COURT FILE NO.: CV-14-512488

DATE: 20180307

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Stephen W. Hale and S. W. H. Management Inc.

Plaintiffs

– and –

Innova Medical Ophthalmics Inc.

Defendants

James C. Morton, for the Plaintiffs

Nafisah Chowdhury, for the Defendants

HEARD: June 5-9, 29 and August 1, 2017

REASONS FOR DECISION

CAROLE J. BROWN, J.

Overview

[1] The plaintiffs, Stephen W. Hale and S.W.H. Management Inc., bring this action for:

i. Wrongful dismissal and breach of contract;

ii. Damages for bad faith;

iii. A declaration that the investment benefits which have accrued to the defendant as a result of their wrongful failure to transfer a policy of insurance from London Life, being policy #B669637-6, dated October 5, 2010, to the individual plaintiff, unjustly enriched the defendant;

iv. A declaration that the defendant holds in trust for the individual plaintiff the investment benefits which accrued to the defendant as a result of their failure to transfer the said London Life insurance policy to him;

v. Further, or in the alternative, an accounting of the investment benefits which have accrued to the defendant as a result of the wrongful conduct; disgorgement of the investment benefits which have accrued to the defendant as a result of the wrongful conduct and further, or alternatively, damages in the sum of $250,000.

[2] The defendant, Innova Medical Ophthalmics Inc., counterclaims in the amount of $130,290, which was subsequently amended to $193,778 for overpayment to the plaintiff during the time of his employment, related to the policy of "Key Man" insurance, and punitive damages in the amount of $100,000.

Amendment of Pleadings

[3] At the end of the trial, the plaintiffs sought leave to amend their claim, paragraph 1(a), to increase the amount of damages sought from $525,000 to $900,000, based on the evidence adduced at trial. It was the position of the plaintiffs that the overall amount sought would not increase as a result of this amendment, as the amended claim only seeks damages for bad faith in the amount of $150,000 and not $500,000. Thus, the plaintiff maintains that the overall amount sought for damages would remain the same, such that no prejudice would result. The amendment was opposed by the defendant on the ground that it was brought late in the trial and that, in the defendant's view, the amendment was not supported by the evidence adduced at trial.

[4] Rule 26 of the Rules of Civil Procedure provides that:

26.01 On a motion at any stage of an action, the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[5] Pursuant to the jurisprudence, an amendment should be allowed unless it will cause injustice to the other side which cannot be compensated for by costs or an adjournment. The court will look only at whether there is a prima facie meritorious case. The proposed amendment must meet the rules of pleading.

[6] In this case, the amendment is sought to be consistent with the evidence adduced at trial. At this juncture, the court does not look at whether the pleading has been proven, but whether it is a tenable pleading. While the defendant may take the position that, in its view, the evidence does not support an increase in damages, that position does not address the test for whether an amendment can be made. I find that the pleading is tenable, and that the defendant will not be prejudiced by said amendment. I therefore grant leave to amend paragraph 1(a) of the pleading to seek $900,000 in damages. Pursuant to Rule 26.06, an order need not be taken out and the pleading as amended need not be filed or served.

Positions of the Parties

Position of the Plaintiffs

[7] It is the position of the plaintiffs, Stephen W. Hale and his management company, S.W.H Management Inc. (referred to hereinafter as "the plaintiff"), that he was wrongfully dismissed, without notice and without cause, from his position as President of the defendant company, Innova Medical Ophthalmics Inc., which he had held from December 1, 2007 to July 31, 2014 ( i.e. 6 years and 8 months).

[8] It is the position of the plaintiff that he was initially employed pursuant to a fixed term contract which ended December 10, 2010. After the fixed term contract ended, he sought, in writing, to negotiate a new contract with Innova's principals, Victor Spear and David Spear. However, no new contract was ever concluded. The plaintiff continued his position on an indefinite term contract, terminable on reasonable notice. It is the position of the plaintiffs that, as a result, the plaintiff was entitled to common law reasonable notice upon termination. He relies on Messer v. Barrett Co. Ltd., 1926 CanLII 738 (ON CA), [1927] 1 D.L.R. 284.

[9] It is the position of the plaintiff that on July 30, 2014, Victor Spear entered the plaintiff's office and advised the plaintiff that Victor was unhappy at work, that either the plaintiff or Victor Spear would have to go, and that it was easier to terminate the plaintiff. There was no other explanation for the termination given, nor any allegation of cause made. Victor Spear told the plaintiff to gather his belongings and leave. It was confirmed that he would receive his severance entitlement.

[10] He was subsequently advised, in correspondence of August 14, 2014 that it had been discovered that insurance policy premiums paid by the company on his behalf on a whole life insurance policy (a "Key Man Policy") had not been paid back by him, that he owed $130,290, and that he had written off $6.8 million without disclosing it to the principals of the company. In correspondence, the defendant reserved its rights to take the position that the plaintiff was terminated with just cause. However, they stated that they were prepared to waive the overpayment made to him in the amount of $130,290 in consideration of a full and final release.

[11] It is the position of the plaintiff that:

i. There was no evidence to indicate that the policy premiums were to be paid back;

ii. The premiums were clearly on the corporate books and set forth in the corporate financial documentation and financial statements provided to the owners, Victor and David Spear, on a regular basis and were therefore not concealed, as alleged by the defendant;

iii. The plaintiff's total income had been confirmed in letters signed by the principals to the banks.

iv. The write-off of $6.8 million represented a loss on a business the defendant attempted to establish in Québec, and had to be taken for accounting purposes;

v. The audited financial statements had been discussed with the principals and the write-off was clearly set forth in the financial statements and documentation provided to Victor and David Spear regularly, and was clearly set forth on the books of the company;

vi. The company did not pay taxes in 2013 or 2014, such that no tax consequences to the write-off occurred.

[12] The plaintiff notes that the principals of the defendant, Victor and David Spear, maintained all signing authority as regards the Corporation.

[13] It is the position of the plaintiff that there was no just cause established for his dismissal, and that he is entitled to his pay in lieu of notice as well as the value of the policy at the end of the notice. The plaintiff also claims for enhanced damages for bad faith. The plaintiff maintains that there was no conduct on the part of the plaintiff which would constitute "cause" and no "misconduct that is incompatible with the fundamental terms of the employment relationship" and cites Dowling v. Ontario, (2004) 2004 CanLII 43692 (ON CA), 192 O.A.C. 126; McKinley v BC Tel, 2001 SCC 38, 2001 S.C.C. 38, [2001] 2 S.C.R. 161.

[14] It is the position of the plaintiff that given that the fixed term contract had ended in December of 2010 and he continued without a contract, he was entitled, upon termination, to reasonable notice. On the basis of the Bardal factors, he is entitled to his pay in lieu of notice for 18 to 24 months, including his base salary of $250,000 and benefits in the amount of $54,000, as well as transfer of the "Key Man" insurance policy into his name. It is further the position of the plaintiffs that Mr. Hale mitigated his damages, took extensive measures to find replacement work, without immediate success, due to the nature of the termination, and finally found work after 30 months of sustained searching.

[15] It is the position of the plaintiff that the defendants failed to produce all relevant documentation, that there was an attempt on the part of the principals of the defendant to blame others for everything, including a failure to produce all documentation, and that an adverse inference should be made where appropriate. In the alternative, if the Court does not make an adverse inference, it is the position of the plaintiffs that the defendant has not produced sufficient evidence to support its case.

Position of the Defendant

[16] It is the position of the defendant that the plaintiff was entrusted to run almost every aspect of the defendant business. However, the plaintiff did not act with honesty, integrity or in the defendant's best interests, breached the trust reposed in him, and repudiated the employment contract, providing cause for termination. They also allege dishonesty and fraud.

[17] The defendant maintains that the plaintiff failed to honour an agreement with Victor Spear and David Spear to deduct the annual cost of a whole life policy and a disability policy from his compensation, thereby giving himself an unauthorized $58,000 annual increase in income. As regards the insurance policies, it is the position of the defendant that they were to be "net neutral" to the company and ultimate payment was to come from his compensation (salary and bonus), which did not happen.

