COURT OF APPEAL FOR ONTARIO
CITATION: RJM56 Investments Inc. v. Kurnik, 2016 ONCA 821
DATE: 20161104
DOCKET: C61469
Cronk, Rouleau and Huscroft JJ.A.
BETWEEN
RJM56 Investments Inc.
Applicant (Appellant)
and
Kevin Kurnik and Canada Revenue Agency
Respondents (Respondents in Appeal)
Application under Rule 14.05(3)(d) and (g) of the Rules of Civil Procedure
AND BETWEEN
DOCKET: C61468
Kevin Kurnik and the Kurnik Family Trust
Plaintiffs (Respondent)
and
Martin McCarthy, the McCarthy Family Trust, RJM56 Investments Inc. (formerly R.J. McCarthy Limited), RJM56 Holdings Inc. (formerly R.J. McCarthy Holdings Inc.), 1434669 Ontario Inc. and 214CO Investments Inc. (formerly 2140831 Ontario Inc.)
Defendants (Appellant)
Melvyn L. Solmon and David M. Sherman, for the appellant
Michael R. Kestenberg, for the respondent
Andrew Kinoshita and P. Tamara Sugunasiri, for Canada Revenue Agency
Heard: September 21, 2016
On appeal from the judgment of Justice Suhail A.Q. Akhtar of the Superior Court of Justice, dated November 10, 2015.
Rouleau J.A.:
[1] The appellant appeals a judgment dismissing its application against the respondent and granting, in part, the respondent’s summary judgment motion. At issue in this appeal is the application judge’s interpretation of minutes of settlement (the “minutes”) entered into between the parties.
A. Background
[2] On June 1, 2015, two actions were settled involving the appellant and the respondent Kevin Kurnik, its employee. The minutes provided that the appellant would pay the respondent $1,500,000 in full settlement of all claims. The relevant portions of the handwritten minutes are as follows:
- The defendants in the Kurnik action #CV-11-427649 agree to jointly and severally pay Kevin Kurnik (KK):
a) $250,000 towards KK’s costs of the actions;
b) $1,250,000 less withholding taxes payable to CRA
in the following payments:
i. $250,000 for costs inclusive of HST on July 4, 2015 (with no deductions) payable to Kestenberg Siegal Lipkus In Trust;
ii. $250,000 toward the settlement on July 4, 2015 payable to Kevin Kurnik;
iii. $1,000,000 towards the settlement on February 14, 2016 payable to KK; each of the payments in (ii) and (iii) above represent a bonus due to KK resulting from his employment with RJM56 Investments Inc. and are subject to withholding tax by said co.
- The obligors shall provide proof that all withholdings have been made in the event KK shall request same @ reasonable intervals.
[3] Prior to making the payments required by the minutes, the appellant obtained accounting advice as to the appropriate withholding and remittances to be made to the Canada Revenue Agency (“CRA”).
[4] Based on this advice, the appellant concluded that its obligation under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (“ITA”) was to withhold and remit to CRA on account of the full $1,500,000 settlement amount. As a result, to comply with both its ITA obligations and the terms of the minutes requiring that the first $250,000 payment be paid “with no deductions” to Kestenberg Siegal Lipkus LLP (the “respondent’s solicitors”) in trust, the appellant determined that the withholding and remittance that should otherwise have been applied to the payment to the respondent’s solicitors in trust would be made instead against the other $250,000 payment due to be made to the respondent that same day.
[5] Prior to making the July 4 payments, the appellant informed the respondent of its intention. When the respondent objected to the proposed withholding, the appellant urged the respondent to obtain a legal opinion that withholding was not required and to provide both that opinion and an indemnity bond to the appellant, to be applied in the event that CRA determined otherwise. Alternatively, the respondent could complete and submit Form T1213 to seek CRA approval of a reduction of the amount withheld. The respondent declined to take either course of action and insisted that no withholding and remittance should be made.
[6] The appellant proceeded to make the first payment of $250,000 to the respondent’s solicitors in trust without deductions. It then made a compensating withholding and remittance to CRA against the other July 4 payment of $250,000 made directly to the respondent. The total withholding and remittance was therefore roughly twice as large as would otherwise have applied to the latter payment. The resulting net amount delivered directly to the respondent on account of the July 4 payments, after withholding, was only $960.49.
[7] In light of the parties’ disagreement over the interpretation of the minutes, the appellant brought an application to the Superior Court of Justice, asking the court to determine the rights of the parties under the minutes and seeking a declaration that the amounts paid and withheld were in accordance with the minutes. The respondent, for his part, brought a separate motion for summary judgment asking that the minutes be enforced. He submitted that the portion of the settlement paid to his solicitors in trust was compensation for legal costs, not employment income, and that deductions had, in effect, been improperly made on account of that payment.
