ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-10-410337
DATE: 2012-09-10

BETWEEN:

LUIS IVANDIC Applicant – and – THE BANK OF NOVA SCOTIA Respondent

J. Gardner Hodder, for the Applicant

Martin Sclisizzi and A. Nicole Westlake, for the Respondent

HEARD: June 5, 2012 at Toronto, Ontario

REASONS FOR JUDGMENT

MICHAEL G. QUIGLEY, J.

Introduction

[1] Luis Ivandic asks the court to order the return of moneys that he says were wrongly withheld by Scotiabank from payments he received of deferred compensation. Those payments were made to him after his retirement in respect of services he provided during the time when he was a Scotiabank employee posted outside Canada.

[2] As such, this summary judgment motion concerns the Bank’s tax equalization policies for its expatriate executives and whether they continue to apply after retirement [1] to payments made for deferred compensation that was awarded during the period of employment. The question is whether the tax equalization monies withheld by Scotiabank from deferred compensation payments made after Mr. Ivandic’s retirement were withheld legally, or whether the Bank must now refund those amounts to him.

[3] There is no factual disagreement here. This is simply a matter of characterization of the payments made to the plaintiff. As such, it is one of those cases for which summary judgment represents the most efficient and least expensive method of dispute resolution. Both parties agree.

[4] I have concluded that Mr. Ivandic’s post-retirement deferred compensation income continues to maintain its character as income from employment under governing Canadian law. As such, those payments continue to be subject to “hypothetical taxation” under the terms of Mr. Ivandic’s contract of employment with the Bank. Further, the Bank continues to be obliged to pay tax on those monies to the government of Peru on Mr. Ivandic’s behalf and will continue to have that obligation until his deferred compensation payment entitlements come to an end.

Summary of facts

[5] Mr. Ivandic is 59 years old and a retired banker. He began to work for Scotiabank in November, 1983. He lives in Peru. He is a citizen of Canada, Croatia and Argentina, but he is a permanent resident of Peru for both immigration and tax purposes. He has been a non-resident of Canada for Canadian tax purposes since 1990.

[6] In mid-1989, Mr. Ivandic became the Bank’s senior representative in Brazil. At that time, the Bank started subjecting his salary to “hypothetical taxation” or “hypo–tax”, as it is colloquially described within the Bank.

[7] Under its hypo-tax policy, Scotiabank reduces an expatriate employee’s remuneration in accordance with what would have been the taxes payable by that employee if he or she were resident for tax purposes in Canada at that time. The Bank then pays the actual tax obligation of the individual employee in whatever country the employee was performing his assignment at that time, at the applicable rates of tax and in accordance with the taxation laws of that country.

[8] The policy objective that was implemented by way of the “hypo-tax”, was and remains one of tax equalization. The stated objective was to make foreign assignments by the Bank of its expatriate employees monetarily neutral throughout the world in any of the many countries where Scotiabank maintains operations.

[9] Mr. Ivandic understood hypo-tax to be a method of equalizing net income. It does so by effectively eliminating benefits or detriments that internationally posted employees might otherwise experience as a result of being assigned to positions in differing countries, with their differing tax systems and taxation rates applicable to employment income.

[10] Mr. Ivandic claims that when hypo-tax was introduced, no express change was made to his contract of employment. However, he did understand the objective of hypo-tax and he admits to having acquiesced to it. At that time, he believed its purpose to be salutary.

[11] He worked for the Bank on various assignments throughout Latin America from mid-1989 until May 1, 2010 when he retired. He was an employee of the Bank throughout that time, although from time to time a portion of his salary was paid by Latin American affiliates of the Bank rather than Scotiabank itself.

[12] For the 20 years of his employment with Scotiabank, from 1990 until he retired, Mr. Ivandic was never a resident of Canada for Canadian income tax purposes. Nevertheless, his salary was hypo-taxed by the Bank from July 1, 1989 until retirement as if he were a Canadian resident.

[13] Mr. Ivandic claims that the Bank first began to impose hypo-tax on stock based compensation, that is, on components of remuneration other than salary, commencing in December of 1998. He claims they did this unilaterally.

[14] To implement the tax equalization policy, as Mr. Ivandic explained it, the Bank generally assumed control of the preparation and submission of the tax returns of expatriate executives, like him. He was directed to a particular accounting firm for this work to be done at the Bank’s expense. His tax obligations would be calculated both for the foreign country of residence, and as if he was resident in Canada.