[18] They further allege that, without their authority, he wrote off $6.8 million of Oculab losses. The money was ultimately treated as a capital loss rather than a non-capital loss for income tax purposes, and had the potential to create significant tax consequences for the defendant. The defendant alleges that the plaintiff authorized the debt forgiveness or write-off without advising of the tax consequences, and that the unauthorized write-off was grossly negligent and dishonest.

[19] It is the position of the defendant that this conduct breached the trust inherent in the employment relationship and gave rise to its breakdown.

[20] It is further the position of the defendant that the plaintiff violated the essential conditions of his employment contract, breached the trust inherent in the employment relationship, and engaged in conduct fundamentally inconsistent with his obligations. These actions gave rise to just cause to terminate him. While the defendant originally maintained that the plaintiff had received overpayment in the amount of $130,290, at trial they maintained that the overpayment was actually $193,778.

[21] The defendant brings a counterclaim for repayment of the amounts allegedly owing by the plaintiff for the insurance policies in the amount of $193,778, an order that the plaintiff is required to account to the defendant for all benefits received by the plaintiff as a result of his breach of fiduciary duty and breach of trust, and punitive damages in the amount of $100,000.

The Issues

[22] The issues before this Court are as follows:

1. Whether the plaintiff, Stephen W. Hale, was terminated on July 30, 2014 without cause;

2. In the event that the plaintiff was terminated without cause, what damages are owing by the defendant?

3. Whether declarations as regards the whole life insurance policy should be granted; and

4. As regards the defendant's counterclaim, whether any amounts are owing by the plaintiff to the defendant.

The Evidence

The Plaintiffs' Evidence

Stephen Hale

[23] Stephen Hale was born in Strathey, Ontario and is now 62 years old. He graduated from the University of Toronto in 1980 with a B.Com. He joined Peat Marwick and continued night classes to earn his C.A. (Chartered Accountant) designation in 1981. He left Peat Marwick and joined Niakwa Management Systems in sales and marketing.

[24] He testified that to be a C.A., one needs a university degree and must secure employment with a public accounting firm, spend three years in public accounting, take a series of courses, and finally write a national exam. He wrote his national exam in August 1980, earning a grade in the top 20% of the class. He never practiced as a public accountant after his initial apprenticeship with Peat Marwick and, after 15 years, let his membership in the Canadian Institute of Chartered Accountants lapse for non-payment, as he no longer required the membership in CICA, which is required for public accountants.

[25] From Niakwa, he was recruited to CICS Bradshaw, a computer company that dealt with insurance systems. He served as Sales Manager, with approximately 10 to 15 sales representatives reporting to him. He was thereafter promoted to the Pittsburgh headquarters where he headed US sales with several sales managers and a staff of more than 30 people reporting to him.

[26] In 1990, he returned to Toronto and purchased a small insurance company, as he had always wanted to own his own business. It evolved to become IFG Insurance, growing from 4 employees to a staff of 130. He sold the business and retired, but became bored, and returned to active work.

[27] In 2004, he joined Alcohol Countermeasure Systems (ACS) which designed, manufactured and serviced breathalyzers. He was promoted to President and CEO and served with ACS until 2007, when he joined Innova. He was recruited by an employment recruitment consultant as regards a position as President at Innova.

[28] He described Innova as a company which distributed medical equipment for eye care to optometrists and ophthalmologists. Its headquarters were in Toronto with a Québec regional office. It was a midsized business comprised of 100 to 125 employees (30 salespeople on the road; a commercial front office of 40 to 50 people; a warehouse) and a similar, much smaller regional office in Québec.

[29] The two principals of Innova, the owners, were Victor Spear and David Spear. David was responsible for supplier management; large and international supplier relationships and sales, while Victor was responsible for the operation of the business.

[30] In initial discussions, the Spears told him that they had grown considerably, were not well organized and were experiencing stress caused by their success.

[31] The parties signed an Employment Agreement on November 29, 2007 and the plaintiff began work on December 1, 2007. The contract was for a three year fixed term which terminated December 10, 2010.

[32] As President, the plaintiff was responsible for the day-to-day operations regarding sales, accounting, managers, and the service and operating departments (the managers of which reported to him). His primary role was rebuilding the organization, developing systems, processes and infrastructure to facilitate anticipated future growth.

[33] He spoke with Victor and David Spears almost daily. Senior management meetings were held once a week, with monthly and quarterly meetings and an annual budget meeting also held. For the weekly meetings there was an agenda. As regards the weekly, monthly, quarterly and annual meetings, he prepared reports, agendas and minutes for those meetings which were kept in the management drives. He took notes, drafted and circulated minutes and filed them on an internal Senior Management computer drive. He explained that the IT department had set up internal drives for each department where relevant documentation was filed. This included a Senior Management drive, with access by Victor and David Spears and the plaintiff and a financial drive, with access by Victor and David Spears, Karen Matthews and the plaintiff.

[34] He testified that the defendant was a marvelous company with great opportunities and great products, but was a victim of its own success and needed to be reorganized. It needed structure and discipline. He spent the first two months interviewing key employees, analyzing departments, speaking with the owners and preparing summaries regarding where the opportunities lay, what needed work and laying out a plan going forward.

[35] The defendant's performance from 2007 to 2014 included some ups and downs due to foreign currency exchanges. They were able to grow the company by incurring infrastructure costs. The company performed well. By July 2014, the company was making excellent profits and growing with expenses on or under budget.

[36] Oculab, a startup sister company for the manufacture of prescription lenses, to be located in Laval, Québec, began as an idea presented by the Québec general manager, Denis Sarrizin in 2010. The concept was discussed among Denis Sarrizin, Victor and David Spear, and the plaintiff.

[37] They were hesitant, as the undertaking would require heavy bank financing for the purchase of equipment and the setup of a manufacturing facility. It was estimated that it would cost approximately $8 million in equipment and $2 million for the building and working capital, as well as $1-$2 million for inventory purchases.

[38] In order to undertake such a project, they undertook financing models, budgets, pricing lists, analyses, planning activities, equipment contracts with suppliers, identification of customers and bank due diligence. This was all done by March 2011.

[39] Victor Spear was to be responsible for the building acquisition, production plant and equipment build out and readiness. David Spear was to be responsible for supplier management, corporate sales and marketing relationships outside Québec; and Denis Sarrizin was to be the face of Oculab in Québec and the senior local manager. Stephen Hale was responsible for the operational development, systems, hiring and overseeing operations.

[40] They decided to proceed with the project, based on Denis Sarrizin being able to secure 10 to 12 customers who would commit to the purchase of a certain volume of lenses.

[41] In the end, Oculab was a colossal failure. It resulted in the loss of several million dollars and required two years of "digging out" and securing the future of the defendant.

[42] The Spears had bought a shell of a building for the Oculab project. The office had to be completely demolished and redone, a plant had to be built and the equipment installed. It was to take 12 weeks to build, then 30 to 60 days of testing. People were hired, commitments were made. Ultimately, however, the Québec Labour Board shut the facility down because Victor Spear had imported Ontario non-union labour to work on the facility, which is not permitted in Québec and which occasioned delays. The facility was not up and running for lens testing until the fall of 2011. It became operational in January 2012. In March 2012, the lab, which had apparently not been properly designed, had to be closed down and repaired, which resulted in the loss of several months of production time. As a result, customers left due to the delays and new customers had to be attracted. This was difficult, as many had heard of the issues Oculab had encountered.

[43] The National Bank of Canada, which had financed this operation, became concerned. A bank covenant was breached, and the bank moved in and forced a forbearance agreement. Under the agreement, the defendant was required to follow a strict set of rules. The bank regularly supervised the company and its books. A second forbearance agreement was obtained, which was to expire June 30, 2013.

[44] Another US bank, PNC, was secured. National Bank of Canada was paid off and the company survived.

[45] When Oculab ceased operation, it owed the defendant $6.8 million (75% of the project had been funded by the National Bank of Canada and 25% by an inter-company loan). When the assets were sold, the company realized only 35% of the inter-company loan, leaving $6.8 million owing. This was written off internally at year end in the financial statements sent to the auditor. Victor and David Spear knew about the internal write-off, which appeared in the financial statements that they received as an Oculab loan write-off.

