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HomeMy WebLinkAbout1989-1495.Grinius.95-07-24,~ r ' ~ ' : ONTARIO EMPLO¥~'$ DE LA COURONNE - '; '. ' CROWN EMPLOYEES DE L'ONTARIO ~: GRIEVANCE COMMISSION DE SE~LEMENT R~GLEMENT 180 DUNDAS STREET WES~ 3UITE 2100, TORONTO ON MSG IZ8 ~TE~PHONE/T~L~PHONE : (416) 326-1388 180, RUE DUNDAS OUES~ BUR~U 21~, TORONTO (ON) M5G IZ8 . FACS/~/~~.~ (416) 32~-1396 'O~S~ ~ 90A005~ 90D[9[~ 90D295~ 90D520~ 90D52[ JUL 2 4 lS95 THE CRO~ EMPLOYE=S COLLECTI~ BARGAINING ACT Grievor - and- The Crown in Right of Ontario (Ministry of Citizenship) Employer BEFORE: B. Fisher Vice-Chairperson G. ~ Maj esky Me. er D. Montrose Me. er FOR'THE R. Wells GRIEVOR Counsel Gowling, Strathy & Henderson Barristers & Solicitors FOR THE J. Knight EMPLOYER Counsel Fraser & Beatty Barristers & Solicitors \ HEARING March 24, 1995 FACTS AND ISSUES This case involves the determination of whether or not a reinstated grievor is entitled to additional compensation due to the extra tax paid as a result of receiving his reinstatement compensation in one tax year as opposed to over several years. " The agreed facts are as follows: ' 1. Klevas Grinius ("Grinius") was dismissed by the Ministry of Citizenship (the "Ministry") on June 15, 1990. 2. By Order dated June 25, 1993 the Grievance Settlement 'Board ordered that Grinius be reinstated with a 30 day suspension substituted for the dismissal. 3. As confirmed by the Supplementary Award of the Grievance Settlement Board dated January 31, 1994, Grinius was paid in 1993 the gross amount of $117,311.00. As further confirmed by the Supplementary Award of the Grievance Settlement Board the payment of $117,311.00 included the sum of $110,778.0Ofor back wages allocated as follows: 1990 $20,947.00 1991 $20,523.00 1992 $49,258.00 1993 $20,040.00 4. Deductions for income tax purposes were taken from the payment made in 1993. The amount deducted was approximately $50,000.00 5. Had the employment of Grinius continued without interruption (save for the 30 day suspenSion) through 1990, 1991, 1992 and 1993, that income would have been taxed at a lower marginal rate and in total, over the 4 years, Grinius would have paid income taxes, both federal and provincial, in an amount between approximately $11,000.00 and $19,000.00 less that the amount he actual paid as a result of receiving the funds in one lump sum in 1993. 6. The 1994 the chartered accountant who prepared Grinius' .tax return sought to have the Ministry provide amended T4 Supplementaries from the Ministry to permit the refiling of Grinius' tax returns to seek to have the -income received in 1993 attributed back to the appropriate taxation years for 1990 to 1993. A review of the Income Tax Act leads to the conclusion that an efl3ployer is obliged to issue a T4 indicating the remuneration from employment, paid to an employee in the year. The legislation does not contemplate an employer issuing a T4 for any other amount and therefore the Ministry could not provide Grinius with T4s for 1990, 1991,...1992 and 1993 which did not represent the actual amounts paid to him in those years. Further, the Ministry is under an obligation to issue a T4 in the year in which '~he damages were paid which represent the total amount paid to Grinius in that year (1993). The Grievor is asking for two additional payments: (a) An award equal to the actual amount of eXtra tax he has paid because he received four years of income in one year, rather than over 4 years. (b) In recognition that the award in (a) wilt atso be taxable, an additional amount to be awarded to compensate for the tax payable on (a) so that the net effect of the payment would be that, after paying taxes on this supplemental amount he is left with an amount equal to (a). This payment can be referred to as the "gross up." tt should be noted that the Gdevor was unable to utitise the provisions of the Income Tax Act which allows a terminated employee to put sums determined to be a "retiring allowance" directly into a RRSP, thereby making the payments not taxable in ' the year of receipt. This,was because,the Gdevor's employment was not terminated, rather he received this money as a result of his reinstatement. UNION'S ARGUMENT The Union's argument is actual quite simple and clear. As every law student learned in first year contract Iaw, the purpose of contractual damages are to put the innocent party in the same position be or she would have been had the .c. ontract not been breached, subject to the requirement that the heads of damage must be reasonably foreseeable at the time of the breach. Applying that princ!ple to this case, the following facts would seem to be relevant: (a) It is admitted that had the collective agreement not been breached, the Grievor would have received employ.rnent income as set out in paragraph (3) of the facts, rather than one lump sum payment in 1994. (b) As a consequence of this breach, the plaintiff has had-to pay more income tax. (c) As the Grievor was dismissed in June 15, 1990, it was certainly reasonably foreseeable at the time of termination that the Grievor would file a grievance, that the final determination of the issue would not take place in the 1990, that Grievor would be reinstated with back pay and that he would receive two or more years income in one year. The concept of a gross-up for income tax consequences in a damage award is cedainly well known in tort law. For instance, the Supreme Court of Canada in Andrews v. Grand a. nd Toy Alberta Ltd. 83 D.L.R. (3d) 452 held that awards under the Fatal Accident Act "should reflect tax considerations, since they are to compensate dependants for the loss of support payments made by the deceased. These support payments could only come out of take-home pay, and the paYments