[15] The Bank then paid tax to the country in which Mr. Ivandic, or any expatriate employee, was a tax resident at that time, where his assignment was being carried out, at whatever the prevailing rates of tax would be that would apply to him in that jurisdiction at that time relative to his income from employment. At the same time, the Bank would apply hypo-tax to Mr. Ivandic’s income, based on the advice of the accounting firm, thereby equalizing the treatment of his income for tax purposes and putting him on the same footing as any employee of the Bank who carried out their duties at the Bank’s head office in Toronto and who was a resident of Canada for tax purposes.

[16] Mr. Ivandic’s last assignment before retirement was in Peru. In a letter dated July 13, 2006, Mr. Jim Meek, Senior Vice President and Head of Integration of Scotiabank, Peru, set out the terms of Mr. Ivandic’s appointment as general manager of the Scotiabank Peru Work-Out Unit, at the Senior Vice-President level. Mr. Meek’s letter of appointment shows how the policy was explained to Mr. Ivandic, and how it was emphasized that hypo-taxation was a mandatory term of the employment contract:

Taxation

In line with the balance sheet approach, Scotiabank's tax equalization policy ensures that you won't have to pay more or less income tax on your Bank earnings as an expatriate, than you would as a Canadian resident working in Toronto – thus keeping you “whole” with Toronto. It also ensures equity among expatriates and employees by avoiding windfalls to some and disadvantaging others. Participation in the tax equalization program is mandatory as a condition of your international assignment.

Scotiabank will withhold from your pay a standard Canadian tax, referred to as “hypothetical” tax, which is calculated based on what you would pay in Toronto on your base salary, bonus and including any stock-based compensation you may receive in any form.

The Bank will provide pre-departure tax counseling and annual tax preparation and filing for both home and host locations, through the Banks preferred global tax consultants Ernst & Young (E & Y). Please contact Tina Tam, directly at E & Y at 416–943–2399. [emphasis added].

It is evident that Mr. Ivandic signed that document and thereby accepted the terms set out in that agreement as governing his appointment as a Senior Vice-President for Scotiabank in Peru, on September 1, 2006.

[17] Mr. Ivandic had no objection to the Bank’s tax equalization policy or to the imposition of hypo-tax on him, but he claims to have understood that it related only to employees of the Bank, that is, individuals who were actively working for the Bank. In contrast, Mr. Ivandic is insistent that he never agreed that any payments that would be made to him following his retirement could, or would, be subject to hypo-tax.

[18] It is not surprising the Bank continued to levy hypo-tax on all payments made to him following his retirement on May 1, 2010, other than amounts paid to him in respect of pension. Thus, hypo-tax was applied to the significant payments that were made to him arising from performance and bonus based deferred compensation awards during his employment under the four separate deferred compensation plans maintained by the Bank for its most senior executives: Stock Appreciation Rights (SARs), Restricted Share Units (RSUs), Performance Share Units (PSUs), and Deferred Share Units (DSUs).

[19] Since his retirement, the Bank has withheld a total of $883,506.63 in hypo-tax calculated to July 2011. Mr. Ivandic says that that money has remained in the Bank's general revenues. It is his position that he never agreed to be subject to the “tax equalization” policy on any payments made to him by Scotiabank after retirement.

[20] In the meantime, however, the Bank made a mistake with his return in 2010 since it neither reported nor remitted any local taxes to the Peruvian tax authorities in respect of any of his compensation components on which it imposed hypo-tax. In fairness, as noted, there was an oversight within the Bank, now remedied, that resulted in that omission. The Bank certainly makes no claim that the cost of that mistake ought to be borne by Mr. Ivandic.

[21] When the Bank continued to apply hypo-tax to deferred compensation payments made to him after his retirement, Mr. Ivandic wrote to the Bank to complain. He suggested that his post-retirement non-pension income should not be subjected to hypo-tax.

[22] The Bank’s Vice President of Global Executive Programs & Services, Ms. Michelle Myrah, responded. Her letter confirmed that the hypo-tax policy would continue to apply in retirement respecting “assignment related equity-based compensation.” He was asked to sign an acknowledgement at the bottom of that letter and to return it to the Bank.

