Court File and Parties

COURT FILE NO.: CV-22-030 and CV-22-064 (Walkerton) DATE: 2023-04-04

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

WALTER D BROSS and LINDA M BROSS Applicants

and

JEFF BROSS and SHARON BROSS Respondents

AND BETWEEN:

JEFF BROSS and SHARON BROSS Applicants

and

WALTER DANIEL BROSS and LINDA M BROSS Respondents

Counsel: Robert Scriven, for Dan (Walter Daniel) and Linda Bross Troy Dore, for Jeff and Sharon Bross

Heard: November 24, 2022

Justice. R. Chown

Reasons for Decision

1The parties’ competing applications pit two brothers and their respective spouses against each other over the division of the corporation that holds the family farm. The shares of the corporation, Florbil Farms Ltd., are held 25% by each party.

2In August of 2022, the parties reached an agreement to end the acrimony that had developed. Dan and Linda would take over the dairy side of the operation. Jeff and Sharon would take over the cash crop side. The parties would arrange joint appraisal of the assets and an equalization payment would be made as part of an equitable division. The deal was subject to, among other things, a “tax condition.” Specifically, the deal was subject to each side, in their “sole discretion,” receiving tax advice and waiving a condition associated with receipt of that advice by September 30, 2022. Jeff and Sharon did not waive the condition. In the meantime, Dan and Linda had invested $500,000 in constructing a new barn to house the dairy cattle.

3Dan and Linda accuse Jeff and Sharon of bad faith in their refusal to waive the tax condition.

4After the hearing the parties advised me that they had renewed their settlement negotiations and asked me to delay my decision. Unfortunately, they could not resolve the matter and then asked me to provide my decision.

A. Issues

5There are two issues:

1. Should the settlement between the parties be enforced on the basis that Jeff and Sharon’s refusal to waive the tax condition was not a good faith exercise of the discretion granted to them under the minutes of settlement?

2. (a) If so, how should the minutes of settlement be interpreted regarding the general increase in quota? That is, should the general increase benefit the corporation, or solely Dan and Linda? (b) If not, should Dan and Linda be ordered to return the corporation’s assets (including the dairy herd) and to provide associated relief?

B. Legal Framework – The Duty to Exercise Contractual Discretion in Good Faith

6The parties referred me to Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 as the leading authority on the duty to exercise contractual discretion in good faith. The Supreme Court of Canada set forth the following principles (in the bullet points below I reference the applicable paragraph numbers of Wastech but omit citations):

• “[P]arties must perform their contractual duties, and exercise their contractual rights, honestly and reasonably and not capriciously or arbitrarily” (para. 62).
• “Stated simply, the duty to exercise contractual discretion in good faith requires the parties to exercise their discretion in a manner consistent with the purposes for which it was granted in the contract, or, in the terminology of the organizing principle in Bhasin, to exercise their discretion reasonably” (para. 63).
• “The concept of reasonableness in this context implies a duty to exercise the discretion honestly and in light of the purposes for which it was conferred” (para. 68).
• “Thus, beyond the requirement of honest performance, to determine whether a party failed in its duty to exercise discretionary power in good faith, one must ask the following question: was the exercise of contractual discretion unconnected to the purpose for which the contract granted discretion? If so, the party has not exercised the contractual power in good faith” (para 69).
• “[T]he role of the courts is not to ask whether the discretion was exercised in a morally opportune or wise fashion from a business perspective” (para. 73).
• The approach of deferring to the purposes of the contract ensures “some elbow-room” for the “aggressive pursuit of self-interest,” but it also “prevents good faith from veering into ‘a form of ad hoc judicial moralism or ‘palm tree’ justice.’ In this context, then, courts must only ensure parties have not exercised their discretion in ways unconnected to the purposes for which the contract grants that power” (para. 74).
• “Wherever a party is granted discretion, there may be differing yet legitimate ways in which that party can exercise its power that is itself part of the bargain. In a contractual context, these choices are ascertained principally by reference to the contract, interpreted as a whole – the first source of justice between the parties. Good faith does not eliminate the discretion-exercising party’s power of choice. Rather, it simply limits the range of legitimate ways in which a discretionary power may be exercised in light of the relevant purposes. Where discretion is exercised for an improper purpose, as against that which was intended by the parties, one that is ‘ulterior or extraneous’ to their intentions, it is exercised in bad faith” (para 75).
• “[W]hat a court considers unreasonable is highly context-specific, and ultimately ‘depend[s] upon the intention of the parties as disclosed by their contract.’ Demonstrating a breach will necessarily centre on an exercise of contractual interpretation. It is in properly interpreting the contract and the purposes for which discretion was granted that the range of good faith behaviour comes into focus and breaches can be identified” (para 76).
• “For contracts that grant discretionary power in which the matter to be decided is readily susceptible of objective measurement – e.g., matters relating to ‘operative fitness, structural completion, mechanical utility or marketability’ – the range of reasonable outcomes will be relatively smaller. For contracts that grant discretionary power ‘in which the matter to be decided or approved is not readily susceptible [to] objective measurement – [including] matters involving taste, sensibility, personal compatibility or judgment of the party’ exercising the discretionary power – the range of reasonable outcomes will be relatively larger” (para. 77).
• The duty to exercise discretion in good faith is “a general doctrine of contract law. Like the duty of honest performance, it need not find its source in an implied term in the contract, but rather it operates in every contract irrespective of the intentions of the parties” (para. 91).
• “Parties who provide for discretionary power cannot contract out of the implied undertaking that the power will be exercised in good faith, i.e., in light of the purposes for which it was conferred” (para. 94).
• The loyalty required in the exercise of a discretion granted under a contract is not loyalty to another contracting party, but “loyalty to the bargain” (para. 107).