from the award will only be received net of taxes." Similarly, the Supreme Court of Canada in Watkins v. Otafson 61 D.L.R. (4th) 577 held that in determining the quantum of a lump sum payment for future care, a gross-up should be provided so that the net amount after taxes is sufficient to satisfy the future care needs of the injured party. A similar analogy can be applied to the cases involving interest on damage awards in reinstatement cases. In Air Canada, v. Canadian Air Line Employees Asso¢iatior~ 29 L.A.C. (2d) 142, (P.C. Picher), the arbitrator dealt with the argument as to whether or not arbitrators had the power to award interest. At page 153, the following comment on the guiding principle was stated as follows: "7'he Court has emphasized that the object ofI awarding such damages is to put the aggrieved party into the position he would have been ~n ff there had been on violation of the co//ective agreement. Rather than restrict the nature of the damages that it, the Court, conc/uded that co//ective agreement, through silent, contemplated and that an arbitrator, therefore, had imp/icit if not express authority to award, the Supreme Court has provided as a genera/guide/ine the "make who/e" princip/e of the/aw of contract. The/imitation to the application of this principle is that it not a/ter the terms of the collective agreement." Union counsel agreed that in keeping with the "make whole" principle, the Grievor should be awarded the gross up for excess income tax. The actual issue in this case has only been addressed in an extremely limited number of labour arbitration cases. In Pacific Western Airlines ltd. V. Canadian AirliBe Fmptoye_es Association 7 L.A.C. (3d) 340, (Laison), the reinstated grievor made a claim identical to that being pursued in this present case. At page 345, the arbitrator made the following comments: "We a/so reject the claim for losses to the grievor in respect of higher taxes on the grounds that liability was not proven. /t may we//happen that the grievor wi//be required to pay higher taxes but that is subject to proof, We therefore think it appropriate to dea/ with this claim strictly on the basis of an onus which has not been discharged.' In Canada Post Corp, V, Canadian Union of Postal Worke[s (Beale) 6 L.A.C '- (4th) 232, (T.A.B. Jolliffe), the issue was addressed in the following fashion at page 241. "1 also agree with Mr. Tait's position that all things considered any compensation related to the grievor having.to liquidate $3,000 R.R.S.P. cdntributions in order to pay for a recently taken vacation does not meet the foreseeability test and should not be considered a heading of damages. Likewise the fact that the grievor will receive her monetary compensation package lump sum, putting her in a higher marginal tax bracket is, in my view, too remote a heading of damages. I know of no cases where an employer has been directed to pay additional compensation because of the tax ramifications of a lump sum payout and am not prepared to find that heading a foreseeable consequence of the discharge. ~ In Canada Post Corp. V. Canadian Union of Postal Workers (Winlaw) 36 L.A.C. (4th) 216, arbitrator T.A.B. Jolliffe revisited the same issue, and had the following comments at pages' 218 and 236. 'The second issu~ pertains to the union's concern that the compensation payment to the grievor occurred over two months in June and July, 1991, resulting from the he reinstatement order given on December 6, 1990, and fo#owing the parties' negotiations on the appropriate figure. As a result of the timing of the payment, she received the entire foreseeable that it would take 4 years to resolve this issue and thereby create such.a significant excess tax burden on the lump sum payment. Moreover, it was not reasonably foreseeable that the Grievor. would have remained unemployed or underemployed for such a lengthy period, thereby incurring such large losses. The Employer also raises the point that these.damages are difficult to determine and thus will not only promote Uncertainty but also complicate the .process of determining compensation in discharge cases. The Employer also submitted that the issue at stake here is really one of tax unfairness which flows from the fact that the Income Tax Act does not provide.for backward averaging in these si:[uations. However, the problem should be remedied by. changing the Income.Tax Act, not burdening employers with the cost of this statuto'n/ unfairness. DECISION The Union's position is entirely consistent with'basic contract and damages theory and practice.. There is no doubt that the Grievor in this case and suffered a demonstrable and significant loss due to the extra tax burden as a result of receiving four years' income in one year. I Although it is certainly unusual for there to be a four year gap between the date of discharge and the date of reinstatement, it is quite re;~sonably foreseeable, especially in a case before the Grievance Settlement Board, to expect that the date of discharge and the date of reinstatement would span 'two calendar years, thus two tax "~briods, It is therefore quite foreseeable, therefore, that in almost any reinstatement case 'there will be a movement of taxable income from one year to another. It is common knowledge Upon the general population that Canada has a' progressive tax system, therefore it is reasonably foreseeable that combining two or more years' income into one will likely result in a higher tax liability than if the income was spread out over the same period. The issue of reasonable foreseeability. (or remoteness of damage as it sometimes called) relates not to the quantum 'of damages but to the head or type of damages. Therefore, if it is reasonably foreseeable at the time of the improper discharge