[8] The application judge determined that, properly interpreted, the minutes did not entitle the appellant to withhold and remit to CRA any funds from or on account of the $250,000 payment to the respondent’s solicitors in trust. As a consequence, he ordered the appellant to pay to the respondent the amount improperly deducted. The precise amount was not stipulated in the reasons or in the order but I understand it to be just under $125,000.
[9] The application judge also rejected the appellant’s submission that, for ITA purposes, the $250,000 payment to the respondent’s solicitors in trust was a benefit to the respondent and that the ITA therefore required the employer to withhold and remit taxes on account of that payment. The application judge relied on the case of Scharf v. Freure Homes Limited et al. (1994), 95 D.T.C. 5074 (Ont. C.J.) for the proposition that where a payment for costs is made directly to a party’s lawyers, the ITA does not require the withholding and remitting of taxes from that payment. The application judge concluded, therefore, that because the minutes provided for the payment to be made directly to the respondent’s solicitors, the ITA did not require withholding and remittance of taxes and, contrary to the appellant’s submission, did not override the intent of the parties that there be no withholding and remitting of taxes.
[10] Despite having found the appellant in breach of the minutes, the application judge declined the respondent’s additional request that the penalty provision in the minutes be applied. That provision required payment to the respondent of an additional $250,000 in the event that there was a default in payment. The application judge noted that the withholding and remittance was made on the recommendation of the appellant’s tax advisor. In the application judge’s view, despite his finding that this advice was misplaced in the context of the agreement made by the parties, the penalty provision was not triggered. He determined that the clause was intended to apply to a situation of deliberate default rather than, as was the case here, an erroneous deduction made on the advice of a tax professional.
[11] Accordingly, the application judge dismissed the appellant’s application and granted the respondent’s motion, in part.
B. PositionS of the Parties
[12] On appeal, the appellant maintains that the application judge committed the following errors:
He erred in his interpretation of the minutes and in concluding that the intent of the parties was that there would be no withholding and remitting of taxes with respect to the payment to the respondent’s solicitors in trust;
He disregarded the fact that the payment was not made directly to the respondent’s solicitors but rather was made to the firm in trust; and
He misinterpreted the decision in Scharf and erred in applying it to support his conclusion that the ITA did not require withholding and remitting on account of the payment to the respondent’s solicitors.
[13] For his part, the respondent argues that the motion judge did not err. He maintains that the minutes clearly provide that:
The first $250,000 payment was “towards [the respondents’] costs of the action”;
Further, the $250,000 payment to his solicitors in trust was to be made “with no deductions”; and
Where withholding and remittance was to apply to a payment, it was clearly specified in the minutes.
[14] In the respondent’s submission, the only reasonable interpretation of the minutes in light of those provisions is that the parties had agreed that there would be no withholding and remitting of taxes with respect to the $250,000 payment at issue in the appeal.
C. Discussion
(1) Are the minutes ambiguous?
[15] Although there is no express finding to that effect, it is apparent that the application judge concluded that the minutes were unambiguous. He was of the view that the minutes “provide a clear understanding of the true intention of the parties” and that the parties intended that there would be no withholding and remitting of taxes on account of the $250,000 payment to the respondent’s solicitors in trust. In my view, he erred in so concluding.
[16] First, the application judge failed to consider and address the fact that, in the clause at issue, the parties used the words “with no deductions”. The word “deductions” does not appear anywhere else in the minutes. Rather, in the balance of the minutes, when the parties sought to refer to the withholding and remittance of taxes, they did so by specifically using the word “withholding”. The various expressions used in the minutes are “withholding taxes payable to CRA”, “withholding tax” and “all withholdings”.
[17] Using different words in different provisions of an agreement can, as the respondent argues, be meaningless or merely a drafting oversight. Alternatively, as the appellant submits, it could reflect a conscious and meaningful choice.
[18] If the provision is read as the appellant suggests, the use of the phrase “no deductions” rather than “no withholding” should be taken to mean that the amount to be paid to the respondent’s solicitors would be paid without any reduction. On this interpretation, withholding and remittance of taxes required on account of this payment could still be made, provided that they were made only against the other $250,000 payment scheduled for that day. This is precisely what the appellant did. By the same token, as suggested by the respondent, the parties could have used “deductions” and “withholdings” interchangeably, intending that no reduction whatsoever should be made to or on account of the payment to the respondent’s solicitors.
[19] That both interpretations are possible and reasonable creates an ambiguity.
[20] Second, the minutes did not, as the application judge stated, make “clear that the funds were earmarked for [the respondent’s] lawyers” and the cheque did not “specifically [name] ‘Kestenberg Siegal Lipkus’ as the recipients”. It appears that the application judge viewed a payment made to lawyers “in trust” no differently than a payment made directly to a law firm. Although the minutes state that the payment to the respondent’s solicitors in trust was to be made “for costs”, this does not mean that any portion of that payment will be paid out to the law firm in payment of the respondent’s legal costs. In fact, nothing in the record indicates to whom these trust funds were ultimately paid.
