T-1477-84
Brenda J. Miller (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Reed J.—Winnipeg, June 26;
Ottawa, July 3, 1985.
Income tax — Income calculation — Deductions — Interest
— Whether money received pursuant to retroactive payment of
wages under collective bargaining agreement "interest" —
Amount declared interest income and deducted pursuant to s.
110.1(1) — Deduction disallowed as not interest — Criteria as
to whether amount "interest" — No dispute amount paid on
accrual basis and constituting compensation for use of money
withheld — Right to principal sum contested — No require
ment contingent right to principal sum and pre-established
formula to ascertain principal sum exist to characterize pay
ment as interest — Neither common law, nor s. 110.1(1) nor
authorities warranting such requirements — Appeal allowed
— Income Tax Act, S.C. 1970-71-72, c. 63, ss. 6(1)(a),
12(1)(c), 110.1(1),(2),(3) (as enacted by S.C. 1974-75-76, c. 26,
s. 70(1)) — The Public Schools Act, R.S.M. 1970, c. P-250, ss.
376(b), 391(8), 394.
The plaintiff, a public school teacher, was entitled, pursuant
to an arbitral award made in December 1980 and incorporated
into a collective agreement, to payment of wages retroactive to
January 1, 1980. The agreement also provided that the employ
er would pay interest on the net amount of any retroactive pay
which may be paid to the plaintiff. The plaintiff included, in
her 1980 taxation year, as interest income, the sum of $62.51
received pursuant to the agreement. She then claimed a deduc
tion under subsection 110.1(1) of the Act in the same amount.
Subsection 110.1(1) allows a deduction of interest in the com
putation of taxable income up to a maximum amount of
$1,000. The Tax Court of Canada found that the amount of
$62.51 was not interest, therefore not deductible.
Held, the appeal should be allowed.
Three criteria must be satisfied for a sum to be characterized
as interest: (1) it must be calculated on a (day by day) accrual
basis; (2) it must be calculated on a principal sum or a right to
a principal sum; and (3) it must be compensation for the use of
the principal or the right to the principal sum.
There is no dispute as to the first and third criteria. The
defendant argues that the second requirement has not been met
in that at the time to which the interest referred there was no
principal sum owing to the plaintiff, either ascertained or
ascertainable. According to the defendant, the right of the
plaintiff to have her 1980 salary ultimately determined did not
constitute a contingent right to a principal sum in the absence
of a formula in existence prior to the start of the negotiations
by which her 1980 salary could have been determined. The
defendant's position is based on the Exchequer Court decision
in Huston v. Minister of National Revenue, and that of the
Federal Court of Canada in Perini, R. J., estate of v. The
Queen. Had a formula been in existence at the beginning of the
period so that interest might be calculated by reference to it
should any principal sum ultimately become due, then the
payment at issue would properly be characterized as interest.
Neither of the elements emphasized above were requirements
of the concept of interest. They do not have their source in the
common law. They were neither requirements for the purposes
of subsection 110.1(1) nor requirements arising out of the
Huston and Perini decisions. Whether the sum be ascertainable
in accordance with a previously-agreed upon formula (as in
Perini) or subject to negotiation during almost the whole period
(as in the present case) does not affect the character of the
ultimate amount awarded as interest. In both cases, it is
compensation for the retention of money owed to the plaintiff;
it is paid in relation to a principal sum; and it is calculated on
an accrual basis. It cannot be said that the Federal Court of
Appeal, in distinguishing Perini from Huston, intended to set
down as an absolute requirement for interest the concept that
an ascertainable principal sum be owed at the commencement
of the period to which the interest payment related. Further
more, neither Huston nor Perini were authorities for the
requirement that in order to constitute an interest payment the
formula for such payment must be decided upon prior to the
commencement of the period to which interest relates. It is
open to the parties to govern their relationship by retroactive
agreements. When so doing, they can provide for interest to be
payable on the outstanding sum left due over the relevant
period of time.
An analogy could be drawn to the case of awards of pre
judgment interest given with respect to damage claims (par-
ticularly those in tort). There is no doubt that such payments
are treated by Revenue Canada as interest and taxed as such.
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
Reference as to the Validity of Section 6 of the Farm
Security Act, 1944 of Saskatchewan, [1947] S.C.R. 394;
Huston v. Minister of National Revenue, [1962] Ex.