[46] The plaintiff testified that he was not aware of how the Oculab write-off was treated in the tax returns, as how it is treated in the tax returns is different from how it is treated in the internal books for accounting purposes. He understands that it was treated for tax purposes as a capital loss.

[47] The principals, Victor and David Spear, retained all signing authority.

[48] Tax and audit documents were prepared outside, first by an accountant named "Doran" and then by Grant Thornton. Karen Matthews prepared the financial records, and the plaintiff had input into the analysis of the financial records.

[49] When his three year fixed term contract expired in December 2010, he sent a letter to Victor and David Spear requesting to discuss a new contract and new provisions to be incorporated in said contract, particularly as regards an increase in compensation which would be used to offset a "Key Man" insurance policy which he had recently set up with his bonus and which would be tax-deductible, such that it would be tax neutral to Innova. At that time, his compensation package was a base salary of $250,000 per year plus an incentive bonus. He did not have a benefits package with Innova, as he was covered by his wife's benefits package.

[50] After discussing the matter with the Spears in 2010, he re-sent the letter of December 2010 upon expiration of his fixed term contract. He received no response but pursued the issue again at a management meeting in January 2011. Victor Spear said that they would discuss it later, but no one pursued the matter further. The request was not declined. The plaintiff continued to receive his salary. The company continued to pay for the insurance policy, but no longer paid any more incentive bonuses. There was no further discussion of a new contract.

[51] The plaintiff suggested the insurance policy because he was contemplating his future and wanted to renegotiate his contract such that he could find a vehicle to supplement his retirement income. He found a value-accruing insurance policy with a death benefit. He intended to initially use the policy as a "Key Man" policy to the benefit of Innova until he left, or until the policy beneficiary was transferred to his estate or his wife. While at Innova, the beneficiary was the defendant, on the plaintiff's life. He testified that the insurance was not transferred, as he was not certain whether he wanted to take the policy into his own management company, was happy with the defendant and, as long as it was being paid for through the company and the accrued value was meeting his requirements, he did not need to own it. He testified that at one point he was not happy and was contemplating leaving and, at that point, emailed London Life to get a change form to change the policy beneficiary, but did not, in the end, file it. The policy remained, and to this day remains, in the hands of the defendant. It is his understanding that as the life insured, he is not able to make the payments to keep the policy current. As at October 2014, two months after his termination from the defendant, the cash surrender value was $210,000. Six months after termination, it was $225,000 on a redemption basis, if cancelled. One year after, the value was $260,000, at two years, $310,000 and at three years, $360,000. On the 11^th^ year, the cash in and cash surrender values would have been equal and thereafter the cash surrender value would increase approximately 5 to 6% per year. While the defendant maintains that the plaintiff refused to have the policy collapsed and put in a trust pending the litigation outcome, the plaintiff testified that he could not approve the collapse of the policy because he was not an owner or beneficiary of the policy.

[52] He intended to direct his bonus and some salary to the policy and to this end, spoke to the Spear brothers in a management meeting in October 2010. Thereafter, he wrote to them in December 2010 when his fixed term contract ended such that his policy premiums could be funded through the company. It was to be tax neutral.

[53] The insurance policy was set up in December 2010. Initial cheques were authorized and signed by Victor Spear in the amount of $4,847 per month and, thereafter, automatic withdrawals were taken to pay for the insurance policy. The total for the policy was $52,974 annually. He advised Karen Matthews to trigger his bonus payment from the previous year, which was approximately $20,000, to pay toward the insurance policy. No bonus payments were paid to him directly thereafter.

[54] He considered his total compensation to be approximately $300,000.

[55] After his termination, the allegations of cause affected his search for employment negatively. Prospective employers of senior-level employees do much background research if an applicant was terminated. No one had provided him a reference letter. He applied for up to 100 positions, limiting his search mainly to southern Ontario. He had about a dozen real interview opportunities and meetings with 15 recruitment people. He had no income for 30 months.

Cross-examination

[56] As regards the use of his CA designation in his curriculum vitae, he stated that he uses it as an indication of his education. He did not check with the CICA to determine whether he was authorized to use it following lapse of his membership.

[57] There were certain changes between his proposed employment agreement and the actual agreement, including an increase of the fixed term from his proposed two years to three years and a decrease in the vacation entitlement from the proposed five weeks to not less than four weeks. The incentive compensation bonus was a formula proposed by Victor Spear, to which he agreed.

[58] There was a level of trust in senior management that he would fulfil his duties honestly and competently and he acted with integrity and honesty throughout. Dishonesty was incompatible with his role. They could also trust him to avoid conflicts of interest.

[59] The Spear brothers were also involved in the day-to-day roles and operations of the company, and were also very involved in the daily interactions with the managers, which is not as depicted in the organizational charts in evidence. The managers of the various departments reported directly to the plaintiff. However, by 2014, Victor Spear was having regular one-on-one meetings with the managers, leaving the plaintiff out of the loop. This resulted in ongoing friction between them.

[60] David Spear was responsible for sales, procurement and line of credit monitoring. He was involved in sales, customers, was responsible for acquisition of inventory, ensured that inventory was ordered, and was responsible for monitoring of bank accounts and lines of credit.

[61] Victor Spear worked with product development, with the operations manager, and the warehouse manager in the last 18 months. He also maintained his clinical practice, which took him away from the office for several days a week.

[62] Initially, the plaintiff found the defendant significantly disorganized from a management structure perspective. There was overlap that made operations inefficient. He addressed the staffing and department issues from a structural point of view and recommended changes and hiring where it was needed to fill gaps. Victor Spear and David Spear had the final say regarding staff and salary increases.

[63] At monthly meetings, he presented spreadsheets, starting at a high level. Victor was not as comfortable following details of spreadsheets, but ultimately was able to grasp them. He also prepared monthly narratives to ensure that the owners understood the spreadsheets. The plaintiff recognized early on that Victor had difficulty understanding the financial data presented. David Spear confirmed this. Thereafter, the plaintiff refined the presentation format to make it better and more easily understood and used narrative as well.

[64] He realized early on in his employment with the defendant that the company was a complicated one, with multiple companies, owners, different year ends, all doing different things. It was important to him to design reporting systems to convey the key operating information clearly.

[65] All documentation, reports, spreadsheets and financial statements were included and filed in the hard drives relevant to each department, and accessible to that department. Sensitive data such as results, financial reports, bank reporting, were posted to the senior management drive by the controller, Karen Matthews. She also posted notes to Victor and David Spear with highlights of report results.

[66] The plaintiff expected the principals of the company to regularly review the documents in the senior management drive relevant to them, including financial presentations, results, analyses and commentary. Having readily available information in an understandable form is a key backbone to any successful company. He had worked over a number of years to create an information set that pointed out weaknesses, strengths and low performance and related them to objectives.

[67] One of the major activities was putting together a budget and business plan, which was a multilevel process. Each manager was responsible for delivering a department plan, using budget numbers accumulated by accounting, which he would then review and approve. The documentation would then be presented to David and Victor Spear for approval.

[68] As regards the insurance policy, the email sent to Victor and David Spear on December 30, 2010 with the memo regarding renegotiation of compensation stated as follows:

"Work out compensation acceptable to all, then direct it into the Key Man insurance policy I recently set up with my bonus. Key Man insurance is tax deductible so this would be tax neutral to Innova".

[69] The two policies that had been set up were the "Key Man" policy and a disability insurance, for which the total monthly premium payment was $4,847. While at Innova, the "Key Man" insurance benefited Innova, as they were the beneficiary in the event that the plaintiff died. The plaintiff intended that when he left, the policy would be transferred to him. The policy itself does not refer to "Key Man insurance", which is not a product type. It is the designation of the beneficiary that makes it a "Key Man" policy. Where the death beneficiary is no longer the defendant, it is no longer a "Key Man" policy. To this day, the policy remains in the name of the defendant, which is also the designated beneficiary. Had the plaintiff been wiser, he would have entered into a legal agreement with the defendant as regards transfer of the policy into his name after termination; however, he placed trust in Victor and David Spear that when he retired, he could take the policy with him. In the interim, they would get the benefit of the policy if he died. That was always the intention and that is the way the policy was set up.