[23] Mr. Ivandic did sign, acknowledging what he had been told, that hypo-tax would continue to be applied into retirement. However, in this proceeding he was insistent that his signature at the bottom of that letter was not meant to reflect his agreement with what was said. Rather, it was merely meant to do exactly what the words said – to “acknowledge and indicate that he understood the foregoing information.” He said understanding information and agreeing to be treated in a particular way are two different things.

[24] In a letter of March 4, 2010, to Desiree Fulton of the Bank, Mr. Ivandic proposed that he be exempted from the hypo-tax regime on the basis that that he is being unfairly penalized when the Bank withholds hypo-tax from his post-retirement income. Ms. Fulton's e-mailed response states in part as follows:

As of January 2002, Canadian assignees who have retired outside Canada have continued to be hypo-taxed in retirement, regardless of their country of retirement and it's tax regime, as the income earned is both Bank-source employment AND assignment related, and therefore, under tax equalization provisions, subject to the hypothetical equivalent of the current year Ontario top marginal tax rate. This policy has been applied to all retired assignees, consistently, without exception.

[25] Mr. Ivandic remained dissatisfied. He responded by writing to Mr. Dieter Jentsch, the Bank's Executive Vice President, Latin America, advising that he felt very uncomfortable sharing personal financial information with the Bank or its agents. Again, he asserted that he had not agreed to pay hypo-tax. He asked Mr. Jentsch to provide him with the legal authorization for the Bank to withhold those amounts from payments being made to him, but no satisfactory response was received.

[26] By June of 2010, the dispute had moved further up the Bank’s chain of command. Sylvia Chrominska, Group Head, Global Human Resources and Communications with the Bank, wrote to Mr. Ivandic on June 8, 2010. She confirmed the Bank's intention to withhold hypo-tax on post-retirement amounts. In doing so she noted that Mr. Ivandic had agreed to that in 2006 when he accepted the appointment to the position in Peru. The Bank relied on that authority to hypo-tax payments he received of stock based deferred compensation income, even in retirement.

[27] Mr. Ivandic was not satisfied with that response. He wrote back requesting a legal basis for the application of hypo-tax to post-retirement compensation payments but he received no response, so he commenced this action against the Bank to recover those amounts.

Position of the parties

[28] Mr. Ivandic gives six grounds for his claim that the Bank is not entitled to hypo-tax his receipt of deferred compensation payments following his retirement. First, he says that his contract of employment does not provide that payments made post-retirement would be subject to hypo-tax. Since the employment relationship between himself and the Bank has ended. Mr. Ivandic also says that it is inappropriate for the Bank to be privy to his personal tax circumstances for the purposes of calculating hypo-tax.

[29] Moreover, the objective and premise that hypo-taxation was to make it no more or less advantageous to work for the Bank in any given part of the world cannot apply to retirees, and he says it is impossible to equalize the employment income of retirees, given that none of them continues to be an employee of the Bank. Some retirees will be earning other income than from the Bank, and some are earning no other income, with the result that equalization among these individuals makes no sense. Thus, he says the imposition of hypo-tax on retirees is contrary to the basic premise and stated objective of the Bank’s policy.

[30] In any event, hypo-tax among international retirees of the Bank does not equalize income. Rather it is a withholding of purely notional tax, over and above what is paid by or on behalf of retirees to any government anywhere, with the Bank simply retaining these funds as part of its general revenue.

[31] Based on this line of argument, Mr. Ivandic seeks summary judgment against the Bank with respect to the amounts that he says it improperly withheld from his post-retirement income as hypo-tax. He claims the return of approximately $524,958 from the Bank. Essentially, that amount is the excess of the amount of hypo-tax withheld by the Bank from his deferred compensation income, less amounts of tax paid on his behalf by the Bank to the government of Peru as statutory tax withheld. [2]

[32] The Bank’s position is equally clear, but it says there is only one narrow issue to be determined on this motion. That is whether the deferred compensation payments received by Mr. Ivandic are employment income and thus subject to hypo-tax in accordance with the Bank’s Global Mobility Program and Mr. Ivandic’s contract of employment.

[33] The Bank claims that the record unequivocally establishes:

(i) that stock-based deferred compensation is classified as employment income, regardless of when it is received by an employee or former employee;

(ii) that the parties agree that Mr. Ivandic executed and accepted an employment contract that specifically states that his employment income, including his stock-based deferred compensation payments, would be subject to hypo-tax; and

(iii) that under his employment contract, the Income Tax Act (Canada) and Peruvian tax laws, the stock-based deferred compensation paid to him retains its character as employment income regardless of the time of receipt.