C. Nature of Motions

7The parties took steps to implement the deal they had made. But, when Jeff and Sharon did not waive the tax condition, Dan and Linda treated this as an invalid and bad faith decision and acted as if the deal would proceed. They moved the dairy herd to another farm (as they would have had a right to do under the deal).

8Both sides have brought motions in their competing applications to wind up Florbil Farms Ltd. Counsel advise me that winding up the corporation would result in negative tax consequences, such that neither side truly wants that to occur if it can be avoided.

9Jeff and Sharon’s motion seeks an order that Dan and Linda return the dairy herd and all other assets of the corporation to the corporation’s property and that they provide an accounting.

10Dan and Linda’s motion seeks an order enforcing the minutes of settlement.

11The parties acknowledge the jurisprudence that has held that rule 49.09 is inapplicable to negotiated minutes of settlement, so that the applicable route for a party seeking enforcement of minutes of settlement is under rule 20: Vanderkop v. Manufacturers Life Insurance Co., [2005] O.J. No. 4461 (S.C.J.); Exponents Canada Inc. v. Sharma, 2015 ONSC 2940; Kalinitchenko v. Allure at the Gates, 2021 ONSC 438. The parties agreed under rule 20.04(2)(b) to have the issues determined by summary judgment. They wish to avoid the expense and delay of a trial.

12If they are successful enforcing the minutes of settlement, Dan and Linda also seek an order that a 2% increase in the Dairy Farmers of Ontario quota granted to the corporation on October 1, 2022 is to their sole benefit.

D. Background

13Florbil Farms Ltd. is the successor organization to the original farming operation started by Dan and Jeff’s parents. Its assets include a farm property where Jeff and Sharon have one house and Dan and Linda have another house. The parties hope and expect to sever this property in two, but Bruce County officials must approve the severance. For convenience, I will call the two proposed farms J&S farm and D&L farm. The corporation also holds another farm (627 Bruce Road 12), which I believe the parties sometimes refer to as Ambleside. The corporation also holds milk quota. Linda’s affidavit estimates the value of the corporation’s assets at $9,000,000.

14In February of 2022, Jeff and Sharon first proposed the basic outline of the parties’ eventual agreement. Jeff indicates in his evidence that his health is deteriorating. Milking is physically demanding work and he did not wish to continue doing it. Jeff and Sharon’s handwritten proposal indicates that they would keep J&S farm, Ambleside, some of the inventory, most of the machinery, and one truck. They would receive an equalization payment of $485,000. Dan and Linda would keep D&L farm, the quota, most of the inventory, some of the machinery, the milk shop equipment, and one truck.

15A proposed mediation between the parties fell apart but the parties and their lawyers attended a settlement meeting in Walkerton on July 8, 2022. The parties discussed a framework for settlement but did not reach agreement. The parties and counsel had a further meeting in Walkerton on August 12, 2022. The parties reached agreement and signed minutes of settlement.

16Under Wastech, the contract (in this case, the minutes of settlement), interpreted as a whole, is the first source of justice between the parties. It is necessary to review the minutes of settlement in some detail.

Division of Assets Under the Settlement

17The minutes of settlement call for an effective date (essentially a valuation date) of October 1, 2022 and a closing date to occur within sixty days of consent to sever being received.

18Under section A and B of the minutes of settlement:

Dan and Linda receive:

• The quota
• The cattle herd
• D&L farm
• Milking equipment
• Feeding equipment
• Feed inventory
• A livestock trailer

Jeff and Sharon receive:

• The corporation Florbil Farms and the right to operate under that name
• J&S farm
• Ambleside farm
• Farm equipment
• Shop equipment
• The AgrInvest account

19With some other exceptions, the balance of the corporation’s assets is divided equally.

