”, supra, where, after reviewing the relevant authorities, he wrote, at p. 808:

These authorities are not to be taken as meaning that the findings of fact made at trial are immutable, but rather that they are not to be reversed unless it can be established that the learned trial judge made some palpable and overriding error which affected his assessment of the facts. While the Court of appeal is seized with the duty of re-examining the evidence in order to be satisfied that no such error occurred, it is not, in my view, a part of its function to substitute its assessment of the balance of probability for the findings of the judge who presided at the trial. [Emphasis added.]

This Court has also held, in Beaudoin-Daigneault, supra, at pp. 8-9, that an appellate court will be justified in disturbing the trial judge's findings of fact only if a specific and identifiable error made by the trial judge convinces it that the conclusion of fact reached is unreasonable, and not one that constitutes a mere divergence of opinion as to the assessment of the balance of probabilities. Further, it was held that a second appellate court should only intervene in a first appellate court's decision to overturn findings of fact made at trial if it is convinced that the first appellate court's intervention was not justified.

[34] What thus constitutes an error justifying an appellate court's intervention in the findings of fact made at trial? In the present case, the respondent successfully argued before the Federal Court of Appeal that the trial judge had clearly omitted to consider documentary evidence that contradicted the appellant's testimony regarding the allocation made by the parties of the damages. It is now accepted that a clear omission of evidence by the trier of fact is the kind of error that can and will justify a reconsideration of the evidence by an appellate court. In Chartier v. Attorney General of Quebec, 1979 CanLII 17 (SCC), [1979] 2 S.C.R. 474, the appellant sued the Province of Quebec after being unjustly convicted of causing the death of another person during a fist fight. The Quebec Superior Court and the Court of Appeal both dismissed Chartier's claim. The trial judge, whose findings were endorsed by the Court of Appeal, mentioned only the depositions of the provincial police officers and disregarded evidence relating to the baldness of the true assailant which had been observed by four eyewitnesses and which had not been taken into account by the Quebec Police Force in preparing a composite sketch. Pigeon J., for the majority, found that a reconsideration of the trial judge's findings of fact in that case was justified. He stated, at p. 493:

The question now is on what basis could the trial judge dismiss the claim when faced with these facts that are practically all established by undisputed documents. Counsel for the Attorney General relies on our rule against interference with concurrent findings. But this rule admits of certain exceptions, particularly where the courts below have misapprehended or overlooked material evidence. Here it must be noted that, out of all the evidence, the trial judge mentioned only the depositions of the provincial police officers. He did not say a word of the baldness of the true assailant, which was observed by four eyewitnesses, and which the Quebec Police Force did not take into account in preparing the composite sketch.

[35] An appellate court will be justified in interfering with the trial judge's findings of fact if certain relevant evidence was not considered. This means that the appellate court will be justified in conducting its own assessment of the balance of probabilities, taking into consideration the omitted elements. It does not necessarily mean, however, that the appellate court will come to a different conclusion from that arrived at by the trial judge. It could be that a reconsideration of the evidence, taking into consideration the omitted evidence, calls for a different conclusion on a given factual situation. It could also be that the omitted evidence, even when considered, would not have led to a different conclusion, in view of the weight to be given it. In that sense, the appellate court must, in order to disturb the trial judge's findings of fact, come to the conclusion that the evidence in question and the error made by the trial judge in disregarding it were overriding and determinative in the assessment of the balance of probabilities with respect to that factual issue.

[36] This Court has also developed principles to guide a second appellate court's role regarding findings of fact made by the trial judge that have been overturned by a first appellate court. In Beaudoin-Daigneault, supra, Lamer J., as he then was, referred to this Court's decision in Demers v. Montreal Steam Laundry Co. (1897), 1897 CanLII 57 (SCC), 27 S.C.R. 537, at pp. 538-39, where Taschereau J. stated what was subsequently held to be the governing principle on the power of a second appellate court to reconsider a first appellate court's decision to disturb a finding of fact made by the trial judge:

For it is settled law upon which we have often acted here, that where a judgment upon facts has been rendered by a court of first instance, and a first court of appeal has reversed that judgment, a second court of appeal should interfere with the judgment on the first appeal, only if clearly satisfied that it is erroneous; [Emphasis added.]

Seventy years later, Fauteux J., in Dorval, supra, at p. 294, shed some light on the scope and meaning of Taschereau J.'s reasons in Demers. Commenting on the above cited excerpt, he wrote:

[translation] That is the rule followed in this Court and applied again recently in Pelletier v. Shykofsky, 1957 CanLII 65 (SCC), [1957] S.C.R. 635. Thus, in order to intervene in this case, it would be necessary to be clearly satisfied that the judgment of the Court of Appeal is erroneous, either with respect to the reason for its intervention or with respect to its assessment of the evidence in the record. [Emphasis added.]

