JAMES SCOTT, Appellant, v. HER MAJESTY THE QUEEN,, 2017 TCC 224

Docket: 2014-3260(IT)G BETWEEN: JAMES SCOTT, Appellant, and HER MAJESTY THE QUEEN, Respondent , Docket: 2014-3263(IT)G BETWEEN: SUSAN KENNEDY, Appellant, and HER MAJESTY THE QUEEN, Respondent, Docket: 2014-3265(IT)G BETWEEN: MARY ELLIS, Appellant, and HER MAJESTY THE QUEEN, Respondent, Docket: 2014-3266(IT)G BETWEEN: ANN MCCANN, Appellant, and HER MAJESTY THE QUEEN, Respondent. Appeals heard on August 25, 2016 and October 5, 2016, at Ottawa, Ontario.

Written Submissions filed by the Appellants and the Respondent on August 24, 2016; Supplementary Written Submissions filed by the Appellants on October 5, 2016; Supplementary Written Submissions filed by the Respondent on November 4, 2016; and Appellants’ Reply to Respondent’s Supplementary Written Submissions filed on November 24, 2016

By: The Honourable Justice Don R. Sommerfeldt Appearances : Counsel for the Appellant: Mark Zigler, Roberto Tomassini, Brianna Sims Counsel for the Respondent: Bobby Sood, Rita Araujo JUDGMENT 1. The Appeals of Mary Ellis (2014-3265(IT)

G) and Susan Kennedy (2014-3263(IT)

G) are allowed and the Assessments that are the subject of those Appeals are referred back to the Minister of National Revenue (the “ Minister ” ) for reconsideration and reassessment in accordance with the attached Reasons, and, in particular, on the basis that the distributions in the amounts of $1,371 and $9,011.88 paid in 2011 by the Nortel Health and Welfare Trust (the “HWT” ) to Ms. Ellis and Ms. Kennedy respectively in respect of the Nortel Group Term Life Insurance Plan are not to be included in computing their income for 2011. 2. The Appeal of Ann McCann (2014-3266(IT)

G) is allowed and the Assessment that is the subject of that Appeal is referred back to the Minister for reconsideration and reassessment in accordance with the attached Reasons, and, in particular, on the basis that the amount of the distribution paid in 2011 by the HWT to her that pertained to her survivor transition benefits and that is to be included in computing her income for 2011 is $6,152.42 (and not $6,438.39). 3. The Appeal of James Scott (2014-3260(IT)

G) is dismissed. The Parties are invited to file written submissions on costs, or to request a hearing in respect of costs, within 90 days of this Judgment. Signed at Ottawa, Canada, this 9th day of November, 2017. “Don R. Sommerfeldt” Sommerfeldt J. Citation: 2017 TCC 224 Date: 20171109 Docket: 2014-3260(IT)G BETWEEN: JAMES SCOTT, Appellant, and HER MAJESTY THE QUEEN, Respondent, Docket: 2014-3263(IT)G BETWEEN: SUSAN KENNEDY, Appellant, and

HER MAJESTY THE QUEEN, Respondent, Docket: 2014-3265(IT)G BETWEEN: MARY ELLIS, Appellant, and HER MAJESTY THE QUEEN, Respondent, Docket: 2014-3266(IT)G BETWEEN: ANN MCCANN, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Sommerfeldt J. I.

INTRODUCTION [ 1 ] The fallout and litigation arising from the financial difficulties experienced by Nortel Networks Corporation ( “NNC” ) and its subsidiaries (collectively, “Nortel” ) in 2009 continues. [1] In these Appeals, although Nortel is not a litigant, some of its former employees, or the surviving spouses of former employees, are the Appellants. [ 2 ] These Reasons apply to Appeals instituted by James Scott, Susan Kennedy, Mary Ellis and Ann McCann respectively, and relate to the taxability of distributions that were made in 2011 from a health and welfare trust established by Nortel in 1980.

The Appellants filed their income tax returns for 2011 on the basis that those distributions formed part of their income. However, after the Canada Revenue Agency (the “CRA” ), on behalf of the Minister of National Revenue (the “Minister” ), issued notices of assessment (the “Assessments” ) in accordance with the income tax returns as filed, the Appellants filed Notices of Objection, taking the position that the distributions were not taxable. After the CRA confirmed the Assessments, the Appellants instituted these Appeals. II.

FACTS [ 3 ] At the commencement of the hearing, the Appellants and the Respondent (collectively, the “Parties” ) presented to the Court a Statement of Agreed Facts (the “SAF” ). [2] The SAF is reproduced as Appendix A to these Reasons. Certain of the relevant facts are summarized in the ensuing paragraphs. [3] A. Background [ 4 ] Until January 14, 2009, NNC was a publicly traded Canadian corporation and the direct or indirect parent of numerous subsidiaries. On January 14, 2009, most of the Nortel Entities filed for bankruptcy protection.

In Canada, the Canadian corporations filed under the Companies' Creditors Arrangement Act (the “ CCAA ” ). [4] Ernst & Young Inc. was appointed as the monitor (the “Monitor” ) of the Nortel estate. [ 5 ] During the CCAA proceeding, Nortel divested itself of substantially all of its assets and business units and terminated the employment of most of its employees in Canada.

B. Health and Welfare Plans [ 6 ] As of January 1, 1980, Nortel established health and welfare plans (the “HW Plans” ) for the benefit of certain active and former employees.

The HW Plans provided for various benefits, including health care (medical and dental) benefits, sickness and accident benefits, long term disability benefits, survivor income benefits and group life insurance. [5] [ 7 ] Most of Nortel’s health and welfare benefits, including life insurance and survivor income/transition benefits, were delivered through the Nortel Health and Welfare Trust (the “HWT” ) established pursuant to a trust agreement (the “Trust Agreement” ), made effective as of January 1, 1980, between Montreal Trust Company and Northern Telecom Limited (which was then the name of NNC). [6] The HWT was a single trust fund created for the purpose of delivering health and welfare benefits to active and retired employees of Nortel and their eligible dependents in accordance with the HW Plans. [ 8 ] Most of Nortel’s non-pension employee benefits, including group life insurance, long term disability, health care (medical and dental) and survivor income benefits, were funded by Nortel on a pay-as-you-go basis; however, as an administrative matter, they were paid using the HWT as a payment mechanism.

Certain other benefits were funded, in part, by the HWT using its trust assets. Although the assets for the funded benefits were notionally allocated in the financial statements of the HWT, those assets were not segregated by benefit plan, and no separate bank accounts were established, with the result that all of the HWT assets were commingled. [7] [ 9 ] By agreement dated December 1, 2005, Nortel appointed the Northern Trust Company, Canada (the “Trustee” ) as the successor trustee under the HWT, and the Trust Agreement was amended to reflect this change.

As of the same date, Nortel entered into a letter agreement with the Trustee, wherein Nortel agreed:

a) to be solely responsible for administering the HW Plans and for determining the contributions required to adequately fund the HW Plans, and

b) to indemnify the Trustee from all claims and liabilities incurred by the Trustee and arising out of the administration of the HW Plans or out of the contributions made (or not made) by Nortel to the HWT.

The letter agreement also stated that “to the extent necessary, this letter shall constitute an amendment to the Health and Welfare Trust.” [ 10 ] As Nortel’s financial situation deteriorated and it ultimately became insolvent, it nevertheless continued to fund certain benefits for more than a year after the CCAA filing, but it became apparent that Nortel could not continue to do so indefinitely, which lead to the negotiation of an agreement concerning some of the issues related to the HW Plans and other plans. [8] [ 11 ] Certain employment-related issues of former Nortel employees were addressed in an Amended and Restated Settlement Agreement made as of March 30, 2010 (defined above as the “ARSA” ) among NNC, four other Nortel Entities, the Monitor, the court- appointed representatives of the former Nortel employees (the “Former Employee Representatives” ), Susan Kennedy on behalf of the Represented LTD Beneficiaries, [9] and Representative Counsel [10] (collectively, the “Settlement Parties” ). [ 12 ] The ARSA was approved by the Ontario Superior Court of Justice (the “Superior Court” ) by Order dated March 31, 2010 (the “Settlement Approval Order” ).

The Settlement Approval Order was affirmed by the Ontario Court of Appeal on June 3, 2010. [ 13 ] The ARSA provided that, up to December 31, 2010, Nortel was to continue to pay life insurance benefits and survivor income/transition benefits.