Interim Operation of the Farm

20The minutes of settlement state at section K that:

As of the Effective Date, each parties [sic] shall have management of the assets, including the real property, to be received by them as set out above as part of the distribution on the Closing Date.

21In other words, as of September 30, 2022, each of the parties would start managing the assets they were to receive. The agreement also indicates that each of the parties would have exclusive use of these assets, would be responsible for expenses associated with those assets incurred after September 30, 2022 (section K), and would benefit from any income “related to” those assets earned after September 30, 2022 (section U).

Rental of the Dairy Barn

22One of the dairy barns used by the corporation was located on the land that would become J&S farm. The agreement allowed for Dan and Linda to continue to use that dairy barn until the closing date, and then to lease the barn from the closing date until April 30, 2023, with an option for a further six-month extension (sections M through Q).

Equalization

23The parties intended to split the total value of the corporation equally. The parties would arrange appraisals or valuations for each asset. The parties would divide the assets as described. Each side would receive credit for the assets received. The cash within the company would be used to equalize the value each party received.

24I hesitate to even note this for fear that I may inject a further issue into this matter, but the text of the agreement may be ambiguous about equalization. The minutes of settlement do not appear to contain a specific provision stating that equalization was to occur. Only section E specifically alludes to equalization: “The proceeds of the sale of any harvested crops shall be remain [sic] in the Corporation subject to the equal division of assets as of the Closing Date.” Otherwise, I see no specific reference to equalization in the minutes of settlement. The corporation’s tax consultant, Mr. Oelschlagel, made the same observation. In his September 30, 2022 memo, he wrote: “Is it clear between the parties that cash on the closing Date will be used to equalize the net asset values between the parties to ensure a fair split (50/50)?”

25However, clearly, the parties intended that equalization would take place through division of the cash within the company. That this was the understanding is supported by: (1) the initial offer made by Jeff and Sharon in February of 2022, which references an equalization payment; (2) the preamble to the minutes of settlement which indicates that the parties intend to divide the corporation equally; (3) the fact that the minutes of settlement call for all assets to be appraised or valued; (4) the fact that counsel and the parties immediately commenced the process of evaluating the corporation’s assets after the August 12, 2022 meeting (Mr. Scriven’s letter dated August 17, 2022 speaks to this); (5) the fact that some of the cross examination questions and answers appear to assume equalization; and (6) the submissions I received.

26There are repeated references to equalization in the cross examinations. Again, both parties have operated on the understanding that an equalization payment would be required.

Division to be Tax Efficient

27The minutes of settlement said that “'The parties will cooperate in obtaining tax advice as to the division of the assets of the tax Corporation on the Closing Date and performing such transaction in a tax efficient manner” (section L). The parties were aware when they negotiated that, to be tax efficient, the transaction had to be structured as a “butterfly” transaction. A butterfly transaction allows family shareholders who are going their separate ways to divide up the corporation’s assets between them without triggering taxes that would normally be associated with the division of the corporation’s assets. However, there are strict requirements that must be followed.

28As I understand it, since some assets would go to Jeff and Sharon and some to Dan and Linda, and since the division had to be strictly equal to implement a butterfly, the valuations of the assets would matter a great deal. The corporation had a large amount of cash that could fund equalization. However, valuations would be required to know with certainty that a butterfly transaction could be done, and the valuations would have to be confirmed as at the closing date if there was a significant period of time between the valuation date and the closing date.

29Also, as I understand it, to successfully complete the butterfly, the corporation may need to reduce excess cash. Excess cash cannot exceed 10% of the total value of all the assets of the corporation. Excess cash can be reduced by dividends, bonuses, or buying business assets.

30As will be seen, Jeff justifies his refusal to waive the tax condition, at least in part, on the uncertainty associated with the butterfly. I will return to this in the analysis below.

The Tax Condition

31The minutes of settlement indicate that the agreement is subject to certain conditions (section C), including the tax condition that is the focus of the parties’ current dispute:

This Agreement, and the terms contained herein, are subject to the following conditions:

ii. In the sole discretion of both D&L and J&S, review and approval of their tax counsel as to the terms of this Agreement. Each parties [sic] shall provide written notice to each other, or its designated counsel, of either this condition being satisfied or fulfilled by September 30, 2022, failure of which shall mean that this Agreement is terminated. [sic]

32As is apparent, the date for waiver of this condition and the effective date were both September 30, 2022. Because people work to deadlines, it was predictable that the parties might not obtain the advice they sought until close to the time to waive the condition. It was also predictable that the accountants would be prudent and cautious and as a result the parties would not receive unequivocal tax advice to the effect that the deal was as fair and as efficient as possible from a tax perspective. Expecting such an assurance would be unrealistic.