(See also Beaudoin-Daigneault, at p. 8.) Clearly, if the ground upon which a first appellate court relies to justify disturbance ‑‑ being a question of law ‑‑ is, in the eyes of a second appellate court, ill-founded, the trial judge's decision will be restored by the second appellate court. If a second appellate court agrees with the first appellate court on the ground upon which the latter intervened, must it show some kind of deference towards the first appellate court's assessment of the balance of probabilities or can it only substitute its own assessment of the evidence?

[37] In my view, nothing justifies a second appellate court in showing that kind of deference to the assessment of the balance of probabilities made by the first appellate court. If the second appellate court agrees that the trial judge made some kind of error that justifies intervention, it should be free to reconsider the evidence and substitute its own findings of fact for that of the first court of appeal's if disagreement occurs. The first appellate court is not in a more advantageous or privileged position than the second court of appeal in assessing the evidence. It does not see or hear the witnesses testifying, nor benefit from the general insight that comes from participating at the trial. Moreover, judicial policy concerns referred to earlier regarding a trial court's role would obviously not justify deference towards the assessment made by an appellate court. There is therefore no reason to impose any duty of deference on a second court of appeal in those specific circumstances.

[38] With that in mind, I now move on to a consideration of the factual issue. The essence of the Crown's argument, before the Federal Court of Appeal and this Court, is that Rip J.T.C.C. erred because in assessing the evidence on the question of apportionment, he failed to consider evidence which contradicted Mr. Schwartz's testimonial evidence. Rip J.T.C.C. found that the amount received by Mr. Schwartz in compensation was mostly for mental distress suffered as a result of the termination of the contract and that no specific allocation had been agreed upon by the parties. In the Federal Court of Appeal's opinion, that contradictory evidence consisted in the June letters, in which the parties' solicitors made offers to settle the litigation and calculated the proposed amounts by reference to lost salary and stock options.

[39] To find that Rip J.T.C.C. erred in overlooking contradictory evidence on the allocation made by the parties of the settlement amount, one must obviously first be convinced that the June letters in fact do constitute evidence as to the allocation made by the parties of the settlement amount and that such evidence is in contradiction of Mr. Schwartz's testimonial evidence. I do not think that is the case.

[40] The June letters certainly do constitute evidence that is relevant to this litigation. They establish that in arriving at the final settlement amount of $400,000, both Dynacare and Mr. Schwartz considered losses of salary and stock options, thereby supporting the appellant's testimony on this point. In that sense, the June letters are evidence of the fact that the amount of $360,000 is composed, at least in part, of amounts paid to Mr. Schwartz in compensation for losses of salary and stock options. But can they be considered evidence as to what portion of the $360,000 was allocated to such losses?

[41] A global analysis of the evidence on the issue convinces me that this is not the case. There is no evidence that the $267,000 offered by Dynacare for the stock options was accepted by the appellant. Nor is there any evidence that the $75,000 claimed by the appellant for lost salary was agreed upon by Dynacare. The letters were written in June, while the final release was signed by the parties at the end of August. In cross-examination, Mr. Schwartz gave the following testimony as to how the parties arrived at the final settlement amount:

Q. And at that time, in [the October 6, 1988] letter, you were offered $75,000?

A. That is correct.

Q. You didn't agree with that sum of money?

A. That is correct.

Q. You thought you were entitled to more?

A. That is correct.

Q. And you felt that the income that you'd lost as a result of Dynacare's breaking this contract was greater than $75,000?

Q. In the colloquial sense, money that you lost, it was worth more than $75,000?

A. In the broadest sense. I mean, I think when ‑‑ I think I considered that the money was more. But there were many other factors involved. There was the pain and humiliation. There was the inducement to leave my partnership. This was about many things. The money was one of them.

Q. And you put in a counter-offer of $400,000?

A. That's correct.

Q. And this was calculated -‑ and I use ‘calculated' in the very broad sense -‑ based on, amongst other things, the loss of stock option and the lost income?

A. I would say that that's true in the very broadest sense of the word. I know that my counsel and I and, in fact, counsel for Dynacare struggled to find some way of finding a number that one could rationalize because this involved a number of factors, as I mentioned earlier. My view is, in the end, we never did and never could and the number was, in some sense, picked from the air.

Q. I'd just like you to flip to Tab 9, please, Mr. Schwartz, pages 33 and 34. That is a copy of the letter from your lawyer?

A. Yes.

Q. At the top of page 34, there is a discussion there about, “apart from the shares, he is entitled to $75,000 for lost income”.

A. That's all correct.

Q. So that was part of the way in which the amount was calculated? That was taken into account?

A. As I said, I think it was taken into account in the broadest sense. It was part of the hurly-burly of the discussions. But, ultimately, it didn't seem to me that that became terribly relevant.

