COURT FILE NO.: CV-16-560988 DATE: 20170717 SUPERIOR COURT OF JUSTICE – ONTARIO
RE: ERIC FEHRMAN Plaintiff
- AND –
GOODLIFE FITNESS CENTRES, INC. Defendant
BEFORE: FAVREAU J.
COUNSEL: Andrew H. Monkhouse, for the Plaintiff Amanda N. Shaw, for the Defendant
HEARD: June 26, 2017
Endorsement
Introduction
[1] The plaintiff, Eric Fehrman, brings a motion under Rule 49.09 of the Rules of Civil Procedure to enforce a settlement. The underlying claim was an action for wrongful dismissal. The action was settled at a mediation, and the settlement included a payment of $25,000 "payable as wages and subject to all necessary statutory deductions". The parties now disagree about the amounts that the defendant, Goodlife Fitness Centres, Inc. ("Goodlife"), deducted from the settlement payment for taxes, and Canada Pension Plan ("CPP") and Employment Insurance ("EI") contributions.
[2] Prior to paying this portion of the settlement to Mr. Fehrman, the defendant made deductions on the same basis as deductions would have been made if the amount had been paid out to the plaintiff as employment income. The plaintiff claims that this portion of the settlement should have been treated as a "retiring allowance" to which no CPP or EI deductions should have been made and to which only a 30% tax deduction rate should have been applied.
[3] For the reasons set out below, I find that the parties have an enforceable settlement and that the defendant has met its obligations under the terms of the settlement. Given the wording of the agreement and given that the parties did not address the specific deductions to be made from the $25,000 payment, it was left up to Goodlife to make the deductions it viewed as "necessary". As conceded by counsel for both parties, it remains open to Mr. Fehrman to seek to recover the amounts deducted when he files his 2017 income tax. Ultimately, it is the Canada Revenue Agency that has the authority to decide whether the deductions applied by the defendant were appropriate.
Background
[4] The plaintiff commenced an action for wrongful dismissal on September 22, 2016. The defendant defended the action on October 17, 2016.
[5] The parties then participated in a mediation and entered into minutes of settlement on November 21, 2016. The minutes of settlement included the following terms:
a. The Defendant will make a payment of $25,000 to the Plaintiff, payable as wages and subject to all necessary statutory deductions, payable during the first week of January 2017. b. The Defendant will make a payment of $15,000 to the Plaintiff payable as general damages, payable within the next 14 days. c. The Defendant will make a payment of $5,000 to the Plaintiff payable as overtime wages and subject to all necessary statutory deductions, payable during the first week of January 2017. (emphasis added)
[6] With respect to the payments of $25,000 and $5,000, on January 6, 2017, the defendant made a direct deposit payment to the plaintiff in the amount of $13,384.88. The defendant treated both amounts as employment income and made the following deductions:
a. $1,478.34 for CPP; b. $489 for EI; and c. $14,647.78 for taxes.
[7] Following receipt of the payments under the settlement, the plaintiff through his counsel raised an issue in relation to the deductions made by the defendant. In particular, the plaintiff took the position that the amount of $25,000 should have been treated differently from the $5,000, and that it should have been treated as a "retiring allowance" from which no CPP or EI deductions should be made and only 30% in taxes should have been deducted.
[8] A retiring allowance is defined in section 248(1) of the Income Tax Act, R.S.C, 1985, c.1 (5th Supp.), as:
"retiring allowance" means an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received
- (a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or
- (b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,
by the taxpayer or, after the taxpayer's death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer.
[9] After the plaintiff raised the issue of the deductions made to the $25,000 payment, the defendant wrote to the Income Tax Rulings Directorate of the Canada Revenue Agency (the "CRA") to seek an opinion as to whether the $25,000 should have been treated as a retiring allowance and what statutory deductions were appropriate on that amount.
[10] The CRA responded to the defendant by phone and in writing. As part of its response, the CRA indicated that it would not make a formal ruling because it only issues advance rulings on applicable deductions in respect of settlements that have not yet been signed. However, the CRA did indicate that if the plaintiff disagreed with his T4, he would have the option of filing a Notice of Objection with his 2017 Notice of Assessment after which the CRA could make a final decision on the proper deductions at that point. The CRA also provided the defendant with a number of prior rulings on similar issues. This information was shared with the plaintiff soon after it was received.