For these reasons, the Bank claims that it properly hypo-taxed Mr. Ivandic’s employment income in accordance with Bank policy and his employment contract, and that his claim ought to be dismissed.

Legal Framework for Summary Judgment

[34] Rule 20(4), as it was amended, requires that summary judgment be granted where there is “no genuine issue that requires a trial.” Controlling appellate guidance to the appropriate interpretation of those amendments has now been provided in Combined Air Mechanical Services v. Flesch [3] and the other group of cases decided at that time. They emphasize that the principal factor in determining whether summary judgment should be granted will be whether a fair and just determination of the claim can be achieved through the summary judgment process, bearing in mind that the purpose of the rule is not to eliminate trials, just trials that are unnecessary. If it cannot, the matter must proceed to trial.

[35] Combined Air recognizes that it is more appropriate to use the summary judgment rule in certain cases. These include cases where the parties agree that it is an appropriate method to determine the outcome of an action, where a plaintiff’s claim is clearly without merit, or where the interests of justice do not require that the matter be adjudicated at trial. In other cases, disposition by way of summary judgment is not suitable.

[36] The first matter to be considered, however, is whether the motions judge can have the “full appreciation” of the evidence and the issues necessary before dispositive findings can be made. Only where that “full appreciation” can be achieved will it be appropriate or possible to determine a matter by summary judgment. Only after this question has been affirmatively answered may a motions judge carry on to consider whether there is a genuine issue that requires a trial, taking account of the case law developed over the past years that remains applicable relative to summary judgment motions, and the evidentiary and persuasive burdens that law imposes on the parties.

[37] In this case, the parties agree that the documentary record is sufficient for me to have a “full appreciation” of the evidence and the issues that are required in order to make dispositive findings based on this record. In particular, I note that the parties agree on the material facts of the case, that there are no credibility issues with respect to the parties, and that there are limited witnesses that could speak to the issues in dispute. Moreover, the findings I am called upon to make are principally document driven based on the record that has been put before the court. Finally, and of equal importance, the key issue to be determined on this motion is a question of law: see Combined Air , [4] above; Moorefield Excavating v. Municipality of Aran-Elderslie . [5]

[38] I also note, as a procedural matter, that the parties accept that the court has jurisdiction to make a determination in this case in favour of either the moving or the responding party on the question of liability. While the power to grant summary judgment would typically go in favour of the party bringing the motion, the court in Combined Air acknowledges, at para. 12 that the Supreme Court has held that rule 20.04 (2) and (4) permit me to grant summary judgment in favor of the responding party, even if it did not bring a cross-motion requesting that relief. [6]

[39] Clearly in this case, it is possible have a “full appreciation” of the evidence and the issues necessary to permit dispositive findings to be made. The parties agree. This is a case where it is both possible and appropriate to determine the matter by summary judgment.

Analysis

[40] The main issue on this motion is whether the post-retirement deferred compensation payments received by Mr. Ivandic are properly characterized as employment income, notwithstanding that he is now retired from employment. This is evident notwithstanding interesting philosophical arguments made by the plaintiff about whether the policy objectives of equalization can ever realistically apply to Scotiabank’s retired expatriate personnel, wherever in the world they may happen to reside.

[41] The determination of that question of characterization has two components. One is the contractual aspect that arises from the fact that Mr. Ivandic only receives amounts from the Bank because he was an employee, who was subject to a contract of employment. The other aspect is statutory, because the characterization of amounts received out of or under statutorily recognized deferred compensation arrangements under Canadian taxation law is governed by the provisions of the Income Tax Act (Canada) and the administrative practice of the Canadian tax authorities.

[42] The question of character of the amounts he receives is dispositive of this motion, and his action against the Bank, because if deferred compensation payments are properly characterized as employment income, then it is his employment contract that stipulates that such payments are to be hypo-taxed. This would continue to be the case regardless of whether or not he is retired. If it is characterized as employment income, then its character and source does not change, and its tax treatment does not change, merely because Mr. Ivandic’s employment status has changed and he is now retired. That follows because of the stipulations in his employment contract.