The ARSA also provided that no such benefits were to be paid by Nortel for any benefit coverage period after December 31, 2010. [ 14 ] Pursuant to the ARSA, the affected employees and survivors, including the Appellants, were entitled to file an unsecured claim as ordinary creditors against the Nortel estate in the CCAA proceeding for any funding deficit in the HWT or for any HWT-related claims (the “HWT Claims” ). [ 15 ] Certain of the representative parties to the ARSA, on their own behalf and on behalf of the parties represented by them, released the Trustee of the HWT, the Monitor and others from any claims related to the HWT.

Nothing in the ARSA released Nortel from any claim for any funding deficit in the HWT or for any HWT Claims, to the extent that such claims were allowed as ordinary unsecured claims against Nortel. [11] [ 16 ] In the ARSA, the Settlement Parties agreed to “work towards developing a Court approved distribution of the HWT corpus in 2010 to its beneficiaries entitled thereto and the resolution of any issues necessarily incident thereto.” The ARSA did not affect “the determination on any basis whatsoever of the entitlement of any beneficiary to a distribution from the corpus of the HWT.” [ 17 ] The HWT allocation agreed to by the Settlement Parties was submitted to the Superior Court for approval.

The HWT allocation and the distribution of the HWT’s corpus were approved by the Superior Court by Order dated November 9, 2010 (the “HWT Allocation Order” ).

The methodology for allocation of the corpus of the HWT approved by the Superior Court provided that the amount of the allocation was to be calculated based on each approved participating benefit’s respective share of the present value of all the approved participating benefits. [12] The Order also provided that certain beneficiaries, [13] including the Appellants, were to receive distributions from the approved participating benefits’ pro rata share of the HWT corpus.

The distribution of the corpus of the HWT was to be made by the Trustee (or an agent of the Trustee or Nortel) to the entitled individuals in accordance with the HWT Allocation Order. [ 18 ] The date of the Notice of Termination for all purposes under and pursuant to the Trust Agreement was deemed by the HWT Allocation Order to be December 31, 2010. The HWT Allocation Order also provided that the requirement for and delivery of a Notice of Termination to the Trustee pursuant to

section 2 of

Article VI of the Trust Agreement was dispensed with for all purposes. [14] By way

of background, the first two sentences of

section 2 of

Article VI of the Trust Agreement read as follows: Upon sixty (60) days prior written notice to the Trustee, the Corporation may terminate its obligation to make employer’s contributions in respect of benefits after the date of written notice to the Trustee (hereinafter called the “Notice of Termination” ).

Upon receipt of the Notice of Termination the Trustee shall within one hundred twenty (120) days determine and satisfy all expenses, claims and obligations arising under the terms of the Trust Agreement and Health and Welfare Plan up to the date of the Notice of Termination. [15] Thus, the term “Notice of Termination” refers to the termination of NNC’s obligation to make contributions in respect of benefits under the HW Plans, and not to the termination of the Trust.

The date of the Notice of Termination marked the end of NNC’s obligation to make contributions to the HWT and the effective date for the determination and satisfaction of the expenses, claims and obligations of the HWT. [16] [ 19 ] As at December 31, 2010, the HWT had insufficient assets to deliver the vested employee benefits. Nortel was then insolvent and could not fund the benefits. [ 20 ] Distributions from the HWT, in accordance with the HWT Allocation Order, commenced in 2011, pursuant to various interim distribution orders issued by the Superior Court in 2011.

The Appellants all received distributions, some of which are described below. [17] [ 21 ] By Order dated November 19, 2013, the Superior Court further ordered and declared that “upon the posting of the Notice of Declared Distribution on the Monitor’s website and completion of the distributions from the HWT as provided for in this Order, the HWT will automatically terminate.” [18] As of August 2016, the distributions from the HWT had apparently not been completed. [19] C. The HWT’s 2011 Income Tax Return [ 22 ] The hearing of these Appeals commenced on Thursday, August 25, 2016.

On Monday, August 22, 2016, a trial management conference was held by telephone conference call. At that time, counsel for the Appellants advised that there would be no witnesses called at the hearing and that there would be a statement of agreed facts, as well as agreed-upon exhibits. Counsel for the Respondent concurred with the foregoing statements.

Three days later, shortly after the beginning of the hearing, the SAF was entered as Exhibit AR- 1 and a three-volume Joint Book of Documents (defined above as the “JBOD” ) was entered as Exhibit AR-2. [ 23 ] At the commencement of the hearing and before the above-mentioned documents were entered as exhibits, counsel for the Respondent requested leave to file, as contemplated by subsection 244(9) of the Income Tax Act [20] (the “ ITA ” ), an affidavit (the “Affidavit” ) sworn by a CRA auditor and containing, as exhibits, copies of the 2011 T3 Trust Income Tax and Information Return filed by the HWT and the 2011 Trust Notice of Assessment issued by the CRA to the HWT.

Counsel for the Appellants objected to the admission of the Affidavit. I directed that the Affidavit be marked as Exhibit R-1 for Identification, and indicated that I would consider, and ultimately make a determination concerning, the admissibility of the Affidavit. D. Mary Ellis (Pensioner Life Insurance Benefit) [ 24 ] In 2010, Ms. Ellis, who was a retired employee of Nortel, had a vested right, by virtue of her employment with Nortel, to receive life insurance benefits under the Nortel Group Term Life Insurance Plan (the “Group Life Plan” ). [21] Ms.

Ellis’ benefit consisted of group life insurance coverage and the payment by the HWT of the requisite insurance premiums during her lifetime. The amount of the insurance proceeds that would have been paid, on the death of Ms. Ellis, to her beneficiary, and which was based on her earnings while she was an active employee of Nortel, was $17,000. For taxation years ending before 2011, Ms. Ellis included, in computing her income, the amount of the group life insurance premiums paid on her behalf by the HWT. [ 25 ] Pursuant to the ARSA, the HWT continued to pay the life insurance premiums in respect of Ms.

Ellis until December 31, 2010, but no premiums were paid thereafter. The Monitor estimated that, as at December 31, 2010, the present value of Ms. Ellis’ claim was $6,855. [ 26 ] As Ms. Ellis was a beneficiary of the HWT, when distributions from the corpus of the HWT were made in 2011, Ms. Ellis received $1,371. The Monitor subsequently issued to Ms. Ellis a T4A slip in respect of the $1,371 distribution. When Ms. Ellis prepared and filed her income tax return for 2011, she included the distributed amount of $1,371 in computing her income. Ms.

Ellis’ 2011 tax return was assessed as filed, and she subsequently objected and later appealed. E. Susan Kennedy (Long Term Disability Life Insurance Benefit) [ 27 ] In 2010, Ms. Kennedy was a former employee of Nortel who was receiving long term disability benefits ( “LTD Benefits” ) under the Nortel Long Term Disability Plan for full-time employees (the “LTD Plan” ).

As such, she had a vested right to receive life insurance coverage under the Group Life Plan (while she was in receipt of LTD Benefits), until attaining age 65, whereupon she would have been eligible for pensioner life insurance coverage under the Group Life Plan for her lifetime. The amount of the insurance proceeds that would have been paid, on the death of Ms. Kennedy, to her beneficiary was $62,000 for basic life insurance and $186,000 for optional life insurance. For taxation years ending before 2011, Ms.

Kennedy included, in computing her income, the amount of the group life insurance premiums paid on her behalf by the HWT. [ 28 ] The HWT paid the life insurance premiums in respect of Ms. Kennedy until December 31, 2010. No premiums were paid thereafter. The Monitor estimated the present value of Ms. Kennedy’s claim, as at December 31, 2010, to be $29,394. [ 29 ] As Ms. Kennedy was a beneficiary of the HWT, she was entitled to receive a share of the distribution of the corpus of the HWT. She received lump-sum payments in the amounts of $7,281.88 and $1,730 in September 2011 and December 2011 respectively.

The Monitor subsequently issued one or more T4A slips (presumably in the aggregate amount of $9,011.88, i.e., $7,281.88 + $1,730) to Ms. Kennedy, who, in preparing her income tax return for 2011, included the distributed amounts in computing her income. [22] The CRA assessed Ms. Kennedy’s 2011 income tax return as filed, after which Ms. Kennedy objected and later appealed. F. James Scott (Management Survivor Income Benefit) [ 30 ] While she was alive, the spouse of Mr. Scott was an active non-unionized full-time employee of Nortel. After the death of his spouse, Mr.