[70] The plaintiff assumed that the policies would be funded from his bonus and salary. The deposit cheques of $4,500 and $347 were signed by Victor Spear, who thereafter emailed Karen Matthews wanting to know "how the difference between the annual cost of the premium less bonus would be reimbursed to the defendant, salary reduction?" When she asked the plaintiff, he told her that she needn't get involved, as he was dealing directly with Victor and David Spear regarding negotiations concerning payment.

[71] In the event that the premium was not paid, the insurers would deduct the premium from the cash value. London Life would keep the contract in force until the indebtedness exceeded the cash value. Unpaid premiums became indebtedness.

[72] As regards the plaintiff's compensation, David Spear knew what the plaintiff made, as David Spear was responsible for the monthly transfers into the plaintiff's account. Further, both David and Victor Spear signed letters to the banks stating that the plaintiff's income was $300,000.

[73] As regards Oculab, the plaintiff was in charge of supervising and overseeing the administrative operations of Oculab from Toronto, but not the manufacturing operations. While Victor and David Spear are not on the organizational chart for Oculab, this was because they were not line operational people. They were, however, responsible for certain aspects of the startup phase of company.

[74] The Oculab laboratory discussion summary of November 7, 2014 indicates that Stephen Hale was in charge of operational development, systems, hiring and overseeing operations; Victor Spear was in charge of building acquisition, production plant and equipment buildout readiness; David Spear was responsible for supplier management, corporate sales and marketing relationships outside Québec; Denis Sarrizin was in charge of senior local management (based at Oculab), business development and sales.

[75] As regards the Oculab losses, treating the losses for tax purposes as capital or non-capital was outside the plaintiff's responsibility. The plaintiff ensured that it was written off on the financial statements which make no distinction as to capital or operating losses. That distinction is a tax distinction. As regards amalgamating Oculab and Innova, the plaintiff's limited understanding of tax law would have told him that the two companies could not be amalgamated for purposes of taking advantage of tax losses, as they were in different businesses. However, he left that to the tax professionals. He did not inquire of them what to do with the $6.8 million write- off. Grant Thornton was aware of the write-off as they did the audit of the financial statements.

[76] As President, he was ultimately responsible for ensuring that the financial statements passed the audit and were done in accordance with GAAP.

[77] At the time of his termination, he testified that Victor Spear entered his office and advised him that they had different outlooks on how to manage the business and that it was time to make a change. When asked by the plaintiff what precipitated this, Victor told him that he was not happy at work and that one of them had to go and stated "It is a lot more difficult if it is me". When asked about severance, Victor said they would honour the agreement and it would be sorted out when Karen Matthews returned from vacation the following week. Victor told him to box up his things and leave. This account of the termination was documented in notes that the plaintiff made on July 30, 2014.

Defendant's Evidence

Victor Spear

[78] Victor Spear has a degree in Science from the University of Waterloo and a Doctorate in Optometry. He is licensed as an optometrist and maintains a part-time practice. He testified that he had no formal training in business or accounting.

[79] Innova was started in 1986, initially by his father and David Spear, with his involvement being peripheral. David was the salesperson and Victor knew about the ophthalmic equipment and how practitioners thought.

[80] Victor was responsible for most of the administration while David was responsible for sales and acquisition of products. They had a number of managers including Karen Matthews, whom he had hired as the accounting manager.

[81] By 2007, the company had experienced organic growth and had 70 employees. He attributed their success to having hired good people and having good products. There were no real procedures or policies and the company needed organization. They needed someone with financial acumen and organizational ability.

[82] Through a patient of his, a business professor at Ryerson, they were referred to the plaintiff, who was the only one they interviewed. He trusted his patient's judgment.

[83] He emphasized the fact that the plaintiff was a CA, as indicated on his CV, which meant to Victor Spear that he had to conduct himself with integrity and undertake continuing education. He stated that the CA designation was important to him and he only learned after the plaintiff's termination that the plaintiff had not maintained the designation. He stated that his trust had been "shattered".

[84] He prepared the Employment Agreement and hired the plaintiff for a three-year term rather than the two-year term the plaintiff wanted. He prepared a compensation package with base salary and bonus that reflected the performance of the company. Notice on termination was to be six months. As regards vacation, the plaintiff wanted five weeks and Victor agreed to four. It was agreed that compensation would be paid through the plaintiff's holding company. Also, afterward, he wanted a part of his compensation to go to an insurance package. Victor agreed as long as it was "net neutral" to the company.

[85] Victor conceded that he, David and the plaintiff met regularly and had weekly and more formal and semi-formal meetings. Victor was responsible for IT, building infrastructure, regulatory affairs and product development, as well as questions as to product, practitioners and marketing. He did not manage accounts, as the department ran on its own. He signed the cheques and was present for the quarterly and annual meetings. Karen Matthews was the bookkeeper, and was later promoted to controller. The plaintiff eventually made her manager of Finance and Customer Service Relations and she reported to him. Victor described her as intelligent, last-minute and slightly disorganized. He spoke to the plaintiff numerous times about her performance. Stephen Hale, in his testimony, had stated that he felt she could be improved, and that given the changes the company was undergoing, it would be difficult to find a replacement who could quickly assume her responsibilities.

[86] All salary increases had to be approved by Victor Spear. Victor took the lead role in HR and HR strategy and reporting was directly to him. The plaintiff and Victor were to co-approve hires, promotions, terminations, severance packages and salary adjustments. The Spears retained signing authority.

[87] After the Oculab meltdown, Victor wanted to become more directly involved. The plaintiff reported to him on a weekly basis, would advise him about the issues of the week, discuss issues, and arrive at conclusions regarding how to proceed. There were also monthly, quarterly and annual meetings to present month-end, quarter and year-end financial information and results.

[88] As regards the weekly meetings, he, David and the plaintiff would meet to discuss issues, plans, and day-to-day activities. They did not really discuss financial performance in the weekly meetings but discussed it at the monthly, quarterly and annual meetings. The monthly and quarterly meetings were often delayed as Karen Matthews was often not ready regarding the monthly and quarterly reports and analyses. Spreadsheets were presented at a fairly high level. He wanted to know how the company was doing, whether it was profitable, whether the sales were growing and the rest was "accounting stuff". He found financial data difficult to grasp. While Victor Spear denied that the plaintiff distributed minutes of meetings, the evidence before the Court includes an email from Warren Tom, who replaced the plaintiff, to Grant Thornton dated October 15, 2014 indicating that "I have scanned all of the management team meeting minutes for 2013 and 2014...", indicating that, indeed, minutes were circulated. This was further confirmed by David Spear.

[89] The plaintiff was allowed to run the company as he was much more sophisticated than Victor, who is not an accountant. He stated that trust was paramount. He wanted someone competent to look after the financial health of the company, and stated that he wanted a CA.

[90] When he looked at financial statements, on a larger level, he looked at the revenue, gross margin, expenses and profits. He further looked at forecast sales, profit and variance due to effects of foreign currency exchange. He often had many questions at meetings.

[91] He knew about the management drives, as IT reported to him and he was quite familiar with computers. He had access to all drives.

[92] He testified that after 2008, the defendant's profitability began to slip dramatically. The plaintiff explained to them that expenses attributable to putting infrastructure in place contributed to that, as well as the fact that North America was in a recession.

[93] In 2010, the plaintiff came to Victor and suggested that he would like to have an insurance policy for his and his estate's benefit as a savings plan. Victor testified that he agreed as long as it was net neutral to the defendant, meaning that it did not impact the defendant's finances or cost anything to the defendant. He had no problem having him direct part of his remuneration to the insurance policy.

[94] He testified that neither he nor his brother had "Key Man insurance". They are not believers in insurance generally, and did not feel it was value for money, nor necessary.

[95] He understood that the plaintiff was using some tax loophole or tax positioning whereby he was able to have a personal whole life policy and not pay tax on the amount of premiums. He understood that this was the plaintiff's personal policy.

[96] He understood that the plaintiff would fund the "Key Man" insurance policy and the disability insurance policy from his remuneration and that Karen Matthews and Heather Maione would do the salary adjustments.