[43] Looking first at the contractual considerations, Mr. Ivandic agreed in writing that his base salary, and bonus, including any stock-based deferred compensation he might receive in any form , would be subject to hypo-tax. The Bank’s Global Mobility Program and Mr. Ivandic's employment contract clearly state that the Bank will withhold from his pay a "standard home country tax” which is calculated on the basis of what that expatriate employee would pay in Canadian tax in Toronto on his or her salary, bonus and any stock-based compensation. In Mr. Ivandic's case, the “home country” is Canada. Hypo-tax applies to him as if he were a Head Office executive of the Bank in Toronto.

[44] This is beyond doubt based on the related documentation that was filed on the motion. The July 13, 2006 letter sent to Mr. Ivandic confirming his appointment as general manager of the workout unit, at a senior vice president level for Scotiabank Peru, confirms that he would be subject to the International Assignment Program policies of the Bank during that assignment. That letter also notes that the Bank provided him with the “International Assignment Program Toolkit”, which is the compensation and salary arrangements information package given to all international employees. The tax equalization policy is explained in the Toolkit under the heading “Taxation”, and it was specifically noted there that participation in the Bank’s tax equalization program was mandatory and a condition of Mr. Ivandic’s international assignment.

[45] That paragraph specifically advises that a standard Canadian “hypothetical” tax would be calculated based on what he would pay in Toronto on not only his base salary and bonus, but also on any stock-based compensation that he might receive in any form. That would necessarily include any payments received under SARs, RSUs PSUs and DSUs. Mr. Ivandic indicated his acceptance of these terms with his signature and by a specific indication that he accepted them, dated September 1, 2006.

[46] Most of the “International Assignment Programs” document prepared for Scotiabank expatriates was included in the Second Supplemental Motion Record filed by Mr. Ivandic on this motion. It is voluminous, but there are portions that are specifically relevant to this summary judgment motion. It includes an explanation of the tax equalization process and it identifies the three principles that underlie the policy of hypo-taxing international expatriate staff like Mr. Ivandic. They are the principles of flexibility, equity and unity.

[47] Salary differences caused by differences in regions are eliminated by the use of the tax equalization approach because all expatriates are paid using the Toronto compensation, benefits and performance management program. Thus, the effects of variable costs of living, currency values and tax laws are “equalized” so that the expatriate employees are neither disadvantaged nor advantaged compared to their Toronto peers, regardless of where in the world they may be assigned. Moreover, the document emphasizes that policies and procedures are more transparent, and easier to understand since they apply to everyone equally. However, this regime is not applied to all payments. It does not apply, for example, to the Expatriate Assignment Premium and other allowances received by the expatriate relative to the foreign posting. Those allowances are not included as income for the purposes of calculating the employee’s hypothetical Canadian tax, nor should they be conceptually, since they are received only by the expatriate staff.

[48] Finally, the expatriates Toolkit also includes advice relating to the end of an employee’s assignment, under the heading of “Repatriation”. In that section, the Bank advises expatriate employees who have been performing an assignment outside Canada, of all of the steps involved in the repatriation process and explains the services the Bank will provide along the way to the employee. On the subject of income taxes, that document states the following:

While you have been on assignment, the Bank has been paying income tax on your behalf under the Tax Equalization policy. This process will continue until all taxing authorities are satisfied and you exit the tax program in your country of assignment. Please ensure that all tax liabilities have been satisfied prior to your final departure from your country of assignment.

[49] Thus, looking at its contractual aspects, it is plain that Mr. Ivandic was contractually required to agree to the imposition of hypo-tax to his salary, bonus, and stock-based compensation as a condition of his employment by the Bank as a senior expatriate executive. There is no limitation of the application of hypo-tax only to payments made by the bank and received by Mr. Ivandic while he remained an employee prior to his retirement. In any event, as Ms. Lorna Sinclair, a senior partner at Deloitte Touche and the Bank’s expert testified on her cross-examination, it would be unnecessary for the bank to explicitly state as a contractual term that payments made after retirement would continue to be subject to hypo-tax. This result follows since the Bank's policies clearly state that employment income will be subject to hypo-tax. Consequently, if payments to Mr. Ivandic of deferred compensation continue to be properly characterized as employment income even after retirement, then there is no question that such payments would continue to be subject to hypo-tax.

[50] Turning to the tax considerations that apply, it is clear that the deferred compensation paid by the Bank and received by Mr. Ivandic have their source in his former employment with the Bank, regardless of when they are received. Under governing Canadian taxation law that causes them to be characterized for tax purposes as employment income, plain and simple.