[11] On this motion, the plaintiff asserts that the payment of $25,000 should have been treated as a retiring allowance, and that the plaintiff made improper deductions from that amount. The plaintiff asserts in his affidavit that it was his understanding that because he would be receiving a lump sum payment in lieu of wages, that that amount would be taxed at 30%. One of the plaintiff's lawyers who attended the mediation also swore an affidavit in which he indicated that it was also his understanding that the payment of a lump sum in lieu of wages was to be taxed at a rate of 30% and that this had been discussed with the plaintiff in the presence of the mediator. However, he has not provided any evidence of direct discussions between counsel for the parties confirming that the $25,000 was to be treated as a retiring allowance.
[12] In contrast, the respondent takes the position that the language of the minutes of settlement makes clear that the $25,000 was to be treated as employment income and that deductions were to be made on that basis. In an affidavit filed by counsel for the respondent who attended on the mediation, she indicates that in the normal course, if it was the intention of the parties to treat settlement amounts as a retiring allowance, she would have indicated so in the minutes of settlement. She also states that she did not have any discussions with the plaintiff's counsel or the mediator about treating the $25,000 as a retiring allowance.
[13] The amount at issue as calculated by the plaintiff is $6,345.38, which the plaintiff says should have been paid to him when the settlement was paid out in January 2017 rather than being deducted and remitted to the CRA.
[14] Notably, both parties seem to agree that the issues between them have limited long term financial consequences. From the plaintiff's perspective, he can seek to recover the amounts from the CRA when he files his 2017 taxes. From the defendant's perspective, whether the amount at issue is paid to the CRA or to the plaintiff does not affect the defendant's overall financial obligations under the settlement agreement. Under the circumstances, I encouraged counsel for the parties to find a resolution but unfortunately they were unable to do so.
[15] While the motion was brought by the plaintiff for enforcement of the settlement on the basis of his position that there was an agreement that the $25,000 would be treated as a retiring allowance, at the motion counsel for the parties agreed that it was open to me to make one of three findings, namely that 1) the parties have an enforceable agreement under which the $25,000 is to be treated as a retiring allowance, 2) the parties have an enforceable agreement under which the $25,000 is to be treated as employment income, or 3) the parties do not have an enforceable agreement.
Analysis
[16] Rule 49.09 provides that:
Where a party to an accepted offer to settle fails to comply with the terms of the offer, the other party may,
(a) make a motion to a judge for judgment in the terms of the accepted offer, and the judge may grant judgment accordingly; or (b) continue the proceeding as if there had been accepted offer to settle.
[17] The courts have developed the following test under Rule 49.09:
a. was an agreement to settle reached; and b. if so, should it be enforced based on all of the evidence.
Bank of Montreal v. Ismail, 2012 ONCA 129, at para. 5
[18] I have concluded that my jurisdiction to decide the issue between the parties is limited. At its core, the dispute between the parties is whether the $25,000 payment should be treated as employment income or as a retiring allowance. While parties can agree up front on their intention in this regard, it is ultimately up to the CRA and, if necessary, the Tax Court to make a determination on this issue. Section 12 of the Tax Court of Canada Act, R.S.C. 1985, c. T-2 gives original and exclusive jurisdiction to the Tax Court to determine taxation issues under the Income Tax Act.
[19] Therefore, my limited jurisdiction on this motion is to decide whether the parties reached an agreement on how the $25,000 was to be taxed, and, if not, whether the taxation issue is an essential term of the agreement sufficient to vitiate the agreement.
[20] It is my view that the parties reached agreement on the essential terms of the settlement. They agreed on the amounts to be paid and the timing of payments. They also agreed that Goodlife would make the "necessary deductions" to the payments. While it would have been preferable for them to have a common understanding of what the "necessary deductions" were, on a reading of the words used in the agreement, it was up to the defendant to make the deductions it viewed as necessary. More importantly, it is ultimately up to the CRA to decide whether the payment is in fact a retiring allowance and to determine the deductions to be made from the payment.
[21] As held in Olivieri v. Sherman, 2007 ONCA 491 at para. 44, a "determination as to whether a concluded agreement exists does not depend on an inquiry into the actual state of mind of one of the parties or on the parole evidence of one party's subjective intention". Where an agreement is in writing, it is to be measured by an objective reading of the language chosen by the parties to reflect their agreement. As further held in Olivieri, at para. 50, courts should encourage settlement and not be too quick to find ambiguity or a lack of agreement in the terms of a settlement agreement.
[22] The plaintiff's position is that the defendant should have understood that the $25,000 was meant to be treated as a retiring allowance because this is customarily how lump sum payments are treated when employment is terminated. However, the plaintiff's reliance on what is customary is not supported by the CRA documents put forward by the parties or by the case law relied on by the plaintiff.