Q. The final amount you actually did settle on was $360,000 plus costs for $40,000?

A. That's correct.

It is difficult to see how the solicitors' letters could be seen as constituting evidence as to apportionment when Mr. Schwartz clearly testified to the contrary and Rip J.T.C.C. made no negative finding as to Mr. Schwartz's credibility. It is also noteworthy that the record at trial reveals that the Minister did not even argue that the letters constituted evidence as to apportionment contrary to Mr. Schwartz's testimony. Logically, the Minister should not have the burden of presenting, in every case where the apportionment of a general award is at issue, specific evidence amounting to an explicit expression of the concerned parties' intention with respect to that question. However, there must be some evidence, in whatever form, from which the trial judge will be able to infer, on a balance of probabilities, which part of that general award was intended to compensate for specific types of damages. I believe that the solicitors' letters, considered in the global evidentiary context of the case at bar, are insufficient to serve as a basis for such an inference.

[42] The Federal Court of Appeal was, therefore, incorrect in inferring from the letters that the parties had agreed to allocate $342,000 of the $400,000 to losses of income relating to salary and stock options; consequently, it was wrong to conclude that the trial judge had failed to consider contradictory evidence. It should also be noted that the Federal Court of Appeal's conclusions as to Mr. Schwartz`s credibility ‑‑ as opposed to those arrived at by Rip J.T.C.C. who, needless to say, had the benefit of seeing the appellant testify ‑‑ constitute in the present circumstances unjustified and inappropriate intervention by an appellate court on a matter which is at the core of a trial judge's duties. At the very most, these letters establish that the parties considered losses relating to salary and stock options in arriving at the final settlement amount of $400,000. I, therefore, conclude that the Federal Court of Appeal erred in disturbing the trial judge's finding with respect to apportionment.

[43] As mentioned earlier, the conclusion that the Federal Court of Appeal was wrong in interfering with the trial judge's finding of fact respecting apportionment disposes of the Minister's main argument. This is so because in order to find that some of the amount received by Mr. Schwartz was taxable under s. 3(a) as income from the employment contract, one must be able to identify what portion of the $360,000 was paid to Mr. Schwartz in compensation for amounts that he would have been entitled to receive under the contract of employment. Since the Federal Court of Appeal erred in its decision relating to the trial judge's assessment of the evidence, the factual situation is that there is evidence that the amounts received by Mr. Schwartz were, in part, received to compensate for the loss of amounts to which he would have been entitled under the employment contract entered into with Dynacare and, in part, to compensate for embarrassment, anxiety and inconvenience suffered by the appellant, and that there is no evidence tending to establish what portion of the $360,000 was allocated to which head. Thus, absent a proper determination of that factual situation, the damages received by Mr. Schwartz cannot, in whole or in part, be found to be taxable under s. 3(a) of the Act as income from the employment contract.

[44] As I mentioned at the beginning of my analysis, however, I propose to deal with the substance of the Minister's main contention since it raises important issues that merit attention and have been fully argued by the parties. I, therefore, turn to these submissions.

(b) The Surrogatum Principle and Unenumerated Sources

[45] The Crown relies on the principle developed by Diplock L.J. in London & Thames, supra, and argues that the portion of damages received by Mr. Schwartz relating to lost salary and stock options constitutes income from a source. In London & Thames, Diplock L.J. had this to say, at p. 134:

Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation.

The Minister, quite correctly, noted that this principle was adopted and applied by the Federal Court of Appeal in Manley, supra. There the Minister had assessed damages received by the taxpayer in compensation for a finder's fee he was entitled to pursuant to a commercial agreement as constituting profit from a business taxable under s. 9(1) of the Act. Mahoney J.A., for the court, after citing relevant excerpts from London & Thames, stated, at p. 219:

In the present case, the respondent was a trader; he had engaged in an adventure in the nature of trade. The damages for breach of warranty of authority, which he received from Benjamin Levy pursuant to a legal right, were compensation for his failure to receive the finder's fee from the Levy family shareholders. Had the respondent received the finder's fee it would have been profit from a business required by that Income Tax Act, to be included in his income in the year of its receipt. The damages for breach of warranty of authority are to be treated the same way for income tax purposes.

In the present case, the Federal Court of Appeal applied this principle and found that, since part of the damages received by the appellant replaced lost salary and stock options which, if they had been paid to Mr. Schwartz, would have constituted income from employment taxable under s. 5(1), such damages had to be treated in the same manner for tax purposes, i.e., as income from office or employment taxable under s. 5(1) of the Act.

[46] The solution arrived at by the Federal Court of Appeal is in contradiction with the findings in the Atkins case, supra, where the same court held that such damages could not be characterized as income from office or employment under s. 5(1). The correctness of the conclusion arrived at in Atkins was reaffirmed in 1984 by the Federal Court of Appeal in Pollock, supra, despite the doubts expressed in an obiter dictum by Pigeon J. in Jack Cewe Ltd. v. Jorgenson, 1980 CanLII 177 (SCC), [1980] 1 S.C.R. 812, at pp. 815-16.