[97] The plaintiff approached them further to discuss increasing his compensation and payment of the insurance policies on January 11. He raised the issue at the end of the meeting, and Victor deferred the discussion. He stated that because he had agreed that the plaintiff would pay the policy from his remuneration, there was not much to discuss. He understood that it would come out of the plaintiff's remuneration and be net neutral to the defendant.

[98] When he signed the two cheques regarding the policy down payment, he wanted to ensure that Karen Matthews understood that this was net neutral to the defendant and any shortfall would come from the plaintiff. He felt there was no need to follow up, as it was a settled agreement.

[99] As regards the email and memorandum of December 30, 2010, in which the plaintiff indicated that he wanted an increase in compensation that would be paid into the cost of the policy, Victor stated that he would not be amenable to that, although he did not follow up. No one advised him that the plaintiff was not adjusting his compensation to deduct the cost of the policies.

[100] The Oculab project was intended to manufacture ophthalmic lenses. It was introduced by Denis Sarrizin, the Québec manager, who believed that the defendant could benefit from lens manufacturing due to technological changes in the lens manufacturing process. It looked like a "slam dunk" and appeared from what Denis Sarrizin advised that they should be able to make good lenses fairly easily with the new technology. As long as they could afford to build the lab, and successfully make the lenses, the project should be a success.

[101] Victor conceded that his task was to build a laboratory. Victor stated that the plaintiff was put in charge, that he actually proposed the project, that he was to acquire the building and prepare it for production of the ophthalmic lenses, that the plaintiff hired a lab manager to assist Victor, and put Denis Sarrizin in place as general manager in charge of sales.

[102] Victor testified that the project failed as it took longer than projected to build a laboratory. This was due to the fact that everyone spoke a different language than he did; the laws regarding labour were different; he was in Toronto and drove weekly to Montréal; and the lab manager had no experience running a lab. He conceded that several missteps occurred and it took two years to build the laboratory. He stated that the lab manager had been put forward by Denis Sarrizin and, he believed, had been hired by the plaintiff. He testified that he did not know that workers could not be hired unless they were part of a union and admitted that he had hired workers from Ontario, rather than Québec. The building inspector came on site, found that the workers were non-union, and shut the site down until he hired a contractor with a fully unionized labour force.

[103] Victor conceded that they had underestimated how long it would take to make the lab successful, that it was no one's fault, and that he took some of the blame for it.

[104] Denis Sarrizin had located a bank to fund Oculab, the National Bank of Canada, and had introduced the Bank to the plaintiff. As regards the bank loan, he understood that as long as they were making payments on time that was all they had to do. He stated that the plaintiff was ultimately responsible for ensuring compliance with the terms of the bank loan.

[105] He first learned that the defendant was offside the bank loan covenants when David told him that he had received a telephone call from the Bank that the company loan had been moved to a "special loans group" somewhere in 2012 or 2013. He ultimately learned that this occurred when the defendant breached its bank covenants and the bank became concerned about repayment of loans. They were in forbearance, which he described as one step from bankruptcy. He testified that this hobbled the business and that the bank required that they cede most of the financial control to the bank. It limited their line of credit and required they sell two warehouses. After this was done, they were able to obtain financing from a US bank, located through the efforts of the plaintiff and Denis Sarrizin, which permitted them to pay the loans owing to the National Bank of Canada.

[106] After what they had gone through, they felt that they no longer wished to do business with the plaintiff and that it was an appropriate time to part. He went into the plaintiff's office on July 31, 2014 and terminated him.

[107] He asked accounting to do a reconciliation regarding the vacation pay, bonus and amounts outstanding regarding a final payout to the plaintiff. Karen Matthews did this and her reconciliation indicated that the plaintiff had not been deducting insurance premiums from his remuneration. He owed the defendant a substantial amount. They knew that they were paying the plaintiff's insurance, but assumed that it was being reconciled.

[108] They ultimately hired Warren Tom to replace the plaintiff. When Mr. Tom came in, he reviewed the company's financial position and alerted them to the $6.8 million write-off regarding Oculab. Victor testified that he had not agreed to the write-off when it was raised by the plaintiff. He testified that Grant Thorton had prepared the defendant's taxes for 2013 and 2014 and that he had no involvement.

[109] A post-termination letter dated August 14, 2014 was sent to the plaintiff indicating that the plaintiff owed $130,290 regarding the insurance payments. The letter also raised the issue of the write-off of the Oculab loan of $6.8 million.

[110] Thereafter, Warren Tom became involved, recalculated the numbers and found the overpayment to the plaintiff regarding the insurance policy to be $193,778.

[111] As regards the amount of compensation earned by the plaintiff and the three letters signed by himself and David to the banks indicating that the plaintiff earned $300,000 annually, he stated that he did not pay attention to the letter, and the amount seemed within the potential range of what the plaintiff could earn.

Cross-examination

[112] In cross-examination, it was determined that the reconciliations made by Karen Matthews had not been produced by the defendant. As regards production, he testified that Warren Tom and his counsel had looked through the documents to locate information to support their case. He conceded that many documents that would be helpful to the defendant and plaintiff were not produced. He was perhaps told about the defendant's obligation to make full production and assumes that Warren Tom and his lawyer collected all the relevant documentation.

[113] Victor conceded that the plaintiff did discuss the write-off of the Oculab loans but that he did not agree and told the plaintiff so. He never told the plaintiff to go ahead or not to go ahead.

[114] He stated that he was familiar with the term "net neutral" and that this indicated that it was neutral as to taxes. He stated that this was a basic concept. However, he was not familiar with the write-off indicated in the financial statement regarding Oculab and testified that most people would think that "W/O" meant "without". He knew that they had lost money on the Oculab loan, that the plaintiff wanted to write it off, but did not know that he had done so.

[115] Attached to the termination letter was the reconciliation prepared by Karen Matthews which indicated a total bonus earned by the plaintiff from 2007 to 2014 of $101,996. He assumed that the reconciliation was prepared by Ms. Matthews with the assistance of Warren Tom.

[116] As regards the weekly and monthly management meetings, Victor Spear testified that he had never seen an agenda until late in 2014. He denied that agendas for the meetings were presented to him.

[117] Victor Spear denied that he knew the plaintiff's salary was $250,000. He further denied knowing that the plaintiff never received any bonus payment, unless the insurance payments were to be considered bonuses. He trusted the accounting department to do their reconciliations. While he would not agree that he was ignorant of the defendant's and related companies' finances, he maintained that he did not know what the President was paid specifically. He knew that the letter written to the banks indicating that the plaintiff's current annual earnings were $300,000 was to support the plaintiff's obtaining a personal mortgage.

[118] He testified that he does not recall ever seeing any weekly reports of the bank consultants who were at the office during the time that the company went off side the bank covenants, and testified that he trusted the plaintiff with the running of the company. He did not read the month-end statements for any of the groups of companies except perhaps to peruse them for the general idea of how the companies were doing. He simply read the "bottom line". If he saw something troubling, he would ask for an explanation. He did not keep track of the dates or times of the tax filings required, which was the responsibility of the accounting department.

[119] However, despite testifying that he did not keep track of the accounting or the financial documentation, he forwarded a memo to the plaintiff on February 26, 2010 stating, inter alia, "I have not yet had the loans straighten [sic] out (going on for months); several small companies have yet to have their year end tax submission; I am not getting month-end statements for small companies". While, in his testimony at trial, he appeared to portray himself as unaware/uninterested in the financial matters of the company, this memo suggests that he kept track of such things.

[120] He was told by his lawyer that the defendant's obligation was to make full disclosure of all documents.

[121] He knew the meaning of orders for financial statements, namely that the auditor had to review the work of the accounting department and that he should sign all financial statement orders.

[122] As regards the reconciliation appended to the termination letter of August 14, 2014, he testified that there were several variations of the reconciliation to ensure that the documents were accurate. He asked Karen Matthews what information she used to ensure that the reconciliation was calculated correctly. He denied asking her to lower the bonus by removing the inter-company sales. Rather he asked her to make accurate calculations. He told her to check her work and to produce a different document because she had a history of making mistakes. Despite the definition of bonus calculation contained in the Employment Agreement of the plaintiff, he maintained that inter-company sales would not be included, although he agreed that inter-company sales were not referenced in the contract. He agreed that the only way to compile the bonus calculation is by looking at the year-end financial statement of the defendant. He subsequently testified that he may have asked her to remove the inter-corporate sales.