[23] For example, the CRA information bulletin dealing with the subject of retiring allowances states that compensation received from an employer can be characterized as "employment income, a retiring allowance, non-taxable damages or a combination of these". It is also apparent that whether a lump sum paid upon termination of employment is to be treated as a retiring allowance depends on the reason for the loss of employment and the purpose of the payment.
[24] With respect to what counts as "loss of employment" for the purpose of a retiring allowance, the information bulletin offers the following description:
A loss of employment usually involves the elimination or expiration of particular employment. For example, a job position might be abolished for economic reasons or as a consequence of the employer exiting a particular business. A loss of employment may also refer to the loss of an income source of an employee who is released from employment whether unilaterally or not. Since early retirement incentive plans are basically designed to eliminate a number of employment positions (even if it is on an elective basis), payments made upon such termination are generally considered as being a loss of employment.
[25] In one of the advance rulings provided in the materials, the CRA goes through the exercise of ascertaining whether a lump sum payment was paid out as employment income or a retiring allowance by distinguishing between whether the money was paid out in lieu of notice or as additional compensation for damages suffered as a result of the loss of employment:
Where an employee's employment is to be terminated, the employment contract (including the applicable statutes and terms implied by the courts under common law) may require that the employee's employment be continued for a certain period known as the "notice period" prior to termination. However, in lieu of continuing the employee's employment for the notice period, the employer may pay the employee's normal wages for the notice period in a lump sum and terminate the employee's employment at that time. With respect to the notice period required for termination of employment under provincial employment or labour standards laws, Canada Customs and Revenue Agency (the "Agency") treats payments in lieu of such notice as employment income… Consequently, a payment in lieu of earnings for the period of reasonable notice which is made by virtue of the terms of an employment contract (whether explicit or implied) will be treated as employment income and not as a retiring allowance; such a payment can be distinguished from a payment in respect of loss of employment by reason of the purpose of the payment. The purpose of a payment in lieu of earnings is to replace earnings which would otherwise have been earned under the contract of employment while a payment in respect of loss of employment is intended to compensate the employee for that loss.
[26] Accordingly, from the materials provided by the CRA, it cannot be said that it is customary for all lump sums following the end of employment to be paid out as a retiring allowance. The treatment of the payment will depend on the reason for the termination and the purpose of the payment.
[27] The plaintiff is also not assisted by the decision in Deiana v. Credit Union Central of Saskatchewan, 2014 SKQB 79, relied on at the motion. In that case, the employer did treat a payment as a retiring allowance, and the dispute was over whether the employer should have made any tax deductions at all on that amount. The Court was not asked to consider whether it was customary for such payments to be treated as retiring allowances; the only issue was whether it was appropriate for the employer to deduct any amount for taxes, which the Court found it was.
[28] It is therefore evident that how a payment is to be characterized depends on the facts of each case, and it is ultimately up to the CRA and the Tax Court to make a final determination on the issue.
[29] This does not preclude the parties to an agreement to agree up front on how they intend to the payment to be characterized, but such an agreement is not determinative as it is ultimately up to the CRA to decide whether the characterization is appropriate in the circumstances. In this case, the parties used the words "payable as wages and subject to all necessary statutory deductions". Based on the objective meaning of those words and in the absence of any evidence that the parties had otherwise explicitly agreed that the amount was to be treated as a retiring allowance, there is no ambiguity in the words used by the parties and it was reasonable for the defendant to treat the $25,000 as employment income and to make the deductions it did. Accordingly, I see no reason to find that the parties did not have a binding agreement or that the defendant did not meet its obligations under the settlement agreement.
[30] Having found that the parties reached an agreement to settle, I also find that this is not a case in which there is any reason to refuse to enforce the agreement. In considering whether a settlement should be enforced, the courts have regard to the equities of the situation based on the evidence put forward on the motion: Draper v. Sisson, [1996] O.J. No. 3654 (Ont. Ct (Gen. Div.)). In this case, refusing to enforce the contract would ultimately be detrimental to both parties. It would unravel an agreement that has already been implemented requiring the plaintiff to reimburse moneys he has already received from the defendant in circumstances in which it is still open for him to seek to recover the amount at issue from the CRA.
Conclusion
[31] I find that the parties have an enforceable settlement and that the defendant has met its obligations under the settlement.
[32] As a follow up to my note above about the limited financial consequences of this issue, I note again that it is unfortunate that this motion ever had to be brought. While the defendant is successful on the motion, given the circumstances I agree with the defendant's suggestion that there be no costs of the motion.