The Tax Advisors

33Linda is an accountant at BDO. She generally did the corporation’s bookkeeping.

34Kurt Oelschlagel, another accountant at BDO (who specializes in agricultural tax), provided advice to the corporation and the parties jointly regarding tax issues surrounding division of the corporation’s assets. He had provided advice to the parties about dividing the assets of the company as early as 2020. The parties knew at that point that the tax issues were not straightforward.

35Jeff and Sharon engaged Jordan Bowles, an accountant with MNP, to assist them. He had been retained prior to the August 2022 settlement meeting.

E. Analysis

36Each party raises conduct of the other as evidence of bad faith. The conduct they each complain of coincided closely with the effective date (September 30, 2022) and therefore added to the mistrust between the parties at a crucial time. Because of the emphasis the parties placed on each other’s conduct, I will review it as part of the chronology of events, but I do not see the conduct as a controlling feature. The conduct plays a role in understanding the surrounding circumstances or factual matrix. However, the reasons behind Jeff and Sharon’s decision not to waive the tax condition are key to the analysis of whether they made that decision in a good faith exercise of their discretion. They assert that the uncertain tax consequences are why they did not waive the condition.

37Dan and Linda take the position that the real reasons Jeff and Sharon refused to waive the tax condition were: (1) “buyer’s remorse,” i.e., they wanted to back out of the deal; and (2) they felt they would be in a stronger position for future negotiations because Dan and Linda have invested so much in the new dairy barn.

The September and Early October Events

1. Use of Manure

38On September 8, 2022, Dan advised Jeff that he was going to remove 15 loads of manure. Dan acknowledges that the manure is property of the corporation. He used the manure at his son’s property. He knew removing it could be an issue so he documented the amount he took. He justifies taking it because:

• The barnyards were full and were a mess.
• The weather conditions were favourable for spreading manure.
• Jeff had told him he (Jeff) had no acreages to put manure on that fall.
• “The Minutes of Settlement allowed for each party to receive manure and it did not specify that manure could not be moved before October 1, 2022.” [While true, the minutes do say that manure owned by the corporation would be determined on the effective date. The use of the manure by Dan was not for the benefit of the corporation. The minutes also say that after the effective date, the manure would be for the exclusive use of Dan and Linda.]
• He only took 15 loads and they would be valued at $100 to $150 per load. He was a partial owner of the corporation and the value of the manure could be dealt with in the equalization.

39At the time, both parties expected the division of assets to proceed. Both parties were taking steps towards completion of the deal. Even on Jeff’s version, this was a $4,200 item so was a miniscule fraction of the division of assets. I do not consider the use of manure to be an act of bad faith. Dan notified Jeff before doing this. It should even have been a significant irritant to Jeff. The manure had to go somewhere and Dan did not suggest that the corporation would not be compensated for it.

2. Use of Estrumate

40Dan and Linda were to receive the cattle herd as of the effective date. A specified appraiser would determine the herd’s value. If any animals died or were born between the date of the appraisal and the effective date, the value would be adjusted accordingly. This meant that calves born after the effective date would benefit Dan and Linda exclusively, whereas Jeff and Sharon would share in the value of calves born before the effective date. Each calf had a value of roughly $2,000.

41Estrumate is a drug used on pregnant cows to induce them to deliver. A cow injected with Estrumate should calve within 24 to 48 hours. Without consulting Dan, Jeff injected two cows (called Mercedes and Pammie) with Estrumate on September 26 or 27, 2022.

42Jeff said he did not discuss the injections with Dan because he “knew it would be an argument.” He notes that as of October 1, 2022, roughly 55 cattle were pregnant. He justified the Estrumate injections because:

• One cow was overdue and this increased the chances of the calf being stillborn.
• The second cow was located at Ambleside so was more difficult to observe for calving or complications. A calf had been recently lost in similar circumstances.

43At the time, Jeff and Sharon had not taken a position on the tax condition and Jeff understood that the dairy herd would be going to Dan and Linda. He also knew that there would be value to him for calves born before October 1, 2022.

44On September 26, 2022, Dan observed Mercedes. He knew she was due to calve soon. That same day, he found a bottle of Estrumate had been opened. The vet was due to come out on September 28, 2022. The vet attended and measured the amount of Estrumate missing, indicating that two to three doses had been used. The vet also determined that Mercedes had a twisted uterus. He twisted out the uterus and Mercedes delivered a calf within two hours. Dan’s evidence was that Mercedes had not been ready to calve. He took a photo on September 26, 2022 showing that her udder was small. He said her subsequent milk production was low.

45Pammie calved on September 29. She had a retained placenta and required antibiotic treatment and also had reduced milk production.