that the grievor, if reinstated with back pay at a later time in another tax year, would suffer damages due to the increased tax burden, then it matters not whether the actual delay is four years instead of two, or the actual tax burden is $20,000.00 as opposed to $2,000.00. This case undoubtedly took much longer than anyone expected, and no single party is to blame. There ,~,ere complex preliminary issues, numerous witnesses, extensive submissions and the like'. However, as this was a discharge case, at all times it was the Employer and only the Employer, who could have avoided the mounting liability by reinstating the Grievor. it chose, as is its right, to have the GSB determine the issue, however having done so, it should not be the Grievor who suffers the extra loss because of the lengthy process. I therefore find that this type of damages is reasonably foreseeable. The mere fact that this type of damage award has never been awarded is of little significance for the following reasons. (a) Both counse have only been able to find three cases where it was even raised by the Union. (b) In none of the cases was the issue squarely addressed, in the Pacific Western Air. lines case, the claim was dismissed beCause there was no proof of any loss. In Can.ada Post (Beale) the issue was, in the words of the same arbitrator in the subsequent Winlaw case, "presented in a somewhat cursory matter. In the Canada Post (Wintaw) case,, the issue was not awarded because the ( -15- If the parties cannot agree on the quantum of this payment within 60 days of the release date of this award, then either party may request that the Registrar reconvene this same panel to determine the sum owing, together with any interest owing on that sum. Dated at Toronto this 2z~ day of .~ut¢995. Bo Fisher, Vice Chairperson "I D£,ssent" (dissent to follow) ,, Eiptoyer Nominee · ~ ~RINIUS 149§/89 etc. DISSENT EMPLOYER MEMBER I have reviewed the decision in the above award and with respect disagree with the decision for the following reasons: t. The grievor was made whole. The amount of compensation lost was calculated with interest and paid to the grievor based on a method that has been used and agreed by the parties in hundreds of discharge/reinstatement cases. To compensate the grievor with an amount greater than the established norm would make the grievor (forgive me) more "wholier" than he is now. 2. The type of damages was not reasonably foreseeable. The grievor's abysmal employment record, coupled with his conflict of interest, would not warrant the employer to implement a liability account for back pay. In addition, it was not reasonably foreseeable that the grievor would have remained unemployed ~r underemployed for four years, thereby incurring such large losses. 3. The issue in this dispute is the Income Tax Act which does not address backward averaging in assessing income tax incurred by reinstatement. Had the grievor been terminated, he could have utilised the provisions of the Income Tax Act to put sums determined to be "retiring allowance" into an RRSP, thus sheltering the back pay for Income Tax liabilities. In effect .this dispute is between the grievor and Revenue Canada and should be remedied by ~he grievor and Revenue Canada a~d not by panel of arbitration. The majority in this award compounds the income tax problems by awarding not only compensation for the additional tax burden, but a "gross up" of this amount because such payment itself becomes ta~able income. It would appear each "gross up" to eliminate the tax burden incurred by the last "gross up" would lead to infinity, e.g. each payment begets another payment which begets another, etc. 4. The doctrine of f~ctus officio. The grievor is asking for two addition payments: (a) An award equal to the actual amount of 'extra tax he'has paid because he received four years of income in one year, rather than over 4 years. lb} In recognition that the award in (a} will also be taxable, an additional amount to be awarded to compensate for the tax payable on (a) so that the net effect of the payment would be that, after paying taxes on this supplemental amount he is left with an amount equal to (a). This payment can be referred to as the "gross up." The additional payments are a blatant expansion of the original grievance which concerned itself with pay and interest from the date of dismissal. The additional issues are well beyond the scope of reinstatement, therefore the purpose for the existence of this panel ha~ ended. The issue of "gross-up" was not addressed by the parties during the 4 year period of the initial hearing and would create difficulties by attempting to introduce this category of relief after the award had been made. The difficulties that could be encountered and potential sequences of expanding the original grievance are described by Vice chair Roberts in : HlqOkND (G.S.B. 1443/91 etc.). Would it lead to absence of "closure" in cases and the advent of inefficient "piecemeal" determinations? Would it absolve counsel from their responsibility to raise all logical issues, including implementation issues, in a single proceeding? Would it lead to one party seeking strategic advantage over the other by intentionally' staggering the presentation of such issues? Would it lead to parties seeking to obtain more than "one kick at the can" by parsing broad issues into several sub-issues and presenting them one or two at a time, thereby eroding the doctrine of functus officio? The Panel in this award has clearly exceeded its jurisdiction. This award could lead to the chaotic situation of re-opening virtually every arbitration award dealing with, but not limited to, payment upon reinstatement. For these reasons, I would have dismissed the grievance. D.C. Montrose