C.R. 69; (1961), 61 DTC 1233; Perini, R. J., estate of v.
The Queen (1982), 82 DTC 6080 (F.C.A.).
REFERRED TO:
Attorney-General for Ontario v. Barfried Enterprises
Ltd., [1963] S.C.R. 570; Riches v. Westminster Bank,
Ltd., [1947] 1 All E.R. 469 (H.L.); Simpson v. The
Executors of Bonner Maurice as Executor of Edward
Kay (1929), 14 T.C. 580 (K.B.); Trollope & Coils, Ltd.
and Holland & Hannen and Cubitts, Ltd., Trading as
Nuclear Civil Constructors (a firm) v. Atomic Power
Constructions, Ltd., [1962] 3 All E.R. 1035 (Q.B.).
COUNSEL:
Cy M. Fien and Celia Gorlick for plaintiff.
Eric Atkinson for defendant.
SOLICITORS:
Simkin, Gallagher, Winnipeg, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
REED J.: This is an appeal from a decision of the
Tax Court of Canada finding that the plaintiff was
not entitled to deduct $62.51 from her taxable
income for the 1980 taxation year. As can be
surmised, the amount of $62.51 is not the motivat
ing factor behind this appeal. This is a test case
putting in issue the correct characterization of
certain monies received pursuant to a retroactive
payment of wages under a collective bargaining
agreement.
The collective bargaining agreement covering
the plaintiff's employment as a public school
teacher in Manitoba expired December 31, 1979
and agreement on a new one could not be reached.
The matter went to binding arbitration in October
1980. 1 An arbitration award was made in Decem-
ber 1980. It determined that for the 1980 taxation
year the plaintiff should receive a 10.5% increase
over the salary she had received in 1979 and
article 24 of that award provided:
The Board of Arbitration determines that interest on retroac
tive pay for the 1980 agreement should be paid to members of
the Association calculated from the date the salary was pay
able. The interest shall be computed on the net pay of the
member (that is, the gross pay after deducting therefrom
personal income tax, unemployment insurance and Canada
Pension Plan deductions) and shall be computed at the lesser of
eight per cent per annum or the average rate at which the
Division borrowed funds during the twelve-month period from
January 1, 1979 to December 31, 1979.
' Subsection 391(8) of The Public Schools Act of Manitoba,
R.S.M. 1970, c. P-250 provides that an award of a board of
arbitration is binding on the employer and employees and
section 394 provides for the signing of a collective agreement
pursuant to the award.
A collective bargaining agreement incorporating
the arbitration award was executed on February
11, 1981, its operation being made retroactive to
January 1, 1980. Article 17 of that agreement
provided that the employer would pay:
... interest on the net amount of any retroactive pay which
may be paid to such members (that is, the gross pay after
deducting therefrom personal income tax, unemployment insur
ance and Canada Pension Plan deductions), the interest to be
calculated from the dates on which the monies would have been
due, to the date of actual payment.
The interest shall be computed at the lesser of 8% per annum or
the average rate at which the Division [the employer] borrowed
funds during the twelve-month period from January 1, 1979, to
December 31, 1979.
The plaintiff included, as interest income, the
$62.51 received pursuant to this article when cal
culating her income for the 1980 taxation year.
She then claimed a deduction under subsection
110.1(1) of the Income Tax Act [R.S.C. 1952, c.
148 (as am. by S.C. 1970-71-72, c. 63, s. 1;
1974-75-76, c. 26, s. 70(1))] in the same amount.
Subsection 110.1(1) allows a deduction of interest
in the computation of taxable income up to a
maximum amount of $1,000, subject to certain
conditions, none of which are relevant to this case.
The plaintiff contends that the $62.51 is interest
and properly deductible. The defendant contends
that the $62.51 is not interest, and not deductible.
There is no dispute that the amount, if interest,
retains that character even though it arises in
connection with employment. Counsel for the
plaintiff argued that if the sum was determined to
be interest and therefore fell within paragraph
12(1) (c) it could not be classified as a benefit
derived from employment and thereby fall into
paragraph 6(1)(a). This contention was based on
the rule of statutory construction which requires
that provisions of general scope must be read
subject to provisions of a more specific nature. It
was pointed out that paragraph 12(1)(c), with its
specific mention of interest, was of a more particu
lar nature than the more general concept, benefit
derived from employment, found in paragraph
6(1)(a). The defendant takes no issue with this
interpretation; it is agreed that if the sum in
question is properly interest then it is interest
income and deductible.