[47] However, the correctness of Atkins is not at issue before us since the Minister, as I have explained, is not arguing that the amounts are taxable as income from employment, but submits, rather, that they are income from an unenumerated source taxable under the general provision of s. 3(a) of the Act. Pigeon J., in Jack Cewe, had pointed out that the Federal Court of Appeal, in Atkins, had not considered whether such amounts were alternatively taxable under the general provision of s. 3(a):

This Court might well disagree with the conclusion reached by the Federal Court of Appeal in Atkins. In this respect, I will note that in that case consideration appears to have been given only to the question whether the damages for wrongful dismissal were income “from an office or employment” within the meaning of ss. 5 and 25 of the Income Tax Act (R.S.C. 1952). No consideration appears to have been given to the broader question whether they might not be income from an unspecified source under the general provision of s. 3.

[48] I pause here again to reaffirm what was implied by Pigeon J. in Jack Cewe, that s. 3(a) does contemplate the possibility that income arising from sources other than those enumerated in s. 3(a) and Subdivision d of Division B of Part I of the Act may nonetheless be taxable. Parliament has stated very clearly in that section that the five sources identified in s. 3(a) do not constitute an exhaustive enumeration. This is evident from the emphasized words in the paragraph, which I here reproduce:

3. . . .

(a) determine the aggregate of amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property; [Emphasis added.]

Mr. Schwartz argues that the sources of income other than those contemplated in s. 3(a) are the “other sources” referred to in Subdivision d of Division B of Part I of the Act and relies on this statement by E. C. Harris, Canadian Income Taxation (4th ed. 1986), at p. 99:

While the Act recognizes that there may be other sources of income than [those specifically provided for in s. 3(a)], the case law under the former Act suggests that the only other sources of income and loss that are likely to be recognized are those that are specifically recognized in the Act.

However, this conclusion disregards the fact that Parliament, in the introductory part of s. 56(1) of the Act, made clear that the enumeration that followed was not to be interpreted as restricting the generality of s. 3:

56. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year. . . . [Emphasis added.]

[49] Mr. Schwartz also submitted that, for policy reasons, an interpretation to the contrary would defeat the purpose and fundamental structure of the Act. However, as noted by Krishna, similarly valid policy concerns can be invoked to support an interpretation to the contrary. In his textbook The Fundamentals of Canadian Income Tax, supra, at pp. 129-30, he writes:

The better view is that the named sources (office, employment, business, and property) are not exhaustive and income can arise from any other unnamed source. Hence, income from any source inside or outside Canada should be taxable under paragraph 3(a) of the Act. This is justifiable both on the basis of the language of the statute and on policy grounds. To the extent that the income tax is based on the ability to pay, all accretions to wealth of an income nature are a measure of that ability and should be taxable regardless of source. [Emphasis added.]

[50] In any event, policy concerns such as those raised by the appellant should not and cannot be relied on in disregard of Parliament's clearly expressed intention. In s. 3(a), when Parliament used the words “without restricting the generality of the foregoing”, great care was taken to emphasize that the first step in calculating a “taxpayer's income for the year” was to determine the total of all amounts constituting income inside or outside Canada and that the enumeration that followed merely identified examples of such sources. The phrasing adopted by Parliament, in s. 3(a) and in the introductory part of s. 56(1) is probably the strongest that could have been used to express the idea that income from all sources, enumerated or not, expressly provided for in Subdivision d or not, was taxable under the Act.

[51] This interpretation is also consistent with the approach adopted by this Court in the few other cases where this question was at issue. In Curran v. Minister of National Revenue, 1959 CanLII 98 (SCC), [1959] S.C.R. 850, the taxpayer had received a $250,000 payment by a third party in return for which he was to resign from his employment and start working for another company. The payment did not constitute income from employment, since it had not been paid by the taxpayer's employer, but was assessed as constituting “income from a source” under the general provision of s. 3 of the Act. This assessment was upheld by the Exchequer Court of Canada (1957 CanLII 812 (CA EXC), 57 D.T.C. 1270). The relevant provisions found in s. 3 of the Act were, at that time, similar to those found in s. 3(a) in today's version of the Act:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources . . . and without restricting the generality of the foregoing, includes income for the year from all

(a) businesses

(b) property, and

(c) offices and employments.

Dumoulin J., after concluding that the impugned payment was in the nature of income, held that it was taxable. He stated, at p. 1277:

For reasons somewhat differing from those propounded by respondent, I agree that the sum of $250,000 constitutes income.

Audette J. in re Morrison v. Minister of National Revenue, (1917‑27) C.T.C. 343 at p. 350 (1 DTC 113 at p. 116), spoke thus:

Now the controlling and paramount enactment of sec. 3 defining the income is “the annual net profit or gain or gratuity.” Having said so much the statute proceeding by way of illustration, but not by way of limiting the foregoing words, mentions seven different classes of subjects which cannot be taken as exhaustive since it provides, by what has been called the omnibus clause, a very material addition reading “and also the annual profit or gain from any other sources.” The words “and also” and “other sources” make the above illustration absolutely refractory to any possibility of applying the doctrine of ejusdem generis set up at the hearing. The balance of the paragraph is added only ex majori cautelâ . . . The net is thrown with all conceivable wideness to include all bona fide profits or gain made by the subject.