Scott, pursuant to the Management Survivor Income Benefit Plan (the “SIB Plan” ), became entitled to receive monthly survivor income benefits (the “SIBs” ), each in the amount of $871.46, by reason of his spouse’s employment with Nortel. In preparing his income tax returns, Mr. Scott reported the SIBs as death benefits, which he included in computing his income. Mr. Scott received SIBs until December 31, 2010, but not thereafter. [ 31 ] Mercer (Canada) Limited ( “Mercer” ), which was Nortel’s actuary, estimated the present value of Mr. Scott’s SIBs, as at December 31, 2010, as being $124,345.

When the corpus of the HWT was distributed in 2011, Mr. Scott received lump-sum payments of $724.18 in January 2011, $482.79 in May 2011 and $7,319.20 in July 2011 (resulting in aggregate distributions of $8,526.17 to him in 2011). [23] The Monitor subsequently issued one or more T4A slips to Mr. Scott in respect of the distributions, and Mr. Scott included the distributed amounts in computing his income for 2011. After his 2011 income tax return was assessed as filed, Mr. Scott objected and later appealed. G. Ann McCann (Union Survivor Transition Benefit) [ 32 ] Before his death, the spouse of Ms.

McCann was a unionized employee of Nortel. Upon the death of her spouse, Ms. McCann became entitled to receive monthly survivor transition benefits ( “STBs” ) under the Union Survivor Transition Benefit Plan (the “STB Plan” ), by virtue of her spouse’s employment with Nortel. Specifically, under the STB Plan, Ms. McCann was entitled to receive a monthly payment in the amount of $725 for a fixed five-year term that would have expired on December 31, 2013. Pursuant to the ARSA, Ms. McCann continued receiving the monthly STBs until December 31, 2010, after which no further benefits were paid.

The Monitor estimated the present value of Ms. McCann’s STBs, as at December 31, 2010, to be $24,644. [ 33 ] As Ms. McCann was a beneficiary of the HWT, when distributions from the corpus of the HWT were made in 2011, she received $2,175 in January 2011, $285.97 in May 2011 and $3,691.45 in July 2011 (resulting in aggregate distributions of $6,152.42 to her in 2011). [24] The Monitor subsequently issued one or more T4A slips to Ms. McCann in respect of the distributions to her. [ 34 ] When Ms. McCann filed her income tax return for 2011, she included the distribution of $6,152.42 in computing her income.

The CRA subsequently assessed her return, apparently to include, in computing her income, STBs in the amount of $6,438.39, after which Ms. McCann objected and later appealed. [25] III. ISSUES [ 35 ] The issues to be resolved in respect of these Appeals are the following: A. Is the Affidavit, together with the HWT’s 2011 T3 Trust Income Tax and Information Return and 2011 Trust Notice of Assessment, admissible? B. Are sections 104 through 108 of the ITA applicable to the disposition of these Appeals, and, if so, how? C. Should the distribution in the amount of $1,371 by the HWT to Ms.

Ellis in 2011 be included in computing her income for 2011? D. Should the distributions in the aggregate amount of $9,011.88 by the HWT to Ms. Kennedy in 2011 be included in computing her income for 2011? E. Should the distributions in the aggregate amount of $8,526.17 by the HWT to Mr. Scott in 2011 be included in computing his income for 2011? F. Should the distributions in the aggregate amount of $6,152.42 by the HWT to Ms. McCann in 2011 be included in computing her income for 2011? IV. ANALYSIS A. Admissibility of the Affidavit

(1) Background [ 36 ] When drafting an agreement concerning the use of a statement of agreed facts or a joint book of documents, it is not uncommon for one or more of the parties to reserve the right to call one or more witnesses or to introduce additional documentary evidence at the hearing.

There was no such reservation by either Party here, although the introductory paragraph of the SAF concludes by saying, “Nothing in this document precludes any parties from relying on the facts otherwise in the record before the court.” As mentioned above, counsel for the Respondent applied to have the Affidavit admitted as evidence so that it and its exhibits would be part of the record before the Court.

[ 37 ] It is my understanding that the primary reason for which the Respondent wanted to introduce the Affidavit (including the HWT’s 2011 tax return and notice of assessment) as evidence was to prove that the HWT existed in 2011 and that, in computing its income for 2011, the HWT deducted the amounts distributed by it to the Appellants in 2011.

Counsel for the Respondent submitted that the matching principle was applicable, such that, assuming that the HWT deducted the distributed amounts, it would follow that those amounts should be included in computing the income of the recipients. [ 38 ] Counsel for the Appellants objected to the admission of the Affidavit on the basis that the delivery of the Affidavit to him on the morning of the first day of the hearing constituted prejudicial “last-minute trial-by-ambush type tactics.” [26] Furthermore, counsel for the Appellants pointed out that the HWT is not a party to these Appeals and that its tax return and notice of assessment are confidential.

In addition, counsel for the Appellants submitted that the matching principle does not exist and that the manner in which the HWT was taxed is not relevant to the taxability of the Appellants. [ 39 ] While making his submissions concerning the admissibility of the Affidavit, counsel for the Appellants stated that, although the HWT Allocation Order provided that the date of the Notice of Termination (which, in my view, marked the end of NNC’s obligation to make contributions to the HWT and set the effective date for the determination and satisfaction of the expenses, claims and obligations of the HWT [27] ) was deemed to be December 31, 2010, he was willing to concede that the winding-up of the affairs of the HWT continued into 2011, 2012 and subsequent years and that the HWT has filed tax returns for each year during which the winding-up has continued. [28]

(2) Rule 89(1) [ 40 ] Each of the Appellants filed a List of Documents (Partial Disclosure) on January 30, 2015. Each List referred to the 2011 Income Tax and Benefit Return of the particular Appellant, but did not refer to the 2011 T3 Trust Income Tax and Information Return of the HWT. [ 41 ] On January 30, 2015 the Respondent filed a List of Documents (Partial Disclosure) in each of these Appeals. The Lists filed in respect of Mr. Scott’s and Ms. McCann’s Appeals referred to copies of the 2011 income tax returns of those two Appellants respectively. [29] The Lists filed by the Respondent in respect of Ms.

Kennedy’s and Ms. Ellis’ Appeals referred to the 2011 Option C Printouts for those two Appellants, [30] rather than to their actual tax returns. The Lists filed by the Respondent did not refer to the HWT’s 2011 income tax return or notice of assessment. [ 42 ] Subsection 89(1) of the Tax Court of Canada Rules (General Procedure) [31] (the “ Rules ” ) states: 89(1) Unless the Court otherwise directs, except with the consent in writing of the other party or where discovery of documents has been waived by the other party, no document shall be used in evidence by a party unless (

a) reference to it appears in the pleadings, or in a list or an affidavit filed and served by a party to the proceeding, (

b) it has been produced by one of the parties, or some person being examined on behalf of one of the parties, at the examination for discovery, or (

c) it has been produced by a witness who is not, in the opinion of the Court, under the control of the party. [ 43 ] The HWT’s 2011 tax return and notice of assessment do not come within paragraph 89(1)(

b) or (

c) of the Rules , nor are they referred to in the pleadings or in the Respondent’s List of Documents. They are, however, included as exhibits in the Affidavit, which was not filed with the Court before the commencement of the hearing and was only served on the Appellants on the morning of August 25, 2016 (the day when the hearing commenced). Paragraph 89(1)(

a) of the Rules does not specify a deadline for filing and serving a list of documents or an affidavit containing a document. Subsection 81(1) of the Rules provides that a list of documents (partial disclosure) is to be filed and served within 30 days following the closing of the pleadings. This suggests that a list of documents should be filed sooner, rather than later. [ 44 ] The context of sections 78 through 91 of the Rules suggests that, in paragraph 89(1)( a ), the word “affidavit” means an affidavit of documents as contemplated by subsections 82(4) through (6) and

section 88 of the Rules , rather than an affidavit of the type contemplated by subsection 244(9) of the ITA . [ 45 ] If the Affidavit is not an affidavit of the type contemplated by paragraph 89(1)(

a) of the Rules , unless the Court otherwise directs, the HWT’s 2011 tax return and notice of assessment may not be used in evidence by the Respondent. If the Affidavit is an affidavit of the type contemplated by paragraph 89(1)( a ), and if I determine that the Affidavit is admissible, the service of the Affidavit on the Appellants on the morning of the commencement of the hearing placed the Appellants at a significant disadvantage.