46Dan also said in his affidavit that administration of Estrumate is an extreme treatment. He estimated that in his 31 years of dairy farming, they had administered Estrumate for inducing purposes less than ten times. He rejects the explanation that Jeff used Estrumate on the cow at Ambleside for convenience given its location. He said, “That farm is only a 3-minute drive away for Jeff, and we have routinely calved out cows at that location.” These aspects of his testimony were not seriously challenged.

47I do not accept Jeff’s explanation for why he needled the two cows. It is inexcusable that he did not consult or advise Dan before doing this, when it was only days before Jeff and Sharon would cease to benefit from the dairy herd and the herd was scheduled become Dan and Linda’s sole responsibility if the deal proceeded.

48I do not accept Jeff’s suggestion that he injected Estrumate out of concern for the health of the involved animals. I find it much more likely that it was an effort on his part to gain a financial advantage, and I would note it was a miniscule advantage when considered in the context of a deal in which the parties were dividing roughly $9,000,000 in assets. As such, it was an act of bad faith on Jeff’s part. Dan was justifiably upset by this action at a crucial time in the transaction.

3. Quota General Increase

49Two to four days before October 1, 2022, the parties became aware of a Dairy Farmer’s of Ontario (DFO) announcement that there would be a quota general increase of 2%. DFO announces general increases in quota when demand for milk increases. It means that every farmer with quota is allocated a percentage increase, in this case, 2%.

50Licenced producers can buy and sell quota on the quota exchange. A 2% increase meant that the value of the quota increased by roughly $40,000 on October 1, 2022. The minutes of settlement did not address the possibility of general increases or decreases in quota.

51On September 30, 2022 at 8:12 a.m., Mr. Dore emailed Mr. Scriven and raised the quota increase as an issue. He stated that “of course” the increased quota arising from the general increase would be included in the corporation’s assets. Dan and Linda did not reply to this email, but they took a different view of it. Their position is that the quota increase took effect on the effective date, so they should exclusively benefit from it.

52The quota increase became yet another issue at a crucial time in the transaction. Dan and Linda paint the general increase in quota as one of the significant motivators behind Jeff and Sharon’s decision not to waive the tax condition.

4. September 29, 2022

53On Thursday, September 29, 2022 (i.e., the day before the time limit to waive the tax condition) at 2:26 p.m., Mr. Dore (counsel for Jeff and Sharon) sent an email to Mr. Scriven (counsel for Dan and Linda) listing in bullet points seven issues to be addressed. For the most part, the email raised issues that the parties had not specifically addressed in the minutes of settlement.

54This email was the first inquiry regarding clarification on tax matters. It arrived in the day after the veterinarian had confirmed the amount of Estrumate that had apparently been used. Dan and Linda did not respond to the email. Dan’s position is that the issues raised “were not accounting issues arising from the minutes of settlement, but minor clarification issues.” I will review the email in more detail below.

5. September 30, 2022 – The “Effective Date”

55On Friday, September 30, 2022 at 1:06 p.m., Mr. Scriven wrote to waive the tax and financing conditions and to raise concerns including the use of Estrumate. His letter did not address Mr. Dore’s inquiries from the day before.

56At 1:13 p.m., Mr. Dore emailed Mr. Scriven’s clerk to inquire when he would receive a response to his two emails (his email of September 29, 2022 and his email of 8:12 a.m. on September 30, 2022 about the quota increase).

57At 1:53 p.m., Mr. Oelschlagel emailed the parties and their lawyers a memo with his tax advice. I will review that advice below.

58At 5:14 p.m. on Friday, September 30, 2022, Mr. Dore emailed Mr. Scriven to say that Jeff and Sharon were unable to waive the tax condition without the information requested in his September 29, 2022 email. Jeff and Sharon offered an extension to the tax condition until 8:00 p.m. on Monday, October 3, 2022. However, the email goes on to state that “if this extension is not accepted, as per the Minutes of Settlement, the agreement shall be terminated at the end of today.” In other words (assuming “the end of today” meant midnight), on a Friday evening after 5:00 p.m., Jeff and Sharon gave Dan and Linda less than seven hours to accept a one-business-day extension to the tax condition.

59The very short time frames for accepting the offer and the short extension proposed do not impress me as genuine efforts to further investigate the tax concerns. The materials contain no explanation for the very tight timeline and I received no explanation in argument.

60On Saturday, October 1, 2022 at 10:05 a.m., Mr. Scriven emailed Mr. Dore questioning how the issues raised in Mr. Dore’s September 29, 2022 email had any bearing on receiving tax advice and why the issues waited until the last minute to raise these concerns. He also complained about the tight timeline that had been set and dismissed the approach taken as “playing games.”