[51] Canada taxes income under the Income Tax Act (Canada)(the “ Act ”), not according to the status of the recipient, but having regard to the source of the payment. Section 3 of the Act specifies the manner and sequence in which income from each source flows into the computation of a taxpayer’s net income. Section 3 also identifies sources of income, one of which is income from employment, and it is plain in the introductory sections of the Act , that Canada reserves and asserts the right to tax all Canadian source employment income. Income received in retirement does not generally attract tax consequences based upon the retired status of the recipient. Rather, tax consequences flow from the character of the amounts received, whether as employment income, income from business or property, or as income from the disposition of property. [7]

[52] Section 5 of the Act stipulates that income from employment includes salary, wages and other remuneration received by the taxpayer in the year. “Remuneration” is defined as compensation for services from an employment relationship, whether past, present or future. Section 6 of the Act requires that the value of any benefits that the taxpayer receives that flow from the employment relationship is to be included in employment income under section 5 . Specifically, paragraph 6(1)(a) of the Act states that the value of "benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of employment,” constitutes employment income.

[53] The Supreme Court clarified in The Queen v. Savage , [8] that the words “benefits of any kind whatsoever” in paragraph 6(1) (a) of the Act are quite broad in scope and it is equally well established that the words “in respect of” are intended to convey the widest possible scope of relationship: Nowegijick v. The Queen . [9] Thus, paragraph 6(1)(a) takes into income from employment any material acquisition that conferred an economic benefit so long as the acquisition arose and was received in connection with or in respect of an employment relationship. These very broad words certainly embrace any and all stock-based compensation paid to Mr. Ivandic for the services he provided to Scotiabank.

[54] It is beyond dispute under Canadian law that benefits under classic stock option plans, Stock Appreciation Rights plans, Restricted Stock Unit plans, Performance Share Unit plans and Deferred Stock Unit plans are all treated as income from employment earned in the year of receipt of payments out of or under the plan. The inclusion in income from employment of the value of stock option plans paid to or for the benefit of an employee is clear based on appellate jurisprudence. [10]

[55] Neither is it in doubt whether employment income amounts paid after employment has ended, as in the case of a retiree like Mr. Ivandic, continue to maintain their character. Subsection 6(3) of the Act stipulates that the characterization as employment income subsists even after the employer-employee relationship has been brought to an end. Regardless of whether the employee remains an employee of the organization making payments, the character of such amounts as employment income is maintained. This follows from the fundamental premise that Canada imposes taxation on the basis of source.

[56] Thus, in summary, when sections 5 , 6(1) (a) and 6(3) of the Act are read in conjunction and as a harmonious whole, it is plain that the stock based compensation amount payable to Mr. Ivandic under the Bank’s four stock value based deferred compensation types of plan retains its character as income from employment, and as such, is subject to hypo-tax under Mr. Ivandic’s contract of employment. Moreover, beneficiaries of deferred compensation awards are advised, in the terms of the plans themselves, that payments under the plans are fully taxable as employment income. [11]

[57] Finally, it is directly relevant that the Canada Revenue Agency has issued advance income tax rulings confirming the eligibility of the Bank’s plans, or plans essentially the same as the Bank’s plans, to be treated under the Act and section 6801(d) of the Income Tax Regulations (Canada) as qualifying plans permitting deferral of the timing of recognition as income from the time of award of the benefit to the time of payment under the plan, but also recognizing plainly that the character of such payments as income from employment is maintained and confirmed. [12]

[58] This is sufficient to dispose of the motion, but there are several final points that I wish to note relative to several of the arguments put forward by Mr. Ivandic. He complains that the Bank is trying to equalize the employment income of retirees, but that is clearly not the case. The Bank has no interest or concern with the economic circumstances of retirees or with employment income that may be earned by retirees from other sources, and such amounts are irrelevant. The Bank’s sole interest is to maintain equality of all amounts whenever received by its own expatriate employees and that is sourced in their employment with Scotiabank, regardless of whether they are later employed elsewhere or enjoying the halcyon years of retirement.

[59] It was also clear from Ms. Sinclair's evidence that the preparation by the Bank’s designated accounting firm of tax returns and tax calculations implementing hypo-tax does not result in the bank being privy to personal tax circumstances of the expatriate employee, contrary to Mr. Ivandic’s complaint. The returns are prepared on a confidential basis by Ernst & Young, the Bank’s designated service provider, and one of the top accounting firms in the world. It maintains professional confidence relative to the information provided to it by all of the bank's employees, as is its professional obligation. It only informs the Bank of the amounts that the Bank is required to pay to the country of residence on account of taxation imposed by that country, and the amount of hypo-tax required to be withheld under calculations that assume that the employee was resident in Canada. There was no evidence put before me that raised a privacy concern or suggested on any reasonable basis that the Bank is aware of any particular details of Mr. Ivandic's or any other expatriate employees personal financial circumstances.