[123] As regards his focus on the plaintiff using the designation CA in his resume presented at the time of his hiring, he stated that this was important to him, but admitted that no employment documents or advertisements had required the plaintiff to be a CA and no employment documents referred to a candidate having the designation "CA". He further confirmed that the plaintiff had never done the corporate tax returns. His role was operational and to assure the sound financial health of the company.

[124] He and David Spear retained the cheque signing authority as a control mechanism, ensuring that they knew what was being paid out of the company. During the four years that the "Key Man" insurance payments were made, the initial deposit was paid by cheque, signed by him, and thereafter by pre-authorized debit, authorized by the company. He was aware that they were taking care of the plaintiff's personal whole life policy.

[125] Although he had signing authority, he testified that he was not aware that no bonus had been paid to the plaintiff, unless one considers the insurance payments. Payroll would have been done electronically. The plaintiff would oversee accounting and do everything necessary and honestly. He assumed that the plaintiff was getting what he was entitled to receive regarding his bonus pursuant to the formula in the compensation plan and thought that the plaintiff would have made sure accounting paid him what was due to him according to the formula in his contract. He assumed the reconciliation was being done correctly. He did not get involved.

[126] When asked whether the plaintiff ever had a pay increase during the time he was there, Victor Spear stated that the plaintiff had a consistent contract with a formula for inflation and performance of the company, such that the pay varied depending on the performance of the company.

[127] When asked whether a warning letter was ever sent to the plaintiff regarding the plaintiff's performance, Victor Spear initially would not answer, or attempted to avoid answering, and ultimately, when directed to answer by the Court, stated that no letter was sent, as he felt it would have been redundant. He did not explain this further.

[128] He admitted that from 2007 to 2014, the performance summary for the defendant indicated that sales had grown steadily and that, excluding 2007 and 2009, the profits were consistently higher than 2005-2006. When asked whether 2009 was bad due to the foreign-exchange issues, he stated that he would not know the reason and that Accounting or David Spear could answer the question.

[129] He did agree that in 2014, profits were up and expenses down. He further agreed that Oculab definitely contributed to the financial challenges to the defendant. He admitted that there was a delay in production caused in part by a problem with the labour used, and that there was also a problem with the installation of the lens coating facility. When asked about the investment of $1 million in a venture with a Thailand supplier of the product to be used to manufacture the lenses, he indicated that he did not know the exact amount, but knew that there was an investment. He was not paying attention and was not part of that aspect. He did know that they had agreed to buy a certain amount of product from the Thailand supplier, and knew that they had taken a position in the company, but did not know how much was invested. He appeared not to know about the $1 million investment, but knew there was an investment. Thereafter, he testified that it was actually Denis Sarrizin's responsibility, and then stated that the project was not one person's responsibility.

[130] As regards the Oculab write-off, he testified that he did not inquire as to the entry in the financial statements indicating the Oculab write-off of $6,816,537, or to what "W/O" in the line "Oculab Loan W/O's" would mean. He testified that he thought it meant "without". He testified that he knew the project had lost money but would only look at the bottom line not the line item as regards the $6.8 million write-off. He had no idea whether the defendant's auditors gave an unqualified audit report for 2013 and stated that he had nothing to do with it. He was not aware as to whether the auditors raised any concerns regarding the financial statements of the defendant in 2013. He was not sure whether he signed the financial statements for the defendant. He stated that he really did not know how to go over financial statements. When asked what his role was at the defendant, he stated that it was IT, product development, that he was in charge of building out the Oculab lens manufacturing lab, but then stated that it was the plaintiff's project and responsibility based on the organizational chart.

[131] As regards IT, he was aware of all of the data storage drives and had the right to go into all of them, but testified that he rarely did as it was confusing to him, despite the fact that IT reported to him.

[132] While he is an owner of the business, he would not agree that he and David Spear run the business. He indicated that this was the responsibility of the President and CEO.

[133] His answers were vague when asked about the company. When asked if there were seven managers when the plaintiff was hired, he responded "perhaps" and gave the same answer when asked if the plaintiff reduced the number of managers to five. He stated that when the plaintiff first came, everyone received a raise and that he was surprised that that was the first order of business. I note that David Spear's evidence, as well as that of the plaintiff, differed on this point, and that this was referred to by David Spear in his testimony as an exaggeration. When asked whether everyone actually got a raise he indicated that he would not know how to verify this, and that this was an accounting question.

[134] As regards the meeting at which the plaintiff raised the issue of an increase after the fixed-term contract ended, he testified in cross-examination that it was raised on January 2, 2011. He first stated that there were no minutes of the meeting; then that no one he knew of took minutes; then he said that he was not saying that he was not provided with reports; and finally, he indicated that there was a spreadsheet that was a running commentary of some issues that may have included something about management meetings, but that he hadn't paid much attention to it.

[135] As regards productions for trial, he testified that it was up to the lawyer to find the relevant documents. She would have worked with several of the defendant's departments to do so. He gave her full access to all drives at all levels to ascertain and compile all relevant information for the case.

[136] As regards the insurance policy, he testified that the insurance policy was only for the plaintiff's benefit and the defendant was the beneficiary only for tax reasons, so that the plaintiff did not have to pay taxes on the policy. If the company were the beneficiary, that was the plaintiff's doing.

[137] When asked about the email of December 2010 in which the plaintiff's compensation and the "Key Man" insurance policy was raised and described as tax neutral, he stated that he did not specifically remember getting the email and that it was raised at the January 11 weekly meeting, but that he indicated to the plaintiff that they would discuss it another time.

David Spear

[138] David Spear obtained his BA from the University of Western Ontario, and graduated from the University of Windsor with a B.Com in Sales and Marketing. He is a director at the defendant corporation. He took a couple of first level accounting courses at the University in 1985 and 1986.

[139] When he finished university, his brother Victor Spear, who was an optometrist, suggested that they go into this business. Their father was an optician who had imported instruments for friends within the ophthalmic community. There appeared to be a need for a new entrant into the market to do things differently. They started the company in January 1987, with David working full-time and Victor working part-time. He testified that, at that time, it was like "a cottage industry", and that he did everything, from installations to sales to small businesses. He was the sole employee. Victor was a full-time optometrist and his role at the defendant was part-time. Their revenue in the first year was approximately $160,000.

[140] He stated that he cared deeply about the customers and would move heaven and earth to ensure their happiness with the company. Victor was trained as an optometrist and had knowledge of the instruments used in the business. He was instrumental in the business. The defendant company catered to optometrists, ophthalmologists and hospitals regarding eye care services, supplying and servicing the equipment used in the business.

[141] By 2007, they had 70 employees and their annual revenue was $20-$25 million. The business grew through hard work. He worked approximately 80 to 90 hours per week. It continued to be a family business and developed a strong reputation in the industry as being honourable, honest and hard-working. The business was run on "gut" and intuition. It was not formally organized and there were no formal business plans or financial modelling. He was not good at conducting interviews.

[142] There were two types of employees, line people, such as secretaries, and warehouse workers, people who did not have a direct control over the success of the business and did not have power to affect sales or profitability. These employees would have a salary which was reviewed annually or every other year and had a cost-of-living increase. If money were available, they also may receive a small bonus at year end, although it would not have been described as "generous". The second class of people were senior management and on-the-road sales staff who were compensated based on the success or failure of their work. They received a base salary which was adequate, but not comfortable, and a performance commission which was incentive-based. It was rarely, if ever, that the base salary was increased.

[143] As regards hiring a president, he stated that he differed from his brother as to the reason and that they "live in the world a bit differently". He testified that there was a demand on the company which was becoming exhausting. The number of instances of dropping the ball in the performance of their duties was troubling to both of them. As the numbers became bigger, the financial statement mistakes became more impactful and they felt that professional management would help them on the financial and organizational sides of the business. They were looking for a president who had experience in finance and organization. The plaintiff was introduced to them through a professor of business at Ryerson, who was a patient of Victor's. As regards the plaintiff's qualifications, they knew only what was on the plaintiff's resume. He remembered that the plaintiff was a CA and had a history of organizing, running and growing companies. His credentials seemed impeccable.