Despite a lapse of years, this interpretation of section 3 is still true of the amended text as it read in 1951.

In very wide terms, section 3 renders taxable “income for the year from all sources and without restricting the generality of the foregoing . . .”

Therefore, this controversial payment meets, I believe, the statutory meaning of income for the year from a source other than those particularized by subsections (a), (b) and (c) and was properly assessed as such. [Emphasis in original.]

This decision was later confirmed by this Court. More recently, in Canada v. Fries, 1989 CanLII 9437 (FCA), [1989] 3 F.C. 362, the Federal Court of Appeal expressly recognized that income from unenumerated sources was taxable under the general provision of s. 3(a) of the Act. In that case, the taxpayer was contesting the Minister's assessment, including in his yearly income strike pay he had received from his union. The court dismissed the taxpayer's claim and found that the amounts were taxable as constituting income from a source within the purview of s. 3(a) of the Act. Our Court, however, while implicitly holding that income from unenumerated sources was in fact taxable under the general provision of s. 3(a) of the Act, reversed this decision on the basis that the payments were not in the nature of “income . . . from a source” within the meaning of s. 3(a); see Canada v. Fries, 1990 CanLII 48 (SCC), [1990] 2 S.C.R. 1322.

[52] In the case at bar, I do not think the Minister's argument should be accepted. In order to determine if a specific amount is taxable under the general provision of s. 3(a) of the Act, various considerations should be taken into account. Without providing a list of such considerations or attempting to suggest an approach to taxation under the general provision of s. 3(a) in an exhaustive way, I note that one must obviously go back to the concept of income and consider the whole scheme of the Act in order to properly analyze the issue in a given case. In the present case, accepting the argument made by the Crown would amount to giving precedence to a general provision over the detailed provisions enacted by Parliament to deal with payments such as that received by Mr. Schwartz pursuant to the settlement.

[53] As indicated earlier, Parliament adopted a specific solution to a specific problem that resulted from a number of rulings by the courts respecting the taxability of payments similar to the one received by the appellant. Under these rulings, damages paid with respect to wrongful dismissal were not taxable as income from office or employment under s. 5(1); nor were they taxable as constituting retiring allowances. The Crown had at that point many options. The Minister could have argued that such damages were taxable as income from a source under the general provision in s. 3(a) of the Act. It could also have sought an amendment to the Act making such payments expressly taxable as income from office or employment. But neither of these courses was taken. Instead, the Act was amended twice so that such amounts could be taxable under s. 56 as income from “another” source. First, it was provided that termination payments were taxable. Then, the Act was amended to make such a payment taxable as constituting a retiring allowance. It is thus pursuant to these provisions that taxability should be assessed. To do otherwise would defeat Parliament's intention by approving an analytical approach inconsistent with basic principles of interpretation.

[54] This Court has always refused to interpret the Act in such a manner. For example, in The Queen v. Savage, 1983 CanLII 32 (SCC), [1983] 2 S.C.R. 428, the taxpayer received $300 from her employer as a prize for achievement. Section 56(1)(n) of the Act provided that such gifts, when worth over $500, constituted taxable income. The prize was not, therefore, caught by this provision. The Minister, however, argued that the amount also fell within the purview of s. 6(1)(a) of the Act as a general benefit, and as such was taxable as income from an office or employment. Dickson J., as he then was, rejected this argument. At page 446, he stated:

If a prize under $500 would still be taxable under ss. 5 and 6, it would have to follow on the Crown's argument that a prize under $500 would equally be taxable under s. 3. That cannot be right. That would mean that a prize over $500 would be taxable under s. 56(1)(n) and a prize up to $500 would be taxable under s. 3. The $500 exclusion in s. 56(1)(n) would never have any effect. It seems clear that the first $500 of income received during the year falling within the terms of s. 56(1)(n) is exempt from tax. Any amount in excess of $500 falls under s. 56(1)(n) and is taxable accordingly. If that is not the effect, what purpose is served by the subsection?

The situation here is analogous. To find that the damages received by Mr. Schwartz are taxable under the general provision of s. 3(a) of the Act would disregard the fact that Parliament has chosen to deal with the taxability of such payments in the provisions of the Act relating to retiring allowances. It is thus to those provisions that I will turn in assessing taxability.

(2) Retiring Allowance: Taxability under Section 56(1)(a)(ii)

[55] Before this Court, the Crown argued, alternatively, that the damages received by Mr. Schwartz were taxable under s. 56(1)(a)(ii) of the Act as constituting a retiring allowance. Both courts below refused to find these amounts could be so characterized, although the Crown abandoned this argument before the Federal Court of Appeal. At issue is whether the damages agreed to were received by Mr. Schwartz “in respect of a loss of an office or employment” within the meaning of para. (b) of the definition of “retiring allowance” found in s. 248(1) of the Act. Section 248(1) also defines the words “employment” and “employee”.