It is common ground that the Income Tax Act
does not define interest and that the various sec
tions dealing with interest therein (12(1)(c),
110.1(1), 110.1(2), 110.1(3) ff.), either deeming,
or excluding certain amounts for certain purposes
as interest are of little assistance. One must look to
the general principles of interpretation, dictionary
definitions and the jurisprudence. In this regard
the meaning of the word "interest" in ordinary
parlance is significant.
The defendant's argument is that to have a sum
characterized as interest three criteria must be
satisfied: (1) it must be calculated on a (day by
day) accrual basis; 2 (2) it must be calculated on a
principal sum or a right to a principal sum; and (3)
it must be compensation for the use of the princi
pal sum or the right to the principal sum.
There is really no dispute respecting the need for
these criteria or the existence of the first and the
third in the present case. The sum paid was clearly
calculated on a day to day accrual basis. Both
parties agree that the payment had the character
of compensation for the use of money withheld,
although counsel for the defendant argues that if I
should find that the second criteria was in fact
met, then the third would thereby become
unfulfilled.
It is argued that the second criteria is not met
because at the time to which the interest refers
there was no principal sum owing to the plaintiff,
either ascertained or ascertainable. Until Decem-
ber 1980 the plaintiff did not have the right to any
salary increase to which interest might be refer-
rable (the arbitration board could have awarded
2 Authority for this proposition is found in Attorney-General
for Ontario v. Barfried Enterprises Ltd., [1963] S.C.R. 570, at
p. 575 and in Riches v. Westminster Bank, Ltd., [1947] 1 All
E.R. 469, at p. 478 (H.L.).
the employees a lower wage rate than the 1979
level interim wages they were receiving).'
The defendant relies on Mr. Justice Rand's
definition of interest in Reference as to the Validi
ty of Section 6 of the Farm Security Act, 1944 of
Saskatchewan, [1947] S.C.R. 394, at pages 411-
412 for this contention:
Interest is, in general terms, the return or consideration or
compensation for the use or retention by one person of a sum of
money, belonging to, in a colloquial sense, or owed to, another.
There may be other essential characteristics but they are not
material here. The relation of the obligation to pay interest to
that of the principal sum has been dealt with in a number of
cases ... from which it is clear that the former, depending on
its terms, may be independent of the latter, or that both may be
integral parts of a single obligation or that interest may be
merely accessory to principal.
But the definition, as well as the obligation, assumes that
interest is referrable to a principal in money or an obligation to
pay money. Without that relational structure in fact and
whatever the basis of calculating or determining the amount, no
obligation to pay money or property can be deemed an obliga
tion to pay interest. [Emphasis added.]
I do not find Mr. Justice Rand's comments go so
far as the defendant contends. Those comments to
me merely say that in determining whether a
certain amount is interest it is crucial to consider
to what it relates. If it is paid in reference to "a
principal in money or an obligation to pay money"
then a relational structure exists which indicates
that the sum is interest. In the present case the
sum was paid in reference to a principal sum—
that part of the plaintiff's salary to which she had
become entitled during the 1980 year but which
had not been paid to her during that time. In my
view Mr. Justice Rand's decision does not address
the issue raised by the defendant.
The defendant's position is also founded on an
analysis of two decisions relating to interest under
the Income Tax Act: that of the Exchequer Court
3 Paragraph 376(b) of The Public Schools Act of Manitoba
R.S.M. 1970, c. P-250 requires that when a collective agree
ment has expired and a new one has not yet been agreed upon
the employer shall not, without consent of the teachers,
decrease the rates of pay or alter any other term or condition of
employment until either a new agreement is concluded or a
board of arbitrators has decided the matter.
in Huston v. Minister of National Revenue,
[1962] Ex.C.R. 69; (1961), 61 DTC 1233, and
that of the Federal Court of Appeal in Perini, R.
J., estate of v. The Queen (1982), 82 DTC 6080.