[144] He understood the plaintiff's compensation to be composed of a base salary and an incentive structure. He did not know of any change to the compensation structure.

[145] The plaintiff's primary job function was to pick up the slack in their own deficiencies, particularly in finances, financial control, organization, setting policies, organizing departments to accomplish the job they were required to do. Having been referred by the Ryerson professor and coming in with his credentials, there was no reason not to trust the plaintiff. David was accessible on a daily basis to the plaintiff for approvals and otherwise, at the office, by mobile phone, company phone or email. He was in the office daily and interacted with everyone every day. After the plaintiff came, David paid very little attention to the financial side of the business. However, as regards finances, he and Victor had access to the bank accounts and had signing authority. Everything else was the plaintiff's responsibility. He concentrated on his talents, which were client relationship development, building the business, and driving the revenue on the sales side. Customers were a variety of different groups including individual practitioners, ophthalmic industry buying groups and hospital associations.

[146] After the plaintiff came, David was the "front man" and Victor was involved in sales, marketing and the technical and administrative sides of the business.

[147] He described his brother, Victor, as very bright as regards his scientific mind, understanding products, pathology, and the impact of technology on a doctor's practice. As regards his organizational skills, David testified that he was "a brilliant guy", but was an "absent-minded professor". He stated that being street smart and book smart are two different things and that he may not always make sensible decisions in practical matters. He testified that he would put Victor's attention to detail at "barely a passing grade".

[148] As regards the plaintiff's reporting to them, David testified that they got into the habit of weekly meetings, with ad hoc discussions regarding the issues in the company. He testified that these were fairly casual meetings in which they ran through events of the day, talking about potential solutions to issues, discussing top and bottom lines and how things were going generally. He testified that Victor had a short attention span for financial issues and always seemed a bit confused. The meetings would last 30 minutes to an hour and were attended by Victor, David and the plaintiff. He attended most meetings. Monthly meetings were more organized, with Karen Matthews attending, and projections of current financial statements were presented. The quarterly management meetings were a bit longer. The plaintiff sent out an email with discussion bullet points prior to the quarterly meetings and invited them to make additions as they wished. After the weekly and monthly meetings, the plaintiff would send an email/note/report regarding what was discussed and what was to be done, which was kept in the senior management drives, posted by the plaintiff and to which David and Victor had access.

[149] He knew about the management drives and had access to them. He would go back to them when he wanted to look at financial statements, although this was not often.

[150] Prior to 2007, the defendant's business and profitability were growing. Mistakes were impactful. Everything needed to be organized. The plaintiff began adding people and processes. In 2007, they had a high profit margin, as a result of foreign exchange rates and product sales. In 2007, EBITDA went down, the dollar reversed course, there was a financial crisis and their sales went down by $100,000, which was, however, not a significant decrease based on the $25 million revenue. They continued to hold their own fairly well. The plaintiff was brought in to build the organization and process. Investments needed to be made in order to do so and additional people brought in. They were still in a building mode.

[151] As regards the spreadsheet income statement for 2013-2014, there were cost decreases in 2013 and 2014, which was the period of their financial misery due to Oculab. As a result of the bank-imposed conditions, they were forced to operate under a corporate life which was on the line. They did everything possible to cut costs without affecting the personnel or diminishing the operation of the company. They moved to new downsized offices and tried to cut every cost possible. In 2014, the company had arranged new financing with a U.S. Bank, PNC (Pittsburgh National). The lending was "asset-based", meaning that the bank assesses the assets of the Company, its inventory, accounts receivable, takes control of those assets, and lends a certain value based on those assets. Reporting was required weekly. Karen Matthews, the plaintiff and David did a "base borrowing calculation" weekly, looking at the receivables, inventory, and coming up with a number that they believed they could borrow against. They were considered a high-risk enterprise at that time and their interest rates were higher than normal.

[152] As regards the "Key Man" insurance policy, they were not interested in purchasing such insurance themselves, as they "don't do insurance", with the exception of car and home insurance. David testified that he had no life insurance policy.

[153] He believes that he was first aware of the "Key Man" insurance policy when direct deposits were set up. He understood that the plaintiff wanted to divert a portion of his pay into funding a policy as a retirement vehicle. He was indifferent as to whether the money was paid to the plaintiff or to London Life. He understood that it would not affect the company and they were paying for it.

[154] He testified that people do not come to him to talk about compensation because he cannot say no. The person responsible for the reconciliations between the policy cost and the plaintiff's compensation was Karen Matthews.

[155] As regards the memo of December, 2010 from the plaintiff to the defendant owners, Victor and David Spear, David indicated that he did not recall specifically receiving it, but was sure he did. He does not recall the plaintiff asking again regarding a pay increase in 2011.

[156] As regards the difference between net neutral and tax neutral, he testified that "tax neutral" would be reflective of what the defendant would pay regarding any additional tax. "Net neutral" involves the amount of money paid out. If the plaintiff were paid $250,000 plus bonuses on an annual basis and a portion was paid to the policy, as long as the total equaled the amount of compensation paid to the plaintiff, it would be "net neutral" to the company. They would be able to deduct the compensation as payments to the insurance company so that they were not paying more than would have normally been paid in compensation to the plaintiff.

Cross-examination

[157] As regards inter-company sales, David testified that his brother, Victor Spear is "scattered at best" and that he did not think that he had answered or explained inter-corporate sales properly at all. As regards inter-company sales between Innova Medical Ophthalmic in Ontario and Les Instruments Opthalmiques Innova in Québec, Ontario was the sales importer and purchaser of supplies and products. Moving products to Québec would trigger a sale at cost to the Québec company, such that profitability would be captured on the sale to the Québec end-user. From an accounting/legal point of view, to ensure that the end-user in Québec would be billed by the Québec company, the Québec company had to bring the products into their inventory in order to remove the product from the Ontario company inventory. The only real or material sales are those from the company to the end-user.

[158] The original idea of the Oculab project, which was to construct a full-service freeform lab to produce prescription lenses, came from the Québec manager, Denis Sarrizin. Denis Sarrizin initially spoke with the plaintiff; then David spoke with Mr. Sarrizin directly, likely in the presence of the plaintiff. There was trepidation, as they were entering an area of business in which they had no core competency. However, the profit potential was alluring and there was a possibility that profits could be used to leverage the purchase of capital equipment. The plaintiff appeared enthusiastic. Ultimately, the plaintiff was put in charge of running the operation. David's expertise was selling capital equipment, but he understood the potential benefits of merging the two practices.

[159] They were able to afford the project through BNC. Denis Sarrizin had sourced the bank and made the initial contact. The Bank was then brought in through the plaintiff. He met with the President of National Bank of Canada, Louis Vachon, when they were first going to finance Oculab and the Bank was enthusiastic to support the venture. As regards the bank covenants, there were a number of metrics that a bank would look at regarding a balance sheet as a measure of the Corporation's financial health. The Bank would monitor those to ensure that the company and its loan did not go off side. The Bank would set covenants or limits that the company must adhere to. The plaintiff was responsible for ensuring that the company stayed within its limits.

[160] David became involved in Oculab regarding the investment in the Thailand supplier of approximately $1 million. There was some actual cash involved for the equity position in the company and there was also prepayment of orders that would supply the defendant with goods for Oculab. The expense of the $1 million for the Thailand supplier impacted the ability of Oculab and the defendant to continue financing. It utilized cash that they did not have. The opening of Oculab as a production facility was delayed about eight months. The defendant was paying about $200,000 per month for Oculab. The delay in coming online caused some potential customers to leave and to move to other suppliers.

[161] He received a call from the bank in August of 2012 and was advised that the loan had been moved to the "special loans category", which is a category of loan where the bank has lost confidence in the ability of the company to repay the loan. He testified that he was not aware prior to the phone call that they were close to being offside their covenants. The bank required a forbearance agreement which would prevent the bank from calling the loan, provided the company adhered to the bank-imposed conditions. The conditions imposed cost the defendant money (the costs to the bank of putting the controls in place, legal costs, etc.) and included increased interest rates, restricted credit line borrowing capacity, and monitoring of activities. Ultimately, two forbearance agreements were entered into.