[56] In the recent case of Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, 1994 CanLII 58 (SCC), [1994] 3 S.C.R. 3, my colleague Gonthier J. clarified the proper rules governing the interpretation of tax legislation. After explaining the underlying principles of the traditional rule providing for a strict construction of fiscal statutes, he analyzed the evolution that had occurred on the issue during the past decade. As he explained, at pp. 15-16, this evolution was the logical consequence of the recognition of the social and economic purposes of such legislation. In light of this Court's decisions in Stubart Investments Ltd. v. The Queen, 1984 CanLII 20 (SCC), [1984] 1 S.C.R. 536, The Queen v. Golden, 1986 CanLII 50 (SCC), [1986] 1 S.C.R. 209, Johns-Manville Canada Inc. v. The Queen, 1985 CanLII 43 (SCC), [1985] 2 S.C.R. 46, The Queen v. Imperial General Properties Ltd., 1985 CanLII 7 (SCC), [1985] 2 S.C.R. 288, and Bronfman Trust v. The Queen, 1987 CanLII 76 (SCC), [1987] 1 S.C.R. 32, Gonthier J. held, at p. 17:

[T]here is no longer any doubt that the interpretation of tax legislation should be subject to the ordinary rules of construction. At page 87 of his text Construction of Statutes (2nd ed. 1983), Driedger fittingly summarizes the basic principles: “. . . the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”. [Emphasis added.]

(See also McClurg v. Canada, 1990 CanLII 28 (SCC), [1990] 3 S.C.R. 1020; Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103; Symes v. Canada, 1993 CanLII 55 (SCC), [1993] 4 S.C.R. 695, at pp. 744-51; Thibaudeau v. Canada, 1995 CanLII 99 (SCC), [1995] 2 S.C.R. 627; Canada v. Antosko, 1994 CanLII 88 (SCC), [1994] 2 S.C.R. 312, at p. 326.)

[57] The essence of the Minister's argument is that “employment” as understood in s. 248(1) of the Act commences the moment the contract of employment is entered into by the parties, regardless of whether or not the employee has the obligation to provide services from that point. Therefore Mr. Schwartz, by losing the benefit of the contract of employment entered into with Dynacare, lost “employment”, and the damages received fall within the purview of s. 56(1)(a)(ii) of the Act. I do not think the Minister's position is correct in law, in light of the definitions given by Parliament to the word “employment” and of the ordinary meaning of the words chosen by Parliament to define this term. The Minister's position is also inconsistent with the way Parliament has used the term "employment" in at least one other provision of the Act, while also being untenable when one considers the context in which the 1983 amendment was made.

[58] The key element in the words chosen by Parliament to deal with this situation is the definition of “employment” which is the “position of an individual in the service of some other person” (emphasis added). The statutory requirement that one must be “in the service” of another person to be characterized as an “employee” excludes, in my opinion, any notion of prospective employment when the phrase is given its ordinary meaning. An employee is “in the service” of his or her employer from the moment he or she becomes under obligation to provide services under the terms of the contract. At the basis of every situation of employment is a contract of employment; however, employment does not necessarily begin from the moment the contract is entered into. Before having any obligation to provide services, one cannot be considered to be “in the service” of his or her employer or, more accurately, his or her future employer. Consequently, there cannot be any loss of a position that has yet to be held, under the definition of “retiring allowance” found in s. 248(1). I cannot see how, in the present case, Mr. Schwartz could be “in the service” of Dynacare from the moment the contract of employment was entered into in the spring of 1988 and how he could have “lost” employment when the contract was unilaterally cancelled by Dynacare. Both parties had agreed that Mr. Schwartz would start working upon completion of his assignment with the Government of Ontario. They both had agreed that the contract that had been entered into was a contract for future employment. Mr. Schwartz was not in any way ‑‑ and had never been ‑‑ obliged to provide any services to Dynacare at that moment; he was not “in the service” of Dynacare.

[59] Therefore, when one considers the ordinary meaning to be given to the definition of “employment” in the Act, a distinction must be made between the start of the contractual relationship agreed upon by the employer and the employee and the moment, according to the terms of the contract, at which the employee is bound to start providing services to the employer. It is noteworthy that the Crown does not seriously contest the interpretation to be given under the ordinary meaning of the words Parliament chose to use. During oral argument, counsel admitted that an ordinary person would find that Mr. Schwartz was not an employee of Dynacare when the contract was cancelled.