[21] Nor does the application judge appear to have considered or given effect to the provision of the minutes that directs the appellant to:
… pay to Kevin Kurnik (KK):
a) $250,000 towards KK’s costs of the actions;
b) $1,250,000 less withholding taxes payable to CRA …
This provision directs that the entire $1,500,000 of the settlement funds be paid to the respondent, suggesting that the full amount is a benefit to him. It is only a later sub-clause that directs that, of the payments to the respondent, $250,000 be paid to the respondent’s solicitors in trust with no deductions.
[22] In my view, had the application judge considered the complete text of the minutes, he ought to have concluded that the provision at issue in the minutes is ambiguous. It can be reasonably interpreted either as the respondent or as the appellant argues.
(2) Does the ITA have any application?
[23] The application judge also erred in his interpretation and reliance on the Scharf decision to support his conclusion that the ITA had no application. In Scharf, the court concluded that the employer had acted properly in withholding and remitting taxes to CRA with respect to all of the funds paid to the employee in settlement of her wrongful dismissal claim, including the amount payable to the employee for costs. It was only in obiter that the court went on to express the view that “perhaps” the need to withhold and remit taxes in respect of the costs component of an award for wrongful dismissal “might” have been avoided in that case if the money in payment of costs had been paid “directly to the law firm”.
[24] The Scharf case has no relevance to the issues in the present case. The statement relied on by the application judge was made in obiter and it was expressed as a possibility, not an opinion. Further, the statement in Scharf related to a payment made “directly to the law firm” and not, as we have here, a payment made pursuant to minutes stating that it was a payment to the party “for costs” and where the cheque was made out to that party’s solicitors “in trust”.
(3) Was the withholding and remittance a breach of the minutes?
[25] In my view, whether the minutes allowed or prevented the appellant from withholding and remitting taxes on account of the $250,000 payment to the respondent’s solicitors need not be decided to resolve this appeal. As I will explain, this is because in any event the respondent has suffered no loss.
[26] I have concluded that the parties’ competing interpretations of the contested provision in the minutes are both reasonable and that the appellant acted reasonably in light of the ambiguous nature of the provision in question. The fact that the provision is ambiguous simply provides further support for the application judge’s own finding that, because the withholding and remittance to CRA was done on the advice of the appellant’s tax advisor, the appellant acted in good faith and the penalty provision in the minutes was not triggered.
[27] Even assuming, without deciding, that the withholding and remittance was made in error, however, the respondent has suffered no loss. This is because the payment made to CRA on behalf of the respondent stands to his credit, as a matter of law.
[28] Section 153(1) of the ITA requires the withholding and remittance of taxes on account of, among other things, salary, wages or other remuneration. Section 153(3) provides that:
(3) When an amount has been deducted or withheld under subsection (1), it shall, for all the purposes of this Act, be deemed to have been received at that time by the person to whom the remuneration, benefit, payment, fees, commissions or other amounts were paid.
[29] The payment made by the appellant to CRA constitutes, in effect, a payment to the credit of the respondent. If the respondent’s reading of the minutes is accepted, the payment was made but not in the manner stipulated in the minutes. The respondent, an accountant, has nevertheless confirmed in his affidavit his understanding that his legal costs are indeed tax deductible. Therefore, upon filing his tax return (after deducting any legal costs not yet claimed), the funds paid to CRA will either be reimbursed to the respondent or used to reduce taxes the respondent is otherwise obligated to pay to CRA.
[30] Given the above, the error in making excessive withholding and remittance, if in fact it was an error, would at most have had a negligible impact on the respondent. The loss, if any, would be the respondent’s inability to use the funds pending any reimbursement by CRA. By now, CRA has either reimbursed the respondent for the amount remitted or has applied the amount to reduce taxes otherwise payable by him. The respondent’s claim was not for the temporary loss of use of the funds and nothing in the record allows this court to assess whether the respondent has in fact suffered any loss on account of the payment to the respondent having been, in effect, routed through the CRA.
D. Disposition
[31] For these reasons, I would allow the appeal, set aside the order below and substitute in its stead an order dismissing the respondent’s motion for summary judgment.
[32] The appellant seeks confirmation from the court that the withholding and remittance of taxes it effected were required by the ITA. In my view, such a determination is best made in the context of tax proceedings. Further, in light of the disposition of the appeal that I propose, the application for determination of rights and for an order declaring that the amounts paid and withheld are in accordance with the minutes is moot. As a result, I would also dismiss the appellant’s application.
[33] With respect to costs, the appellant is entitled to its costs of the appeal. I would fix those costs at $15,000, inclusive of disbursements and applicable taxes. Should the parties be unable to agree on the appropriate cost order in the court below, I would ask the appellant to provide brief submissions not to exceed three pages within 14 days of the issuance of these reasons and the respondent to provide brief submissions not to exceed three pages within ten days thereafter.
Released: “E.A.C.” November 4, 2016
“Paul Rouleau J.A.”
“I agree E.A. Cronk J.A.”
“I agree Grant Huscroft J.A.”