This is a more difficult contention to assess. In the
Huston case the taxpayers had been awarded com
pensation by the Canadian government, from a
War Claims Fund, for property (a factory located
in Czechoslovakia) which had been owned by them
in 1939, confiscated by the Germans, and partially
destroyed in 1945. One of the Regulations govern
ing the amount of compensation to be awarded
provided for 3% interest on the property loss from
January 1, 1946 until the date Treasury Board
approved the claim for, compensation (in that case
October 10, 1958). The Minister of National
Revenue sought to tax this 3% payment as interest
income. The taxpayer contended it was a capital
payment. Mr. Justice Thurlow [as he then was]
agreed and said, at page 74 Ex.C.R.; 1236 DTC:
As I see it, the sums in question are not income from property
because, notwithstanding the exceedingly broad scope of the
statutory definition, the appellants during the period from
January 1, 1946 to October 10, 1958 in respect of which the
alleged "interest" was computed, in my opinion, had no prop
erty or legal or equitable right of any kind in the amount on
which the alleged "interest" was computed.
And at page 76 Ex.C.R.; 1237 DTC, quoting from
Simpson v. The Executors of Bonner Maurice as
Executor of Edward Kay (1929), 14 T.C. 580
(K.B.), at page 593:
I think this sum first came into existence by the award, and no
previous history or anterior character can be attributed to it.
And at page 78 Ex.C.R.; 1238 DTC:
No principal sum was payable in the meantime [from January
1, 1946 to October 10, 1958], nor was interest accruing on any
principal sum, nor were the appellants being kept out of any
sum to which they were entitled. In truth, during the whole of
the intervening period they had no right to compensation for
their loss, and there was neither interest accruing to them nor
loss of revenue being sustained in respect to which they would
be entitled to interest by way of damages or compensation.
No case of which I am aware goes so far as to hold such an
amount, call it interest or damages or compensation or any
other name, to be interest or income when there was neither
interest accruing in fact on the "principal" amount during the
material period nor any right to the "principal" amount vested
in the taxpayer during that period. [Emphasis added.]
In the Perini case the taxpayer sold all his
shares in a business, the price consisted of an
initial payment plus possible further payments in
the three subsequent years, if the business made an
after-tax profit in those years. If such payments
became due the purchase agreement also provided
that the purchaser would pay 7% interest on the
amounts payable, calculated from the date of the
closing of the sale to the date of payment. The
Minister assessed the 7% payments as interest
income. The taxpayer argued, on the basis of the
Huston case that the sums were not interest but
payments of a capital nature. The Federal Court
of Appeal described the taxpayer's argument, at
page 6082:
The contention is that while they are called interest, are
calculated like interest, and serve the purpose of interest, they
lack an essential characteristic of interest in that they did not
accrue from day to day on an existin principal amount. The
principal amount on which the sum referred to as "interest"
was based did not come into existence until it had been
determined by an audited financial statement following the
close of the fiscal year. Until then there was no principal
amount on which interest could accrue. [Emphasis added.]
The Court held the amounts to be interest stating,
at page 6084:
In the present case there was in existence on the closing date
an obligation to pay a price to be determined according to the
formula set out in paragraph 1.3 of the agreement, but the
precise amounts of the additional payments, if any, to be made
pursuant to clauses (ii), (iii) and (iv) were not determined as of
that date. The obligation to pay additional sums on account of
the purchase price under these provisions was a conditional one
or a contingent liability. It depended on two conditions which
might or might not be fulfilled. There had to be post-tax net
profits determined by audited financial statements, and the
seller had to be living. Neither was a certainty. That was
sufficient to make the liability for additional payments a con
tingent one.
And at page 6085:
Because of the basis on which the balance of price, if any, was
to be determined, the seller was obliged to wait for payment of
the balance. Interest was the appropriate compensation for that
delay. I think it is the existence on the closing date of a
conditional obligation or contingent liability to pay the balance
of price which the parties were entitled to treat as having
become absolute with retroactive effect, for purposes of inter
est, that distinguishes the present case from Huston. [Emphasis
added.]
The defendant extracts from these decisions the
principle that in order to have interest one must
have at least a contingent right to a principal sum
in existence at the time to which the interest
relates. A contingent right to a principal sum does
not exist, it is argued, unless there is a formula in
existence at the beginning of the time period to
which the interest relates so that any amount
which might ultimately be paid as principal sum is
ascertainable although obviously not capable of
being ascertained, at that time. Thus in the present
case, the fact that the plaintiff had a right to have
her 1980 salary ultimately determined does not, it
is argued, constitute a contingent right to a princi
pal sum. Had there been a formula in existence
prior to the start of negotiations by which her 1980
salary could have been determined, even though
that salary might ultimately have been calculated
at less than that paid in 1979, the defendant would
have no trouble in agreeing that a right to a
principal sum existed.