(3) Jurisprudence concerning Rule 89(1) [ 46 ] Subsection 89(1) of the Rules has a salutary objective, which is to reduce the possibility of taking the other party by surprise (colloquially referred to as trial by ambush). [32] Hence, the general rule is to exclude from evidence a document that is not referred to in the pleadings or the list of documents of the party who seeks to introduce the document. [33] Absent some agreement between the parties, subsection 89(1) of the Rules and other evidentiary requirements relating to the production of documents should not readily be ignored. [34] A departure from the general rule requires some justification [35] or some reason. [36] [ 47 ] The opening words of subsection 89(1) of the Rules provide the Court with a discretion to allow a document into evidence even if the requirements of subsection 89(1) have not been met. [37] As a foundation for the exercise of this discretion, there should be some reason provided to the Court in support of the proposition that a previously undisclosed document should be allowed into evidence. [38] The Court must exercise its discretion judicially, according to the rules of reason and justice, and not arbitrarily. [39] In determining whether to admit a previously undisclosed document, there must be a balancing of the competing interests of both parties, so as to avoid

a miscarriage of justice. [40] The Court must also be mindful of the interests of justice and the overriding importance of having all of the relevant information before the Court to enable it to arrive at a proper and just disposition of the particular appeal. [41] Finally, the Court should not lose sight of subsection 4(1) of the Rules , which provides that the Rules are to “be liberally construed to secure the just, most expeditious and least expensive determination of every proceeding on its merits.” [42] [ 48 ] During the discussion of the admissibility of the Affidavit, neither counsel specifically addressed the question of whether the Respondent’s failure to include the HWT’s 2011 tax return and notice of assessment in its List of Documents precludes, by reason of subsection 89(1) of the Rules , the Respondent from using that tax return and notice of assessment in evidence. [43] Given that subsection 89(1) of the Rules was not discussed expressly by either counsel, counsel for the Appellants did not urge me to exclude the Affidavit on the basis of subsection 89(1) of the Rules , [44] and counsel for the Respondent made no submission as to why the Court should exercise its discretion so as to allow the Affidavit to be admitted, nor did counsel for the Respondent provide a justification or reason for departing from the general rule in subsection 89(1) of the Rules .

Counsel for the Respondent explained why they would like the HWT’s 2011 tax return and notice of assessment to be entered into evidence and why the desire to enter those documents into evidence arose only a day or two before the hearing, but they did not explain why I should ignore the general rule of exclusion in subsection 89(1) of the Rules . [ 49 ] As the impact of subsection 89(1) of the Rules was not argued before me, I am reluctant to base my decision concerning the admissibility of the Affidavit solely on that particular rule. (4) Subsections 241(1) and (3) of the ITA [ 50 ] Another ground for the objection by counsel for the Appellants to the admission of the Affidavit was that the exhibits to the Affidavit constitute taxpayer information (as defined in subsection 241(10) of the ITA ), and, as such, are confidential and are, by reason of paragraph 241(1)(

a) of the ITA , precluded from public disclosure. Paragraph 241(1)(

a) of the ITA reads as follows: 241(1) Except as authorized by this section, no official or other representative of a government entity shall (

a) knowingly provide, or knowingly allow to be provided, to any person any taxpayer information…. [ 51 ] The opening phrase of subsection 241(1) of the ITA makes it clear that the remainder of

section 241 may contain exceptions to the general prohibition contained in subsection 241(1) of the ITA . One such exception is found in paragraph 241(3)(

b) of the ITA , which reads as follows: 241(3) Subsections (1) and (2) do not apply in respect of … (

b) any legal proceedings relating to the administration or enforcement of this Act, the Canada Pension Plan , the Unemployment Insurance Act or the Employment Insurance Act or any other Act of Parliament or law of a province that provides for the imposition or collection of a tax or duty.

(5) Jurisprudence Concerning

Section 241 [ 52 ] In the Slattery case, Iacobucci J of the Supreme Court of Canada enunciated some of the principles that apply to the

interpretation and application of

section 241 of the ITA , as follows: In my view, s. 241 involves a balancing of competing interests: the privacy interest of the taxpayer with respect to his or her financial information, and the interest of the Minister in being allowed to disclose taxpayer information to the extent necessary for the effective administration and enforcement of the Income Tax Act and other federal statutes referred to in s. 241(4).

Section 241 reflects the importance of ensuring respect for a taxpayer’s privacy interests, particularly as that interest relates to a taxpayer’s finances. Therefore, access to financial and related information about taxpayers is to be taken seriously, and such information can only be disclosed in prescribed situations. Only in those exceptional situations does the privacy interest give way to the interest of the state…. By instilling confidence in taxpayers that the personal information they disclose will not be communicated in other contexts, Parliament encourages voluntary disclosure of this information….

Parliament has also recognized, however, that if personal information obtained cannot be used to assist in tax collection when required, including tax collection by way of judicial enforcement, the possession of such information will be useless. Disclosure of information obtained through tax returns or collected in the course of tax investigations may be necessary during litigation in order to ensure that all relevant information is before the court, and thereby to assist in the correct disposition of litigation . But this necessity is sanctioned by Parliament in a very limited number of situations.

Disclosure is authorized in criminal proceedings and other proceedings as set out in s. 241(3). Certain other situations are specified in s. 241(4), which have been described … as being “largely of an administrative nature” …. [45] [ Emphasis added. ] [ 53 ] Iacobbuci J went on to discuss the two connecting phrases that appear in the statutory provision quoted above. In particular, he considered the phrase “in respect of,” which appears in the first line of subsection 241(3) of the ITA and the phrase “relating to” which appears in the first line of paragraph 241(3)(

b) of the ITA . Quoting from the Nowegijick case, he noted that “[t]he phrase ‘in respect of’ is probably the widest of any expression intended to convey some connection between two related subject matters. ” [46] He also stated that, in his view, the comments quoted from Nowegijick are equally applicable to the phrase “relating to” . He then observed: So, both the connecting phrases of s. 241(3) suggest that a wide rather than narrow view should be taken when considering whether a proposed disclosure is in respect of proceedings relating to the administration or enforcement of the Income Tax Act . [47]

Later in his reasons, Iacobucci J reiterated his comments concerning the breadth of subsection 241(3) of the ITA, as follows: As mentioned earlier, in my opinion the exception authorizing Revenue Canada to disclose tax related information in proceedings is verybroad; that is, it operates in respect of proceedings relating to the enforcement of the Income Tax Act.[48] [Emphasis in original.] [54] In my view, particularly in light of the broad

interpretation given to subsection 241(3) of the ITA in Slattery, the Appealsinstituted by Mr. Scott, Ms. Kennedy, Ms. Ellis and Ms. McCann constitute legal proceedings relating to the administration orenforcement of the ITA. I am not aware of any requirement that the legal proceedings in which the disclosure of otherwise confidentialtaxpayer information is sought must pertain to the taxpayer who is the subject of that information.

In fact, the Federal Court of Appealhas previously ordered that the income tax returns of a third party, which were relied on by the Minister in assessing another taxpayer,were to be disclosed to the assessed taxpayer who had commenced legal proceedings to challenge its assessments.[49] [55] Counsel for the Appellants referred me to the Tor Can Waste Management case, which dealt with a motion brought by areassessed taxpayer for disclosure by the Crown of information and documentation obtained by the CRA from a third party from whomthe reassessed taxpayer had purchased certain waste containers or bins.

In the course of deciding the motion, Lyons J stated: 23. Subsections 241(1) and (2) of the Act embody the basic principles that restrict the release of confidential taxpayer information.Paragraph 241(3)(

b) of the Act contains an exception to the prohibition in respect of legal proceedings relating to the administration orenforcement of the Act…. 24. The prohibition against disclosure by the Minister of protected third-party taxpayer information and documentation applies if it isnot relevant to nor was relied on by the Minister in reassessing a tax return. 25. Courts will not order the disclosure of third-party information where the Minister did not use the information nor if there wasvirtually no reason to use the information to make an assessment. 26.

Courts have ordered disclosure of third-party information (income tax returns and information exchanged with the Minister) if theinformation was relied on by the Minister in making the assessment. 27. In the decision of Oro Del Norte S.A. v R., (FC), [1990] 2 CTC 67 (Fed. T.D.), the Court held that third-partyinformation relevant to the issues between the parties or relied on by the Minister in assessing is disclosable.

Recently, in Heinig …,Webb J. confirmed those principles (relevance and reliance).[50] [Footnote numbers omitted.] There was no suggestion by counsel for the Respondent that the CRA relied on the HWT’s 2011 tax return in assessing Mr. Scott, Ms.Kennedy, Ms. Ellis or Ms. McCann. However, counsel for the Respondent asserted that, by reason of the matching principle, the HWT’s2011 tax return is relevant to these Appeals. Counsel for the Appellants took the position that the manner in which the HWT was taxed isnot relevant to the taxability of the Appellants.