[60] The Minister's position is also inconsistent with Parliament's use of the word "employment" in s. 80.4(1) of the Act. Section 80.4 is included in Subdivision f of Division B of Part I of the Act, “Rules Relating to Computation of Income”. It provides the method for determining how an amount in respect of interest-free or low-bearing-interest loans will be characterized as a benefit taxable as income from office or employment under s. 6(9) of the Act, or again, in the case of corporations, as income from a business or property under s. 12(1)(w) of the Act. For the sake of convenience, I repeat the relevant provision, while underlining the crucial passages:

80.4 (1) Where a person or partnership received a loan or otherwise incurred a debt by virtue of the office or employment or intended office or employment of an individual, or by virtue of the services performed or to be performed by a corporation carrying on a personal services business (within the meaning assigned by paragraph 125(7)(d)), the individual or corporation, as the case may be, shall be deemed to have received a benefit in a taxation year equal to that amount, if any, by which the aggregate of . . . .

A parallel can be drawn between the concept of “intended employment” of an individual and services “to be performed” by a corporation carrying on a personal services business, in light of the fact that “employment” refers to the situation of an individual being “in the service” of a person. Clearly, in both cases, the intention of Parliament was to include within the scope of s. 80.4(1) such loans made by virtue of a legal relationship involving the provision of services, by an individual or by a corporation, regardless of whether or not the loans were made before the borrower became under obligation to provide any services. The distinction made by Parliament is an implicit recognition that the term "employment" does not, in itself, have such a broad meaning.

[61] It is a well-established principle of interpretation that words used by Parliament are deemed to have the same meaning throughout the same statute; see, for recent applications of the principle by this Court, R. v. Zeolkowski, 1989 CanLII 72 (SCC), [1989] 1 S.C.R. 1378, and Thomson v. Canada (Deputy Minister of Agriculture), 1992 CanLII 121 (SCC), [1992] 1 S.C.R. 385. This, as all principles of interpretation, is not a rule, but a presumption that must give way when circumstances demonstrate that such was not the intention pursued by Parliament. However, in the present circumstances, I see no reason to depart from that principle since, to the contrary, it confirms and is consistent with the ordinary meaning of the words “employment” and “retiring allowance” chosen by Parliament.

[62] The Minister's position is also untenable when one considers the context in which the 1983 amendment was made. The amendment made by Parliament to s. 80.4(1) of the Act was made through An Act to amend the statute law relating to income tax (No. 2), S.C. 1980-81-82-83, c. 140, the same legislation by which the definition of “retiring allowance” was amended in 1983. If Parliament had wanted to include as retiring allowances payments made in respect of the cancellation of an employment contract occurring before the employee had become under obligation to provide services to the employer, it would, as counsel for the appellant argued, have specifically referred to the notion of prospective or intended employment as it did in s. 80.4(1). This argument seems to me to be compelling and clearly establishes that the objective Parliament sought by amending the definition of "retiring allowance" was limited to termination of the employment relationship once the employee had come under the obligation to provide services to the employer.

[63] The $360,000 received by Mr. Schwartz cannot, therefore, be considered a retiring allowance. As I have explained, “loss of employment” cannot occur before Mr. Schwartz became under obligation to provide services to Dynacare because he could not, before that moment, have been “in the service” of his future employer.

V. Disposition

[64] For all these reasons, I would allow the appeal and restore the decision of the Tax Court of Canada with costs throughout.

The reasons of Sopinka, Iacobucci and Major JJ. were delivered by

[65] Major J. -- I agree with the conclusion reached by La Forest J. but, with respect, think his reasons go beyond those necessary to decide this appeal. I agree that on a plain meaning, s. 56(1)(a)(ii) of the Income Tax Act, R.S.C. 1952, c. 148 (now R.S.C., 1985, c. 1 (5th Supp.)), does not provide for the taxation of settlements for loss of intended employment. I agree as well that there was no factual foundation on which to argue that the settlement could be taxed under s. 3(a) of the Income Tax Act as income from the employment contract.

[66] I do not agree with his conclusion on the taxation of income from unenumerated sources. Since the appeal was properly disposed of on other grounds, I do not think it was necessary to discuss this issue. Although La Forest J. concluded that the settlement in this case could not be taxed under s. 3(a), his obiter dicta indicate that unenumerated sources are as a general matter taxable under s. 3(a). With respect, I disagree with my colleague on this point because I do not believe it is either necessary or desirable to decide the question. Given the conclusion reached in this case, it would seem preferable to avoid deciding whether, in theory, the Minister can tax on sources not specifically identified in the Act. I say this because a number of arguments can be and have been advanced on why this is not necessarily the case. I will briefly discuss these.

[67] Section 3(a) ostensibly permits taxation of income from any source. The argument for the Minister, which is supported by the literal wording of the section, is that "office, employment, business and property" are only examples of sources which may be taxed. My colleague quotes with approval from The Fundamentals of Canadian Income Tax (4th ed. 1992), where Professor V. Krishna states that "all accretions to wealth of an income nature are a measure of [the] ability [to pay] and should be taxable regardless of source" (p. 130).

[68] However, a literal adoption of this position would arguably constitute a dramatic departure from established tax jurisprudence. It has long been recognized that not all "accretions to wealth" are included as income. Inheritances and gifts are "accretions to wealth" but are nevertheless not taxed because they are not income from employment, property, or business. Profits from hobbies are accretions to wealth, but they, too, are not taxed for the same reason.