6. Moving the Herd

61On Saturday, October 1, 2022, 11 heifer cows were moved from the property of the corporation at the direction of Dan. During this, a verbal confrontation occurred. Jeff took the position that the minutes of settlement were at an end. Dan took the position that they were not. Jeff called the OPP. The OPP declined to intervene as it appeared to be a civil dispute and not a criminal matter. Dan continued to move cattle over the following weeks despite knowing that Jeff objected.

62Moving the cattle had been planned and Jeff and Sharon were notified, although there is no evidence that they agreed to it. On September 5, 2022, Mr. Scriven wrote to Mr. Dore to say that “sometime in October,” Dan and Linda “will be hotelling the cattle at another location (subject to DFO approval).” They “felt it would help promote a clean break,” and while it would be more expensive for them rather than leaving them in the barn and renting the barn from the corporation, they thought it would be best for the parties. I infer from some of the material that Jeff had indicated he wanted space in the barn. On September 6, 2022, Mr. Dore emailed back with questions about the location, cost and feed inventory. On September 12, 2022, Mr. Scriven replied with answers. There is nothing in the record to indicate there was further discussion about this.

63In his affidavit, Dan describes moving the cattle “because it had become intolerable working with Jeff in the barn.” He understood that Jeff had been reluctant to agree to hotelling the cattle and had plans for the barn. He also wanted to alleviate conflict. The conditions at the new location were better. The feed on the corporation’s property was running out.

64Jeff took the position that he was not informed of where the cattle were taken, apart from being told it was “the Groen farm,” but he did not know which Groen. Dan’s reply to this was that there is only one large dairy operation locally owned by Groens. I was not directed to any evidence that a demand had been made to know the location of the cattle with more precision than had been provided in Mr. Scriven’s September 12, 2022 email.

65As indicated at the outset of these reasons, Jeff and Sharon seek an order that the herd shall be returned to the corporation’s property.

7. Changing the DFO Password

66Dan changed the password on the DFO website without informing Jeff. Jeff raised this in his supplementary affidavit, so Dan had no opportunity to reply, and Dan was not asked about it in his cross examination, from what I have seen. In argument, Mr. Scriven said that Dan did this because it would have been possible for Jeff to sell the quota without Dan’s knowledge.

The Tax Issues Raised

67Notwithstanding the parties’ complaints about each other’s conduct, it is the tax issues behind Jeff and Sharon’s decision not to waive the tax condition that are key to the analysis of whether they made that decision in a good faith exercise of their discretion. The events leading up to the decision may help understand the position they took. The events after the decision do not. The relevant time to assess whether Jeff and Sharon exercised the discretion afforded to them in the contract in good faith is the moment when they made the decision.

68At that time, they had the benefit of Mr. Bowles’ advice and had Mr. Oelschlagel’s memo. In his cross examination, Jeff raised two concerns:

1. “From what I read of Mr. Oelschlagel’s letter, there’s a question if we can even do the butterfly, and if we can’t do the butterfly, from what I understand, there’s major tax issues” (Q. 164).
2. The minutes of settlement did not clarify whether the equalization would be done on a before-tax or after-tax basis (Q. 231, Q, 234, Q, 245).

1. Bowles’ Advice

69The only contemporaneous record of Mr. Bowles’ advice is Mr. Dore’s September 29, 2022 email. In particular, as a result of Mr. Bowles’ input, the first bullet point of Mr. Dore’s seven-bullet point email sought confirmation:

• “that the associated tax effects of the sale of the assets by parties following the settlement date is to be taken into account as part of the equal/equitable distribution of all assets.”

70Put differently, and perhaps imprecisely, the question was whether the equalization would be based on before- or after-tax values of the assets each party was to receive.

71The other six bullet points in Mr. Dore’s email relate to less significant matters:

• certain equipment valuations were still required;
• confirmation the parties would not claim against each other for crops harvested in the calendar year;
• a request that all the manure not yet removed by Dan (discussed further below) would be Jeff and Sharon’s;
• agreement that Dan and Linda would have no right to use the tractor, loader tractor, or snowblower;
• agreement on the unit values of feed to be received by Dan and Linda;
• confirmation that excess cash beyond an amount referred to in the minutes of settlement would be divided equally as soon as possible.

72Mr. Bowles acknowledged in his cross examination: “The first bullet point to me is actually the largest tax consideration that hadn’t been settled …” He candidly agreed that the other six items would not affect the butterfly “in any way, shape or form.” He agreed with the suggestion that the other bullet points “aren’t big ticket items; they’re not big tax issues.” He agreed that they could be “resolved with the cash that’s in the company equalizing the positions of the parties.”