I will discuss the question of relevance below. [56] In Tor Can Waste Management, Lyons J noted (in footnote 16) that in 9005-6342 Québec Inc.,[51] Hogan J had canvassed theprinciples relating to

section 241 of the ITA. The 9005-6342 case, like many of the cases dealing with

section 241 (including some ofthose referred to above), dealt with an application by a taxpayer to require the CRA to produce third-party tax information that was usedby the CRA in assessing the taxpayer or that was relevant to the taxpayer’s appeal. Given that 9055-6342 did not deal with a situationwhere the CRA or the Crown was endeavouring to enter confidential third-party tax information as evidence in an appeal relating toanother taxpayer, that case is not directly on point with the current situation. Nevertheless, some of the principles pertaining to section241 of the ITA, as enunciated by Hogan J and paraphrased below, might have some application here:

a) Reasons of public policy and relevance might preclude the use of third-party tax information that would otherwise qualify fordisclosure under paragraph 241(3)(

b) of the ITA.[52]

b) Third-party tax information should not be disclosed to another taxpayer if the CRA had virtually no reason to use the informationwhen assessing the other taxpayer.[53]

c) Even though subsection 241(3) of the ITA (which refers to any legal proceedings relating to the administration or enforcement of theITA) is broader than paragraph 241(4)(

a) of the ITA (which requires that the information contemplated by that provision be regarded asnecessary for the purposes of the administration or enforcement of the ITA), and even though subsection 241(3) of the ITA does notspecify that third-party tax information must be relevant to a particular case, the information may be disclosed only if it is relevant.[54]

d) The notion of relevance must be interpreted broadly.[55] With respect to the principle summarized in subparagraph

b) above, counsel for the Respondent did not make any submission to suggestthat, in assessing the Appellants, the CRA used, or even considered, the information contained in the HWT’s 2011 tax return or notice ofassessment. [57] In Gordon v The Queen, after noting that the Supreme Court of Canada had indicated in Slattery that a wide view should betaken when determining whether a proposed disclosure is in respect of a proceeding relating to the enforcement or administration of theITA, O’Keefe J concluded that certain third-party taxpayer information could be released by the CRA and other government officials tocounsel for the Crown to enable counsel to defend an action that had been brought against the Crown.

However, O’Keefe J expressed theview that notice of the proposed release of taxpayer information should be given to the third parties: There is no requirement under the Income Tax Act that third parties be given notice that their tax information will be released. However,this does not mean that some type of advance notice should not be given to the taxpayer [presumably meaning the third party whose taxinformation is to be released]. I am of the opinion that some type of advance notice should be given to the taxpayer.

Based on theinformation available to me on this hearing, I am not prepared to dictate the form of notice. I would, however, direct the parties to thestatements of Justice Phelan in Scott Slipp Nissan Ltd. v Canada (Attorney General), [2005] G.S.T.C. 70, 2005 FC 1479 at paragraphs 15

and 16 where he stated: 15. It was appropriate for the Minister to give notice to third parties and to provide them respectively with their confidentialinformation that was to be released. The principles of fairness generally would require this procedure as these third parties may haverights or interests affected by the Minister’s decision to disclose….[56] [58] In Tor Can Waste Management, Lyons J referenced the Oro Del Norte case, which was a motion by a taxpayer for an ordercompelling the Crown to produce certain documents containing third-party taxpayer information.

It is noteworthy that, in the context ofthat motion, counsel for the Crown advised the third parties that the applicant in that motion was seeking production of their confidentialdocuments.[57] [59] There was no indication given to me by counsel for the Respondent that the HWT had been given notice that the Respondentproposed to enter the HWT’s 2011 tax return and notice of assessment as evidence in respect of these Appeals.

I am reluctant todisregard the view expressed by O’Keefe J that some type of advance notice should be given to a third party before its taxpayerinformation is used in legal proceedings pertaining to some other taxpayer.

(6) Relevance [60] As noted above, both Lyons J and Hogan J indicated that, notwithstanding that subsection 241(3) of the ITA might authorizethe disclosure of confidential taxpayer information in the context of legal proceedings relating to the administration or enforcement of theITA, such disclosure should not be made unless the information is relevant to those proceedings.

The classic explanation of relevancewas reiterated by the Supreme Court of Canada in 2011, as follows: In order for evidence to satisfy the standard of relevance, it must have “some tendency as a matter of logic and human experience tomake the proposition for which it is advanced more likely than that proposition would be in the absence of that evidence”….[58] [61] In Oro Del Norte, Jerome ACJ made the following comments concerning relevance: A taxpayer must therefore be permitted access to all documents which are relevant to or relied upon by the Minister of National Revenuein reassessing a return.

Counsel for the defendant concedes that the broad test of relevancy expounded by McEachern C.J. in Boxer andBoxer Holdings Ltd. v. Reesor, et al. and adopted by Urie J. in Everest & Jennings Canadian Ltd. v.

Invacare Corporation (FCA), [1984] 1 F.C. 856 (F.C.A.) applies: It seems to me that the clear right of the plaintiffs to have access to documents which may fairly lead them to a train of inquiry whichmay directly or indirectly advance their case or damage the defendant’s case particularly on the crucial question of one party’s version ofthe agreement being more probably correct than the other, entitles the plaintiffs to succeed on some parts of this application….[Emphasis in original.] … I fail to see how documents pertaining to the activities of other mining companies, whether similar to the plaintiffs or not, can in anyway “lead the plaintiffs to a train of inquiry which may directly or indirectly advance their case or damage the defendant’s case…” TheMinister has an obligation to treat all similarly situated taxpayers in the same manner, but it does not follow that documents pertaining toa similarly situated taxpayer are relevant to any other taxpayer’s reassessment.[59] Of course, the Respondent is not suggesting that the HWT is a taxpayer who is similarly situated to any of the Appellants.

Rather, Iassume that the Respondent’s objective is to show that the HWT, in computing its income for 2011, presumably deducted thedistributions made to the Appellants, from which, according to the Respondent, it would follow that the distributions should be includedin computing the Appellants’ income for 2011.

In other words, this would be an application of the so-called matching principle, asdescribed by counsel for the Respondent (or, as I prefer to call it, reciprocity of tax treatment).[60] [62] In their submissions concerning the relevance of the HWT’s 2011 tax return and notice of assessment, counsel for theRespondent explained that one of the issues in these Appeals is whether the distributions from the HWT to the Appellants were incomeor capital.

Counsel submitted that, in a general situation, one of the factors to be considered when resolving an income-versus-capitalissue is a comparison of the manner in which the payor and the payee of a particular payment report the payment on their respectiveincome tax returns.[61] While counsel did not refer me to any specific authority for that proposition, I acknowledge that certaincomments made by the Federal Court of Appeal and the Supreme Court of Canada in Redeemer Foundation are supportive.

In theFederal Court of Appeal, Pelletier JA stated: There is reciprocity in the tax treatment of most commercial transactions. Simply put, one person’s business deduction is anotherperson’s revenue. The Minister has every interest in confirming that the amount claimed as a business expense by the buyer is theamount recorded as revenue by the seller. In the case of registered charities, the same reciprocity applies.

If the Minister determines thatdonations received are not eligible for deduction, then he has an interest in reviewing the returns of those to whom a receipt has beenissued in respect of those donations.

This ability to subject both parties to a transaction to equivalent tax treatment is a fundamentalaspect of the verification process.[62] In the Supreme Court of Canada, Rothstein J (dissenting in part) quoted a portion of the above statement by Pelletier JA, and then stated: I agree that there is reciprocity of tax treatment of many commercial and charitable transactions and that the CRA may have an interest inseeing how both the taxpayer and the other party to a transaction have recognized it for tax purposes.[63] [63] Given that the concept of relevance must be interpreted broadly,[64] and given the Supreme Court’s recognition of thereciprocity of tax treatment and the desirability of avoiding asymmetrical tax treatment, I am of the view that the manner in which theHWT reported the distributions to the Appellants is relevant to these Appeals, although it is not necessarily determinative.[65]

(7) Decision [ 64 ] Although the HWT’s 2011 tax return and notice of assessment are relevant to these Appeals and there is a presumption of admissibility, [66] I have concluded that, in the circumstances of these Appeals, the Affidavit should not be admitted into evidence for the following reasons:

a) I have not been provided with adequate justification for departing from the general rule of exclusion set out in subsection 89(1) of the Rules ;

b) there has been no indication that the CRA, in assessing the Appellants, used or considered any information in the HWT’s 2011 tax return or notice of assessment; and

c) notice has not been given to the HWT of the Respondent’s request to introduce the HWT’s confidential taxpayer information as evidence in these Appeals. B. Applicability of Trust Provisions [ 65 ] During oral argument, I raised the question of whether the trust provisions contained in sections 104 through 108 of the ITA are applicable to the disposition of these Appeals. I asked counsel to provide written submissions in respect of this issue.

