Civil litigation matters can sometimes proceed in a tax vacuum, with the tax implications only considered after the parties have agreed to a settlement or a judge has rendered a decision. However, the income tax implications of a settlement or decision may be greatly influenced by the manner in which the parties have drafted the pleadings or settlement documents. The same can be said for commercial matters, where significant income tax consequences flow from a taxpayer's affairs being documented or structured in a particular way. A recent Tax Court of Canada case serves as a useful reminder of the benefits of the timely consideration of the tax implications of one’s actions.
In Schewe v. the Queen, the taxpayer was employed as a dean of a community college. As dean, he was also entitled to commence an instructing position in the future. The college terminated the taxpayer’s employment as dean without notice. The taxpayer sued and was awarded damages for loss of future employment in respect of the instructing position. The Minister of National Revenue assessed the taxpayer on the basis that the damages constituted the receipt of a retiring allowance in respect of the taxpayer’s loss of employment, concluding that the position of dean and the right to take up an instructing position were inextricably linked. The taxpayer appealed, arguing that the damages did not constitute a retiring allowance, as they were neither sought nor awarded for the loss of employment as dean, but rather for the loss of future employment in an instructing position.
The Tax Court allowed the appellant’s appeal. The court concluded that what the damages were intended to compensate for was not a loss of employment but rather the loss of the legal right entitling the taxpayer to employment in the future. Accordingly, the amount did not constitute a retiring allowance and the tax assessment was overturned.
In reaching its conclusion, the Tax Court made a number of references to the civil proceedings, in which the distinction between the taxpayer’s position as dean and the entitlement he had to be engaged as an instructor in the future was clearly drawn, both by counsel as well as the trial judge.