[69] If s. 3(a) were applied literally to provide for taxation of income from any source, then again it is arguable the existing jurisprudence would be placed in jeopardy. Despite the inclusive language of ss. 3(a) and 56, many observers have pointed out that Canadian courts have always recognized that monies which do not fall within the specifically enumerated sources are not subject to tax. For example, E. C. Harris states in Canadian Income Taxation (4th ed. 1986), at p. 99:

While the Act recognizes that there may be other sources of income than [those specifically listed in s. 3(a)], the case law under the former Act suggests that the only other sources of income and loss that are likely to be recognized are those that are specifically recognized in the Act.

This view is reiterated in B. J. Arnold, T. Edgar and J. Li, eds., Materials on Canadian Income Tax (10th ed. 1993), at p. 51. After noting that the literal wording of the statute does not require that income be from a enumerated source, the authors state:

Nevertheless, Canadian courts have tended to adopt the approach of the English courts to the definition of income by restricting the scope of "source" to the traditional sources of income -- employment, business, and property -- rather than attempting innovatively to discover new sources of income.

To the same effect see J. A. Rendall, "Defining the Tax Base", in B. G. Hansen, V. Krishna and J. A. Rendall, eds., Canadian Taxation (1981), 59.

[70] Contrary to the view of my colleague, accepting that unenumerated sources of income are taxable would seriously question a number of cases. For example, in the long line of decisions that distinguish a "business" from a "hobby", it has been consistently held that where the activity in question falls outside of the definition of "business", any profits recognized are not subject to tax under s. 3. This is in accordance with the restrictive approach to s. 3(a).

[71] In cases where a receipt of money has fallen outside of s. 3 and Subdivision d of Division B of Part I of the Act, the money has not been taxed. For example, in The Queen v. Savage, 1983 CanLII 32 (SCC), [1983] 2 S.C.R. 428, the taxpayer received $300 as a prize for achievement. As a result, it fell outside of s. 56(1)(n), which provided for taxation of prizes over $500. The Minister claimed that the sum was still taxable as a "benefit" under s. 6(1)(a). Dickson J., as he then was, rejected this argument, because to do otherwise would have meant that s. 56(1)(n) had no meaning. As that sum was not specifically included in the Act it was not taxable. Thus one could state that that decision is inconsistent with a literal interpretation of s. 3(a).

[72] Moreover, it could be argued that the structure of the Act supports the conclusion that sources may be taxed only if specifically recognized in the Act. If s. 3(a) includes all income from any source, then there is no reason for Subdivision d of Division B of Part I of the Act (ss. 56 to 59.1, "Other Sources of Income"). Section 56 would be left with no purpose, since all sources it lists would already be covered by the general opening words of s. 3(a). However, I acknowledge in pointing this out that s. 56 contains disclaiming words similar to those found in s. 3(a).

[73] La Forest J. finds support for his position in Curran v. Minister of National Revenue, 1959 CanLII 98 (SCC), [1959] S.C.R. 850, and Canada v. Fries, 1990 CanLII 48 (SCC), [1990] 2 S.C.R. 1322. With respect, my reading of those cases brings me to a different conclusion. I agree that the trial judge in Curran held that the payment in question was taxable under the general words of s. 3. However, this Court did not approve or even mention the proposition that the payment could be taxed under the general provision of s. 3. Instead, it was held that the payment amounted to income from employment, since it was made in exchange for personal service. Kerwin C.J. found, "the payment of $250,000 was made for personal service only and that conclusion really disposes of the matter..." (p. 856). I do not agree that Curran is any authority for supporting taxation of unenumerated sources.

[74] Likewise, I disagree that this Court in Fries implicitly held that unenumerated sources of income are taxable. This judgment allowed the appeal on the basis that strike pay did not come within the definition of "income . . . from a source" within the meaning of s. 3. If anything, this case leans against the proposition that unenumerated sources are taxable. This case follows the tradition of excluding any sources not specifically recognized in the Act.

[75] If this Court intends to conclude that s. 3(a) should be applied literally, and permit taxation on income from any source whatsoever, it should only do so in circumstances which warrant such a decision because such a result is of fundamental importance. Moreover, as I have mentioned, so deciding can be viewed as a marked departure from previous tax jurisprudence. In 1966, the Carter Commission recommended the extension of taxation to all sources of income and all accretions to purchasing power, but its recommendations were not implemented by Parliament and it is hardly the role of the judiciary to do so.

[76] Accordingly, it is my opinion that this Court in this case should not answer the question of whether s. 3(a) permits taxation of unenumerated sources. We should only do so when the question is properly and unavoidably before us.

[77] I agree in all other respects with my colleague La Forest J. and would dispose of the appeal in the manner he proposes.

Appeal allowed with costs.

Solicitors for the appellant: Goodman Phillips & Vineberg, Toronto.

Solicitor for the respondent: George Thomson, Toronto.