(1) Appellants’ Submissions [ 66 ] In “Supplementary Written Submissions of the Appellants,” filed on October 5, 2016, counsel for the Appellants submitted that the provisions contained in sections 104 through 108 of the ITA are not relevant to the determination of the issues in these Appeals. Counsel for the Appellants acknowledged that the rollover provisions in

section 107.1 of the ITA do apply to the HWT, as it is a trust described in paragraph (a.1) of the definition “trust” in subsection 108(1) of the ITA . The effect of paragraphs 107.1(

a) and (

c) of the ITA , which are the applicable provisions, is that neither the HWT nor the Appellants realized a gain or a loss on, respectively, the disposition of property by the HWT when making the distributions or the disposition by the Appellants of parts of their respective interests in the HWT in exchange for the distributions. However, the CRA did not assess the Appellants in respect of any alleged gain, such that

section 107.1 is not relevant to these Appeals.

(2) Respondent’s Submissions [ 67 ] Counsel for the Respondent, in “Respondent’s Supplementary Written Submissions re: Sections 104 to 108,” filed on November 4, 2016, submitted that sections 104 to 108 of the ITA do not assist in the determination of the issues in these Appeals. Thus, counsel for the Respondent concurs with the main thrust of the submissions by counsel for the Appellants concerning the non- applicability of sections 104 through 108. However, counsel for the Respondent then went on to suggest that paragraphs 104(13)(

a) and 108(5)(

a) of the ITA could constitute an alternative basis for the taxation of the distributions made in 2011 by the HWT to the Appellants.

(3) Concurrence [ 68 ] I concur with the general positions taken by counsel for the Appellants and counsel for the Respondent to the effect that sections 104 through 108 of the ITA are not determinative of the issues in these Appeals. I accept the submissions made by counsel for the Appellants in the “Appellants’ Reply to Respondent’s Supplementary Written Submissions,” filed on November 24, 2016, that the Assessments were issued on the basis that

section 6 of the ITA (in the case of Ms. Ellis and Ms. Kennedy) or

section 56 of the ITA (in the case of Mr. Scott and Ms. McCann) brought the respective distributions into income, and that it is too late for the Respondent now to suggest, in the alternative, that the applicable charging provisions are paragraphs 104(13)(

a) and 108(5)(

a) of the ITA . [ 69 ] Having concluded that I need not consider sections 104 through 108 of the ITA further, I will now turn my attention to sections 6 and 56 of the ITA . C. Taxability of Distributions

(1) Life Insurance (

a) Mary Ellis (Distribution of $1,371) [ 70 ] Before December 31, 2010, the HWT paid the premiums in respect of the group life insurance coverage for Ms. Ellis. In computing her income from employment for 2010 and preceding taxation years, Ms. Ellis, as required by subsection 6(4) of the ITA , included the amount prescribed by

Part XXVII of the Income Tax Regulations [67] (the “ ITR ” ). [ 71 ] The amount distributed to Ms. Ellis by the HWT in 2011 represented a portion of the present value of her beneficiary’s loss of life insurance coverage as at December 31, 2010. The calculation of the amount to be distributed to Ms. Ellis was based on the present value of the amount of the life insurance proceeds that would have been paid to her beneficiary on the death of Ms.

Ellis; it was not calculated by reference to the premiums that would have been paid if the Group Life Plan had not been terminated. [68] Specifically, if the Group Life Plan had remained in effect, the amount of the life insurance proceeds that would have been payable on the death of Ms. Ellis was $17,000. Mercer calculated the present value of her claim amount as at December 31, 2010 to be $6,855. [69] The amount actually distributed by the HWT to Ms. Ellis in 2011 in respect of the life insurance claim was $1,371. [70]

(

b) Susan Kennedy (Distribution of $9,011.88) [ 72 ] Before December 31, 2010, the HWT paid the premiums in respect of the group life insurance coverage for Ms. Kennedy. In computing her income from employment for 2010 and preceding taxation years, Ms. Kennedy, as required by subsection 6(4) of the ITA , included the amount prescribed by

Part XXVII of the ITR . [ 73 ] The amount distributed to Ms. Kennedy by the HWT in 2011 represented the present value of the amount of the life insurance proceeds that would have been paid to her beneficiary on the death of Ms. Kennedy. If the Group Life Plan had remained in effect, the amount of the life insurance proceeds that would have been payable on the death of Ms. Kennedy was $62,000 for basic life insurance and $186,000 for optional life insurance. Mercer calculated the present value of her claim amount as at December 31, 2010 to be $29,394. [71] The amount actually distributed by the HWT to Ms. Kennedy in 2011 in respect of the life insurance claim was $9,011.88. [72]

(2) Survivor Benefits (

a) James Scott (Distribution of $8,526.17) [ 74 ] Before December 31, 2010, the HWT paid to Mr. Scott monthly survivor income benefits (defined above as “SIBs”), each in the amount of $871.46 . Mr. Scott, as required by subparagraph 56(1)( a )(iii) of the ITA , included the SIBs in computing his income for 2010 and preceding taxation years. [ 75 ] The amount distributed to Mr. Scott by the HWT in 2011 in respect of the SIBs represented a portion of the present value of the actuarial equivalent of the aggregate SIBs that would have been paid to him during his lifetime if Nortel had not become insolvent.

Specifically, Mr. Scott’s SIB claim amount was calculated by Mercer as being $124,345. [73] The amount actually distributed by the HWT to Mr. Scott in 2011 in respect of his SIB claim was $8,526.17. [74] (

b) Ann McCann (Distribution of $6,152.42) [ 76 ] Before December 31, 2010, the HWT paid to Ms. McCann monthly survivor transition benefits (defined above as “STBs” ), each in the amount of $725. Ms. McCann, as required by subparagraph 56(1)( a )(iii) of the ITA , included the STBs in computing her income for 2010 and preceding taxation years. [ 77 ] Mercer calculated Ms. McCann’s STB claim amount to be $24,644. [75] The amount actually distributed by the HWT to Ms. McCann in 2011 in respect of the STB claim was $6,152.42. [76]

(3) Position of the Appellants [ 78 ] The Appellants submit that the distributions to them from the HWT represented settlement payments in consideration for the surrender of their right to receive the benefits that they, or their beneficiaries, would otherwise have received. [77] The Appellants take the position that the distributed amounts constituted consideration for the disposition of a right to receive future amounts, such that the distribution was a capital transaction.

According to the Appellants, the distribution was consideration for the surrender or release of a right, rather than a replacement of an underlying benefit. [78] [ 79 ] Ms. Ellis and Ms. Kennedy also submitted that the amounts distributed to them represented a present valuation of the tax-free life insurance proceeds that would have been paid on their deaths to their beneficiaries, such that, if the surrogatum principle were to apply, the result would be non-taxability. [79] [ 80 ] In addition, Mr. Scott and Ms.

McCann submitted that, as the amounts distributed to them were paid in settlement of their rights to future benefits, a right which they submitted existed independently of the former Nortel employees (i.e., their respective deceased spouses), it is unreasonable to infer that the distributions were received in recognition of their spouses’ employment with Nortel, such that the distributions did not constitute death benefits, as defined in subsection 248(1) of the ITA . [80]

(4) Position of the Respondent The Crown takes the position that the comments by Charron J in Tsiaprailis in respect of the non-taxability of a compensatory payment in respect of future benefits were obiter dicta , and that the ratio decidendi of the majority decision in Tsiaprailis was to the effect that the lump-sum settlement payment in respect of arrears was properly taxable. [81] The Crown also takes the position that the obiter dicta should be confined to situations involving paragraph 6(1)(

f) of the ITA , a provision that includes in income certain amounts that are received “on a periodic basis … pursuant to” certain specified types of plans. Paragraph 6(1)(

f) of the ITA is not applicable in these Appeals, such that the Tsiaprailis obiter dicta is not applicable here. The Crown also takes the position that the distributions by the HWT in 2011 were not promised under a settlement agreement and did not extinguish the Appellants’ respective claims against Nortel. [82] In addition, the Crown takes the position that sections 5, 6 and 56 of the ITA provide that, subject to certain exceptions which are not applicable here, any payment or benefit received in respect of employment is taxable. [83] As well, the Crown submits that the surrogatum principle does apply and that the distributions in 2011 replaced vested employment benefits. [84]

(5) Analysis of Tsiaprailis [ 81 ] As the Tsiaprailis case was a prominent feature of the submissions presented by counsel for the Appellants and counsel for the Respondent, I will briefly review a few aspects of that case. As the case is well known, I will not provide a detailed

summary of its facts. Suffice it to say that Ms. Tsiaprailis had been in receipt of monthly disability payments pursuant to a group insurance policy arranged by her employer, which had also paid the premiums in respect of the policy. When the insurer discontinued the payments, Ms. Tsiaprailis

sued, and ultimately negotiated a settlement, pursuant to which the insurer paid to Ms. Tsiaprailis a lump-sum payment, portions of which were allocated respectively to the arrears that should have been paid periodically up to the date of the settlement, to the loss of future benefits, and to costs. [85] In analyzing the reasons of the three levels of judges in Tsiaprailis , I have focused on the portions of their reasons pertaining to the amount paid in satisfaction of the claim for future benefits, which is the aspect of that case that is most germane to these Appeals.