Atlernatively, if I understand the defendant's
argument correctly, had an interest clause been
agreed upon prior to the start of the 1980 negotia
tions, the defendant would agree that the payment
was interest. Had a formula been in existence at
the beginning of the period so that interest might
be calculated by reference to it should any princi
pal sum ultimately become due, then the defend
ant concedes that the payments would properly be
characterized as interest. If I understand the
defendant's argument correctly this would be so
even though in this case the principal sum would
not be ascertainable at the beginning of the period
for which it was due.
I have difficulty finding either of these elements
to be requirements of the concept of interest. I do
not see them as articulated in the common law
concept of that term nor as a necessary require
ment for the purposes of subsection 110.1(1) of the
Income Tax Act. I do not see them as necessary
requirements arising out of the decisions in the
Huston and Perini cases.
The plaintiff's right to have her salary ultimate
ly decided is similar to the taxpayer's right in
Perini to have payments made if after-tax profits
are earned. In either case no additional amounts
might ever be paid. The only difference is that in
the one case the sum is ascertainable in accordance
with a formula agreed upon prior to the period
during which the money was owing but not paid; in
the other it was the subject of negotiation during
almost the whole period. I cannot see that this
affects the character of the ultimate amount
awarded as interest. In both cases it is compensa
tion for the retention of money owed to the plain
tiff; it is paid in relation to a principal sum; and it
is calculated on an accrual basis.
While the Federal Court of Appeal seems to
distinguish the Perini decision from that in Huston
on the ground that an ascertainable principal sum
was owed at the commencement of the period to
which the interest payment related, I do not think
the Court meant to set so fine a distinction down
as an absolute requirement for interest. The gist of
the Huston decision was clearly that the payments
in question there, were grants, including the sup
posed interest component thereof. There was no
obligation on the government to award any com
pensation at all to the taxpayer in that case. In
both the Perini case and the present case a princi
pal amount was owed pursuant to a commercial
relationship between the parties. In both cases
there was an obligation to pay the taxpayer, a yet
to be determined amount, pursuant to that con
tractual relationship. The amounts payable do not
have the character of a grant. In the present case
the principal amount owed was a sum owed for
work performed during a defined time period.
Equally, I cannot find in the Perini and Huston
cases a requirement that in order to constitute an
interest payment the formula for such payment
must be decided upon prior to the commencement
of the time period to which the interest relates. It
is open to the parties to govern their relationship
by retroactive agreements: Trollope & Colis, Ltd.
and Holland & Hannen and Cubitts, Ltd., Trad
ing as Nuclear Civil Constructors (a firm) v.
Atomic Power Constructions, Ltd., [1962] 3 All
E.R. 1035 (Q.B.). And it is open to them, when
they do so, to provide for interest to be payable on
the outstanding sum left due over the relevant
period of time. In my view the taxpayer's situation
in this case is similar to that of the taxpayer in
Perini.
An analogy can be found to the case of awards
of pre-judgment interest given with respect to
damage claims (especially those in tort). These are
not dissimilar to the interest award made by the
arbitration board in this case. There is an unascer-
tainable amount owing to the plaintiff from the
date that the tort or breach of contract arises. The
formula for determining the interest, or indeed
whether there will be any at all awarded, is not
known at the beginning of the period to which the
interest relates. This is a matter within the discre
tion of the Court. Yet there is no doubt that such
payments are treated by Revenue Canada as inter
est, and taxed as such: Interpretation Bulletin
IT-396R, paragraph 12 (dated May 29, 1984).
(Interpretation Bulletins are of course not
authoritative, but merely one factor for consider
ation.)
In my view the $62.51 was genuinely a payment
of interest. The parties agreed that their relation
ship would be governed on the basis of the retroac
tive agreement. This involved the retention of
monies owing to the plaintiff for which compensa
tion was ultimately paid. The compensation paid
was described by the parties and the arbitration
board as interest. It was calculated on an accrual
basis by reference to a normal rate of interest then
current or with respect to the employer's cost of
borrowing. I can see no reason why this does not
fall within the meaning of the word "interest" as it
is used in section 110.1 of the Income Tax Act.
Accordingly, the appeal will be allowed.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.