73Mr. Bowles felt that the question raised in the first bullet point was different. His concern was that some of the assets exchanged in the transaction would receive different tax treatment than others. The major assets – including the land and the quota – “would have a deferred tax liability that, upon the sale of any of those assets, would result in tax payable.” The sale could occur in the distant future, but:

when either party sells an asset at some point in the future, because it’s inevitable eventually these assets will get sold – it could be three generations from now, but they will be sold – when the assets are sold, there will be tax consequences. The tax consequences would be different for each of those major assets and the minutes of settlement didn’t speak to considering the future tax consequences of the sale of those assets at this point in time.

74Mr. Bowles stated that the minutes of settlement dealt with the division of assets “today” in a tax-efficient manner, “meaning deferring all tax until sometime in the future.” However, the minutes of settlement “didn’t deal with the disparity – potential disparity for accrued tax liability within those major assets.”

75Again, Mr. Bowles’ affidavit raises other issues, but in cross examination he acknowledged that only the first issue above (before-tax v. after-tax valuations) was significant.

76Mr. Oelschlagel’s memo delivered to the parties on September 30, 2022 does not even raise this issue. As indicated, Mr. Oelschlagel has expertise in agricultural tax. He advised the corporation – in effect the parties jointly retained him. I find it significant that he did not seem to see this as an issue.

77I received no evidence as to how one might determine the potential disparity in the tax consequences to each side on the eventual sale of the assets. Mr. Bowles had not done any calculations as to whether there would be potential disparity down the road. Even at the time of his cross examination in November of 2022, he could not provide any sense of the dollars and cents involved. He said it’s only a concern and “it very well could benefit Dan and Linda more so than Jeff and Sharon. It felt like something that should be quantified up front.” He did not have enough information to quantify it. This exchange occurred during Mr. Bowles’ cross examination:

Q. ... So it’s fair to state that in the September 29, 2022 email of Mr. Dore …, which you had an opportunity to provide some input on, the only tax consequence was this potential tax liability sometime in the future but not rooted in the Minutes of Settlement, correct? A. Correct.

78It seems to me that numerous debatable assumptions would be necessary to calculate the impact of potential future taxes so that equalization on a “net of tax basis” could be determined. For instance, due to the time value of money, I infer that the calculation would be time sensitive. If one assumes that the disposition will not occur for three generations, as Mr. Bowles supposed possible, surely that would have an impact on the present value of the amount of tax payable. However, Mr. Bowles did not state in his affidavit, and he was not asked in cross examination, the extent to which the calculation is time sensitive. My suspicion is that attempting to account for a potential disparity in future tax consequences would be impossible. It seems to me that, at best, Jeff and Sharon blew up the deal over a hypothetical concern or unascertainable risk. Accountants may have ways of addressing issues like this, but I did not receive any evidence on the point. Certainly Mr. Bowles did not explain how one might address this possibility.

2. Oelschlagel’s Advice

79Mr. Oelschlagel’s memo contains a section-by-section review of the minutes of settlement. In answer to an undertaking given at his cross examination, Jeff identified the tax consequences of significance raised in the memo. These were:

1. Mr. Oelschlagel said he had not been asked to carry out the detailed calculations to ensure the butterfly will comply with the Income Tax Act.
2. Mr. Oelschlagel said that there can be negative income tax ramifications if Florbil shares do not qualify as a family farm corporation as defined in subsection 110.6(1) of the Income Tax Act.

80I have noted that the record does contain emails that refer to these issues, although in argument neither counsel referred to these emails. In particular, an email exchange in October 2021 between Mr. Oelschlagel and Jeff (exhibit V to Dan’s affidavit) discusses the features a butterfly transaction must have. The requirements include:

a. The corporation’s assets had to be valued and divided pro-rata (in this case, because the two sides had equal shares, equally). b. A former requirement that different asset classes had to be divided equally would no longer be a requirement under Bill C-208. c. The cash within the company could go to one party versus the other if that assisted in equalizing the net assets. (In this case, the company had abundant cash.) d. The corporations involved – Florbil and the corporation to be incorporated by Dan and Linda – would both have to be either family farm corporations or qualified small business corporations. e. To qualify as a family farm corporation, excess cash cannot exceed 10% of the total value of all the assets of the corporation, but excess cash can be reduced by dividends, bonuses, or buying business assets.

81I emphasize here that Mr. Oelschlagel provided this explanation in October of 2021. Between then and the minutes of settlement in August of 2022, the parties had months to consider these issues. The failure to waive the tax condition based on tax issues known to exist months earlier does not seem reasonable. And again, Jeff and Sharon have not provided evidence that there is in fact a problem with any of these points, or any other point, that could lead to the butterfly failing. Jeff and Sharon have essentially relied on a non-existent concern. In all the circumstances, I do not accept that tax issues were (or are) their real concern when the declined to waive the tax condition.