[60] The key here is the application of hypo-tax to income received by Mr. Ivandic that has an employment source regardless of whether that income is received during the currency of his employment, or as trailing income paid on or after his retirement. The principle remains the same. The objective of equalization relative to that income source remains the same, regardless of whatever countries any expatriates may reside in at the time of or after their employment with the Bank comes to an end. That objective is achieved regardless of when the amount may be paid by continuing to hypo-tax deferred compensation amounts paid to expatriate employees after their retirement, where the entitlement to receive such amounts was awarded during and as a term or benefit of their employment.

[61] Neither is it relevant to this consideration and the validity of hypo-tax being imposed on employment income of expatriate employees like Mr. Ivandic as a contractual matter that the Bank may realize a cash windfall on a global basis from the application of that policy. Whether it is beneficial to the Bank to maintain and apply the policy, or whether it is an expense that results in additional cost is irrelevant to the validity of the hypo-tax as a matter of contractual interpretation and taxation characterization.

Conclusion

[62] I find that the character of the payments received by Mr. Ivandic after his retirement, out of and under the Bank’s four stock-based deferred compensation plans, is maintained as income from Canadian sourced employment. As such, it is subject to hypo-tax under the terms of Mr. Ivandic’s employment contract, whether he is retired or not. His motion for summary judgment and his action is dismissed.

[63] In light of the result, costs ought to follow and be payable in favour of the respondent, Scotiabank, but I am not aware if there were any offers made between the parties prior to the motion that might affect costs. As such, counsel are respectfully requested to endeavor to resolve the matter and quantum of costs on their own, acting reasonably. If they are unable to reach agreement, they may contact my assistant and further direction on costs will be provided.

Michael G. Quigley J.

Released: September 10, 2012

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

LOUIS IVANDIC Applicant – and – SCOTIABANK Respondent

REASONS FOR JUDGMENT

Michael G. Quigley, J.

Released: September 10, 2012

[1] It is specifically noted that this question has no relevance to the character of pension income Mr. Ivandic receives.

[2] The claimed amount also ignores the $105,446 penalty that the Bank paid to Peru for failing to withhold following Mr. Ivandic’s retirement, a penalty that resulted from the Bank’s own oversight.

[3] 2011 ONCA 764 ; 286 O.A.C. 3.

[4] Combined Air, Supra note 3 at paras. 54 and 219.

[5] 2012 ONSC 1744 , 214 A.C.W.S. (3d) 127 at para. 3 .

[6] See Manulife Bank of Canada v. Conlin , 1996 SCC 182 , [1996] 3 S.C.R. 415 per Iacobucci J. dissenting. The majority agreed with Iacobucci J. on this issue, at p. 421.

[7] For a good general discussion of the Canadian taxation consequences attendant on the receipt of income or benefits from employment, see Vern Krishna, The Fundamentals of Canadian Income Tax , (2 nd ed.)(Irwin Law Inc.:Toronto, 2012), and in particular Chapter 6, “Office and Employment Income” at p. 126.

[8] 1983 SCC 32 , [1983] 2 S.C.R. 428 at p. 440 .

[9] 1983 SCC 18 , [1983] 1 S.C.R. 29 .

[10] Attorney General of Canada v. Christopher M. Henley , 2007 FCA 370 , 63 C.C.P.B. 167 at para. 18 .

[11] By way of example, the Deferred Stock Unit Plan Highlights Sheet for December 2005, sent out just prior to the date on which Mr. Ivandic accepted the terms of his Peruvian assignment, specifically stated in paragraph 12 that “A DSU payment is fully taxable as employment income and taxes will be withheld at source at the highest marginal rate of tax in effect in the province of residence.”

[12] See Canada Revenue Agency Ruling 2006-0201541R3, “Share Appreciation Rights–type plan”; CRA Ruling 2003-0044483, “Salary Deferred Arrangement Deferred Share Units”; and CRA Ruling 2008-0271191R3, “Deferred share unit plan: 6801(d),” amongst others.