In particular, I have endeavoured to extract the general principles enunciated by the various judges in respect of the scope of paragraph 6(1)(

a) of the ITA , the applicability of the surrogatum principle, and the capitalization of a future income stream. [ 82 ] In considering Tsiaprailis in the context of these Appeals, it is important to note that the monthly disability payments that Ms. Tsiaprailis received (before the insurer discontinued those payments) were included in computing her income pursuant to paragraph 6(1) (

f) of the ITA . Accordingly, Tsiaprailis is not directly on point with these Appeals, as, before 2011, in computing their income, Ms. Ellis and Ms. Kennedy included their life insurance benefits pursuant to subsection 6(4) of the ITA , and Mr. Scott and Ms. McCann included their survivor benefits pursuant to subparagraph 56(1)( a )(iii) of the ITA . [86] (

a) Tax Court of Canada (

i) Limitation on Scope of Paragraph 6(1)( a ) [ 83 ] The trial judge in Tsiaprailis , Bowman ACJ (as he then was), revisited a principle that he had enunciated earlier in Landry , in which he had stated: Paragraph 6(1)(

a) is a general provision and it is not intended to fill in all the gaps left by paragraph 6(1)( f ) – expressio unius est exclusio alterius . [87] In his argument in Tsiaprailis , counsel for the Crown suggested that the above statement should be given limited application. Bowman ACJ disagreed: Counsel for the respondent suggested that the proposition should be given limited application. I agree that all principles of statutory

interpretation – including Latin maxims of ancient vintage – should be treated with some caution. Nonetheless we have a specific

section containing detailed conditions for the inclusion of an amount in income that would not otherwise be income. Since a crucial condition is not met – in this case that the amount be payable on a periodic basis – the Crown tries to bring it into income under a general provision. This is contrary to the most fundamental rules of statutory

interpretation…. [88] (ii) Surrogatum Principle [ 84 ] Another significant aspect of the trial decision in Tsiaprailis was the statement by Bowman ACJ that the surrogatum principle should be limited to the computation of income from a business: I can see no reason for extending that rule [i.e., the surrogatum principle], which has been quoted with approval in Canadian courts ( e.g. , The Queen v. Manley , 85 DTC 5150 ) beyond the computation of income from a business.

I have no difficulty with the idea that where a person receives damages or insurance proceeds for the failure to receive business income those damages are themselves income from that business. That is a far cry from the notion that the same principle can justify that a lump sum payment made as the result of a compromise of a law suit brought to recover disability payments that are taxable only if the strict conditions of paragraph 6(1)(

f) are met can be swept into income under the broad provisions of paragraph 6(1)( a ). That is a distortion of the logic and common sense of the point that Lord Diplock was making. [89] [ 85 ] In allowing Ms. Tsiaprailis’ appeal, Bowman ACJ held the settlement payment was not to be included in computing her income. The Crown appealed. (

b) Federal Court of Appeal [ 86 ] In the Federal Court of Appeal, the majority (Pelletier JA and Strayer JA) determined that the lump-sum payment received by Ms. Tsiaprailis should be allocated between the past and future components of the settlement amount. The majority went on to hold that the portion of the settlement amount relating to accumulated arrears was taxable pursuant to paragraph 6(1)(

f) of the ITA because it related to amounts payable on a periodic basis, notwithstanding that it had been paid as a lump sum as a result of the settlement. The majority acknowledged that the portion of the lump-sum settlement amount pertaining to Ms. Tsiaprailis’ future entitlement did not come within paragraph 6(1)(

a) or paragraph 6(1)(

f) of the ITA . [90] (

i) Limitation on Scope of Paragraph 6(1)( a ) [ 87 ] Concerning the scope of paragraph 6(1)(

a) of the ITA , Pelletier JA stated: Associate Chief Justice Bowman held that a

section of general application such as paragraph 6(1)(

a) could not be used to sweep into income an amount which did not fit within a provision aimed at amounts of that type, such as paragraph 6(1)( f ). I adopt the learned Trial Judge’s position on this issue. [91] Evans JA, who dissented and who would have dismissed the Crown’s appeal and upheld the decision of Bowman ACJ in its entirety, stated the following in respect of this point: I have had the benefit of reading the reasons of my colleague Pelletier J.A. I agree that the Crown’s argument on paragraph 6(1)(

a) of the

Income Tax Act … must fail. [92] Thus, all three members of the panel who heard the Tsiaprailis appeal concurred that paragraph 6(1)(

a) of the ITA cannot be used to sweep into income an amount of a particular type that does not come within a specific provision aimed at amounts of that type. (ii) Surrogatum Principle [ 88 ] The Federal Court of Appeal did not refer to the surrogatum principle by name.

However, Pelletier JA cited London and Thames Haven Oil Wharves , as applied in Manley , as authority for the proposition that, “Where a person has a right to receive a payment, the fact that collection activity must be undertaken to compel payment does not change the nature of that payment in the hands of the payee.” [93] Evans JA (in dissent) noted that: … in London and Thames Haven Oil Wharves … it was held that the underlying source of an award of damages was relevant to determining whether the sum awarded should be treated as profits for tax purposes….

Similarly, this Court has also looked behind awards of damages or settlements to determine whether to characterize a payment as a capital gain or business income…. [94] As authority for the above statement, Evans JA cited Manley , [95] Mohawk Oil , [96] and T.

Eaton , [97] all of which dealt with taxpayers who participated in an adventure in the nature of trade or carried on a business. (iii) Surrender of Right to Receive Future Benefits [ 89 ] Although he did not rely on the concept in his decision, Pelletier JA made the following observation concerning the surrender or other disposition of a right to receive future benefit payments: This right to receive disability benefits so long as the state of total disability persists is a valuable right, just as the obligation to make the payments so long as the insured is eligible to receive them is a significant liability.

The right and the corresponding obligation have a monetary value. An insured can agree to surrender his or her rights, thereby extinguishing the insurer’s liability, in return for a payment. The fact that the parties choose to negotiate the value of that right/obligation by reference to the amounts which could become payable under the policy if the insured remained [eligible to receive them] does not mean that the settlement is a pre-payment of the insurer’s obligations under the policy.

We are not called upon to decide the nature of that right in this appeal but, in other circumstances, the disposition of a right to receive future amounts has been held to be a capital transaction. [98] (

c) Supreme Court of Canada [ 90 ] Ms. Tsiaprailis appealed from the decision by the Federal Court of Appeal that the arrears component of the lump-sum settlement payment was taxable. The Crown did not appeal from the decision that the future component of the settlement payment was not taxable. It appears that the Crown did not argue before the Supreme Court of Canada that the arrears component of the settlement payment came within paragraph 6(1)(

a) of the ITA. Thus, the only issue before the Supreme Court of Canada was whether the arrears component of the settlement payment came within paragraph 6(1)(

f) of the ITA . (

i) Surrogatum Principle [ 91 ] Both Charron J and Abella J discussed the applicability of the surrogatum principle. In her dissent, Abella J questioned the application of the surrogatum principle both on the facts of the case and the statutory provisions under consideration. However, she went to say that, if the surrogatum principle were to be applied, she would not find the arrears to be taxable, as the general nature of the settlement amount paid to Ms.

Tsiaprailis was to release the insurer from a claim that it was liable and to extinguish her claim for entitlement under the disability insurance policy. [99] [ 92 ] After explaining the surrogatum principle in a statement that will be set out below, Charron J observed that the principle has been adopted in a number of Canadian cases, as noted by Peter W. Hogg et al. and Vern Krishna in their respective textbooks. [100] Charron J goes on to discuss the surrogatum principle in such a manner as to indicate that it was applicable to the portion of the settlement amount received by Ms.