F. Result and Disposition re Enforcement of Settlement

82The discretion under the tax condition does not involve a matter of “taste, sensibility, personal compatibility or judgment” of the parties. Rather, it is more akin to a matter of “operative fitness, structural completion, mechanical utility or marketability.” As such, an objective standard of reasonable applies, not a subjective standard: Greenberg v. Meffert, [1985] O.J. No. 2539 (Ont. C.A.), at para. 19. I appreciate that this categorization is a general guide, and not a means to categorize unreasonableness: Wastech, at para. 77; however, Jeff and Sharon do not point to any subjective considerations. In this case, an objective standard of reasonableness applies.

83The issue raised by Mr. Bowles is abstract and intangible. The other issues raised by Jeff and Sharon were known to the parties before they reached the agreement. Jeff and Sharon have provided no evidence the concerns will materialize. It does not appear Jeff and Sharon were acting in good faith by purporting to rely on these concerns for not going ahead with the deal. The extremely short time frames in Jeff’s offer to extend the deal also suggest bad faith. Although not related to the tax condition, Jeff’s use of Estrumate was also an act of bad faith. Overall, Jeff and Sharon have shown a lack of “loyalty to the bargain” as described in Wastech.

84For the foregoing reasons I conclude that Jeff and Sharon did not exercise their discretion in good faith. I would therefore enforce the minutes of settlement.

G. The Quota Increase

85The parties cannot agree whether the quota increase issued by the DFO effective October 1, 2022 should benefit the corporation or solely benefit Dan and Linda. Dan and Linda have requested an order that increase is to their sole benefit. Mr. Dore advised me during submissions that if the issue regarding enforcement of the minutes of settlement is decided in favour of Dan and Linda, Jeff and Sharon want me to make a decision on this issue.

86The minutes of settlement contain a definition for the term “Quota,” and it includes:

1. 82.64 kgs of quota owned by the corporation as of July 31, 2022;
2. 0.16 kg of quota purchased by the corporation on August 1, 2022; and
3. “Any subsequent purchasing of dairy quota by the Corporation from the date of this Agreement to the Closing Date at its purchased price.”

Unfortunately, the minutes of settlement do not address the possibility of a general increase, a general decrease, or a sale of quota.

87Jeff and Sharon note that the minutes of settlement use the phrase “as of and valued on the Effective Date” in several places, but this phrase is not used in reference to the quota. The agreement says in paragraph A that Dan and Linda get the “Quota,” as defined, “As of the Closing Date.” Under the minutes of settlement, the value of the quota is, effectively, the value as of the date of the minutes of settlement plus the value of any quota purchased up to the closing date, “at its purchased price.” Jeff and Sharon argue that, overall, the minutes reflect an intention that the corporation would benefit from the value of the quota determined at the closing date.

88Dan and Linda argue that under the agreement, the risk of increases and decreases in the price of quota fell upon them. They note that Jeff refused to answer a question at his cross examination as to whether, if quota prices decrease before the closing date, that Florbil or that Jeff and Sharon would “take the hit.” The refusal was given on the basis that it was a hypothetical question. Dan and Linda argue that because they are taking the risk of price fluctuations, they should be entitled to the general increase. Under sections K and U of the minutes of settlement, “As of the Effective Date,” each party gets the exclusive benefit of “any income, expenses or proceeds related to the assets to be received on the Closing Date but to be controlled or operated as of the Effective Date.” The argument is that the quota increase is part of the “income” or “proceeds” they were to receive.

89The problem with these arguments is that I would not characterize the general increase as a price fluctuation or as income or proceeds. The parties were well aware that general increases occur from time to time and could readily have specifically included general increases or decreases in the language of the minutes of settlement. The increase became available to the corporation because the corporation held the quota. The entitlement to the general increase flows from the fact that the corporation held the quota as an asset. It is akin to a dividend that accrued during the time that the corporation held the quota but paid on the Effective Date.

90Jeff and Sharon note that a general increase in the quota is not included in the definition of “Quota.” They argue that the general increase should be considered an “other asset” of the corporation and it therefore fits within the clause dealing with the “balance of assets”, being paragraph D, which states that “The balance of the Corporation assets as of the Closing Date shall be divided equally.”

91I agree with Jeff and Sharon that it is significant that the defined term “Quota” does not include general increases or general decreases in quota. Again, at the time of the minutes of settlement, the parties could have predicted the possibility of a general increase. They chose to define the term “Quota” without reference to this possibility. Therefore, the general increase falls outside of the defined term and therefore it is an “other asset” to be divided equally between the parties on the closing date.

H. Costs

92If the parties cannot agree on the costs, they may arrange a hearing through the trial coordinator to take place during the June sittings.

Chown J.

Released: April 4, 2023 Correction released April 5, 2023. The word “Dan” in paragraph 30 was changed to “Jeff.”