Tsiaprailis in respect of accumulated arrears, implying that it was not to be limited to situations where a taxpayer is engaged in an adventure in the nature of trade or a business. [101] Charron J did not suggest that the surrogatum principle would result in the portion of the settlement amount for future benefits being taxable. [102] (ii) Capitalization [ 93 ] Dealing with the concept of capitalization, Charron J referred to the decision of Kellock J in the Supreme Court’s decision in 1956 in Armstrong , which dealt with the deductibility of a $4,000 payment made by Mr.

Armstrong to his wife (or perhaps former wife) to be released from his obligation pursuant to a decree nisi of divorce ordering him to pay $100 a month for the maintenance of the child of the marriage until the child attained age 16 or until the particular court otherwise ordered. Mr. Armstrong deducted the $4,000 payment pursuant to a statutory provision which permitted the deduction of certain amounts payable on a periodic basis for the maintenance of children of a marriage.

Charron J quoted the following statement made by Kellock J, in determining that the $4,000 payment was not deductible: Such an outlay made in commutation of the periodic sums payable under the decree is in the nature of a capital payment to which the statute does not extend. [103] Charron J. then went on to state:

In Kellock J’s view, the payment of a lump sum for future benefits would … be characterized as a capital payment. When the reasoning in Armstrong is applied to the present case, it is clear that monies paid in settlement of any future liability under the disability insurance plan were not paid “pursuant to” the plan because there is no obligation to make such a lump sum payment under the terms of the plan. The part of the settlement for future benefits is in the nature of a capital payment and is not taxable under s. 6(1)(

f) of the Act. [104] I read the above comments by Charron J as indicating that the amount received by Ms. Tsiaprailis in respect of future benefits was not taxable under paragraph 6(1)(

f) of the ITA because it was a capital payment that was not paid pursuant to the disability insurance plan, such that the payment did not come within the wording of paragraph 6(1)( f ). In other words, non-taxability arose because the statutory language of paragraph 6(1)(

f) was not satisfied, and not merely because the settlement amount was a capital payment. (iii) Obiter Dicta [ 94 ] In their written submissions, counsel for the Respondent pointed out that the above statement and other statements in the reasons of Charron J that dealt with the tax treatment of the portion of the lump sum paid to Ms. Tsiaprailis in respect of future benefits were obiter dicta . [105] In considering the Respondent’s submission, I have reviewed the guidance by the Supreme Court in respect of its obiter statements: All obiter do not have, and are not intended to have, the same weight.

The weight decreases as one moves from the dispositive ratio decidendi to a wider circle of analysis which is obviously intended for guidance and which should be accepted as authoritative.

Beyond that, there will be commentary, examples or exposition that are intended to be helpful and may be found to be persuasive, but are certainly not “binding” in the sense the Sellars principle in its most exaggerated form would have it. [106] Counsel for the Respondent did not make any submission as to whether the obiter dicta by Charron J in Tsiaprailis constituted a wider circle of analysis intended for guidance (which should be accepted as authoritative) or commentary, examples or exposition intended to be helpful (which may be persuasive, but are not binding). [ 95 ] In Prokofiew , Doherty JA of the Ontario Court of Appeal made the following comments about obiter dicta from the Supreme Court of Canada, after quoting paragraph 57 of the Henry case: 19.

The question then becomes the following: how does one distinguish between binding obiter in a Supreme Court of Canada judgment and non-binding obiter ? In Henry at para. 53 , Binnie J. explains that one must ask, “What does the case actually decide?” Some cases decide only a narrow point in a specific factual context. Other cases – including the vast majority of Supreme Court of Canada decisions – decide broader legal propositions and, in the course of doing so, set out analyses that have application beyond the facts of the particular case. 20. Obiter dicta will move along a continuum.

A legal pronouncement that is integral to the result or the analysis that underlies the determination of the matter in any particular case will be binding. Obiter that is incidental or collateral to that analysis should not be regarded as binding, although it will obviously remain persuasive. 21. Lower courts should be slow to characterize obiter dicta from the Supreme Court of Canada as non-binding.

It is best to begin from the premise that all obiter from the Supreme Court of Canada should be followed, and to move away from that premise only where a reading of the relevant judgment provides a cogent reason for not applying that obiter . The orderly and rational development of the jurisprudence is not served if lower courts are too quick to strike out in legal directions different than those signalled in obiter from the Supreme Court of Canada. [107] The comments made by Charron J in Tsiaprailis about the non-taxability of the future component of Ms.

Tsiaprailis’ settlement payment were not integral to the result or the analysis that underlay the determination of the matter before the Supreme Court of Canada in that case, given that the appeal dealt only with the taxability of the arrears component of the settlement payment. Therefore, the obiter dicta was only incidental or collateral to the analysis before the Supreme Court. In determining the impact of that obiter dicta on these Appeals, it is important to note that Tsiaprailis dealt with paragraph 6(1)(

f) of the ITA , whereas these Appeals deal with subsection 6(4) or subparagraph 56(1)( a )(iii) of the ITA , as the case may be. Therefore, Tsiaprailis is not on all fours with these Appeals. Thus, even if the obiter dicta is binding, it is not determinative of these Appeals.

Accordingly, I do not think that it is necessary for me to determine whether, in the context of these Appeals, that obiter dicta is binding or merely persuasive. [ 96 ] It should be emphasized that the fact that some of the comments by Charron J in Tsiaprailis were obiter does not minimize or detract from the holding by the Federal Court of Appeal in Tsiaprailis that the portion of the lump-sum settlement amount pertaining to Ms. Tsiaprailis’ future entitlement did not come within paragraph 6(1)(

a) or paragraph 6(1)(

f) of the ITA .

(6) Surrogatum Principle (

a) Statement of Principle [ 97 ] All Parties acknowledged that the tax treatment of damages and settlement payments is generally determined by reference to the surrogatum principle, [108] which provides that the taxability of an award of damages or a settlement payment is determined by reference to the nature and purpose of the payment that the damages or settlement amount replaces, as explained in Tsiaprailis by Charron J as follows: … [A]wards of damages and settlement payments are inherently neutral for tax purposes…. [I]n assessing whether the monies will be taxable, we must look to the nature and purpose of the payment to determine what it is intended to replace.

The inquiry is a factual one.

The tax consequences of the damage or settlement payment is then determined according to this characterization. In other words, the tax treatment of the item will depend on what the amount is intended to replace. This approach is known as the surrogatum principle. [109] In dissent, Abella J explained the principle this way: Damage and settlement payments are inherently neutral for tax purposes and must therefore be classified to determine whether they are taxable. This is the surrogatum principle, as defined by Lord Diplock in London & Thames Haven Oil Wharves Ltd. v.

Attwooll (Inspector of Taxes) (1966), [1967] 2 All E.R. 124 (Eng. C.A.) as follows: 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 … 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. [110] (

b) Applicability of Principle [ 98 ] Counsel for the Appellants have submitted that the surrogatum principle does not apply to render the distributions by the HWT to Ms. Ellis and Ms.

Kennedy as taxable income because those payments did not replace the insurance benefits that they had a vested right to receive. [111] Counsel for the Appellants also submitted that the distributions did not replace the premiums payable in respect of the Group Life Plan or the eventual life insurance proceeds. [112] However, as an alternative argument, counsel for the Appellants suggested that, if the distributions were in replacement of anything, it was the tax-free life insurance proceeds that would have been paid to the beneficiaries, such that the surrogatum principle should be applied so as to treat the distributions as similarly being tax free. [113] [ 99 ] The primary argument put forward by counsel for the Respondent was that sections 5, 6 and 56 of the ITA brought the distributions from the HWT trust into the income of the respective recipients. [114] However, as an alternative argument, counsel for the Respondent submitted that the surrogatum principle does apply and that the distributions by the HWT replaced vested employment benefits. [115] In rebutting the Appellants’ alternative argument that the distributions replaced tax-free life insurance proceeds, counsel for the Respondent submitted that those proceeds would only have become payable on the death of the insureds and that the proceeds would have been payable to the beneficiaries, not to the insureds. [116] Counsel for the Respondent did not provide detailed submissions as to what it was specifically that the distributions replaced, other than to say that the things replaced were vested employment benefits. [ 100 ] I concur with the submissions of counsel for the Appellants and counsel for the Respondent that the distributions by the HWT to Ms.

Ellis and Ms. Kennedy did not replace life insurance proceeds, as such proceeds would have been payable to the beneficiaries and not to the insureds, and would have been paid on the

[…]