[162] He denied that Karen Matthews had told them three months prior to the transfer to special loans that they were going offside. He did not recall Karen Matthews or the plaintiff discussing or warning that they were going off side at the quarterly management meeting. They had many discussions about the fact that they were losing money, but he testified that no one advised that they were headed for destruction.

[163] There was no reasonable view among them, including the plaintiff, that Oculab would generate enough revenue to permit them to pay back the National Bank of Canada. They decided to wind down the lab and dispose of the assets. They brought the warehouse into security. Oculab was a collective failure.

[164] They were able to locate a new bank, PNC, and pay off all amounts owing to the National Bank of Canada.

[165] By 2014, most of their suppliers had remained with them. The suppliers understood that the company had had a misstep, which did not relate to their core business. They did lose one exclusive distributorship. They were forced to buy smaller quantities of product and to incur greater shipping costs as a result.

[166] By that time, they had lost confidence in the plaintiff's ability to manage the company and felt that it was time to part ways and move on. The plaintiff was terminated on July 30, 2014, initially on a without cause basis. After Victor spoke with the plaintiff, David went to the plaintiff's office to check on him and to find out whether he was okay. Before he left, the plaintiff asked him if the plaintiff would have a problem with severance payments owing to him and David confirmed that the agreement would be honoured. Subsequently, they learned about the insurance policy and the $6.8 million write-off. Innova had loaned a substantial amount of money to fund Oculab, which was unlikely to be repaid. Having this on the internal financials is completely different from actually taking a write-off with the CRA. He testified that there had been no discussions with Victor or David regarding taking the loan write off on the books and memorializing it with the CRA. He testified that knowing what he knows now, he would not have approved the write-off.

[167] After 2009, the plaintiff instituted a foreign-exchange hedging program to minimize the impact of the foreign-exchange. Either David or the plaintiff had brought it up, and David had a discussion with him about it. A small change in the Canadian dollar affects the margin. However, they also had revenue in US dollars, so there was a more muted effect on currency changes. They were paid in US dollars, Swiss francs, Japanese yen and other currencies.

[168] David testified that financial statements are different from tax returns, that auditors issue the audited financial statements and opinions regarding correctness of the financial statements annually. As regards the write-off of $6.8 million, David testified that he had no memory of being involved in such a discussion. He agreed that he would have received the statement regarding the Oculab write-off in the weekly and monthly meetings and would have known what "W/O" meant. Contrary to the evidence of Victor, he testified that the write-off's treatment for tax purposes would be completely different from an internal write-off.

[169] He testified that Grant Thornton prepared the income tax returns for the defendant for 2013 and 2014. He was not involved in the discussions with Grant Thornton regarding the treatment of the write-off.

[170] As regards Victor's testimony that the plaintiff had given everyone a raise when he arrived in 2008, David stated that that was "hyperbole". He was not involved in salaries or salary reviews, but did not agree that the plaintiff gave everyone a raise.

[171] He stated that neither he nor Victor signed off on the monthly payroll as it was an automated event set up by Karen Matthews at the direction of the plaintiff with pre-authorized payments initially approved by David and Victor. He stated that he would not even review the authorized payroll withdrawals as he would assume they were correct. The only individuals with authority to approve expenses and authorize the bank to release money by cheque or otherwise were Victor and David, and that is the case to this day. He testified that he may have a pile of cheques to sign at the end of the day and, as long as he knew that the plaintiff or someone else in the company had approved them, he did not look into the amounts or veracity of them. He testified that there were occasions where things were brought to him to sign and he later found out that he should have questioned and should have been more scrutinizing, which was his failure.

[172] He testified that as regards the letter to the banks confirming the plaintiff's compensation, he would have signed the letters without checking the plaintiff's compensation. He did not specifically know the plaintiff's base salary was $250,000. When he signed a letter to the bank, he didn't read it closely. If he had done it correctly, he should have gone to the accounting department to verify the numbers.

Heather Maione

[173] Heather Maione attended college for accounting. She had been employed with Innova for 14 years as accounting supervisor. In 2010, she became the senior accountant, and in 2014, the accounting supervisor. From 2007 to 2014, she reported to Karen Matthews, the controller who reported to the plaintiff.

[174] As accounting supervisor, she was responsible for preparing financial statements, assisting in preparation of the payroll, and supervising a team of four in Accounts Payable and Accounts Receivable.

[175] She was aware of the life insurance and disability policies of the plaintiff, and that they were paid out of the defendant's accounts. She prepared the pre-authorization forms. The payments came from the bank reconciliations monthly and appeared on the reconciled bank statements. The bonus calculations and the insurance payments were included in financial statements. The defendant was paying policy premiums as part of a bonus program. It was to be reconciled and any underage or overage was to be sorted out. She understood the payment structure through Karen Matthews. She never had any conversation with Karen Matthews or the plaintiff regarding whether the overage or underage was being reconciled.

Cross-examination

[176] Ms. Maione is currently the accounting supervisor and reports to the interim controller. She knows that the plaintiff was paid $250,000 base salary. No cheque was ever made payable to the plaintiff for a bonus. She is not aware of any discussions between the plaintiff and Victor Spear in 2010 regarding the insurance policies.

Karen Matthews

[177] Karen Matthews graduated from Seneca College with a three-year accounting degree. She pursued a CGA to the fourth level, and had only a few courses to complete, but had children and decided not to continue with the CGA.

[178] She was employed with the defendant from 2004 to 2015. She started as accounting manager, became manager of administration and accounting in 2008 and controller in 2010. Two teams of approximately 10 people reported to her from customer service and accounting. There were four people in her accounting team: Jackie Vankongent, Heather Maione and two others.

[179] The fiscal year end for the defendant was August 31.

[180] From 2008, she reported to Stephen Hale regarding accounting and customer service. Their relationship was professional and cordial. There were no issues with him. He was a man of integrity. During his time at the defendant, he was fully transparent in reporting to Victor and David Spear. He provided written reports to David and Victor. She sometimes assisted the plaintiff in preparation of the materials. During the Oculab project, the documents included the financial materials on how Oculab was performing.

[181] She ran the day-to-day accounting activities and was responsible for internal and external financial reporting of the company. She was responsible for maintaining documentation containing financial data.

[182] As regards the insurance policy in issue, she received the email of October 31, 2010 from the plaintiff that the company had set up a "Key Man" life insurance policy and disability policy which were to be funded from the plaintiff's bonus. The company was to pay for the policy such that cheques needed to be signed by the signing authorities, namely Victor or David Spear. She prepared the cheques and took the insurance documentation to Victor Spear, which included the Insurance Agreement indicating that the company would pay for the insurance each month. Victor Spear signed the cheques and the Insurance Agreement, which she witnessed. It was her understanding that the company would pay the insurance policy and that two auto-pay payments would come out of the company account each month. In order to stop payment, the company could contact the insurance company or bank.

[183] She did not ask about a reconciliation or salary reduction as she understood that the plaintiff and the Spears had come to an agreement regarding compensation. She emailed Victor Spear asking if the plaintiff was going to reduce his pay, but did not receive a response and no one said anything further.

[184] After the plaintiff's termination, Victor Spear requested that she determine what the plaintiff had been paid for salary, bonus and other payments, to determine amounts owing to the plaintiff. It is a normal practice to calculate how much a person is owed upon termination. She relied on the payroll documentation. As regards vacation, he was entitled to 25 days per year, prorated to the time of his termination.

[185] At the time of his termination, he had been employed six years and eight months and from his HR file, was entitled to six months' severance. His severance for six months based on his fixed 2013 earnings was therefore $145,269.19. His pay benefits comprised the insurance policies that the company paid. Victor reviewed the document she prepared and then instructed accounting to remove the financial information regarding the group of companies and to only use the defendant and the Québec company, and to eliminate inter-company sales.

[186] In August, a letter was sent to the insurance company to immediately stop payment regarding the policies.

[187] The evidence included an email. The email regarding the plaintiff's salary, benefits and vacation pay from the corporate documentation prepared in-house by the defendant indicated benefits from 2011 to 2014 listed as $54,974, $58,168 $58,168 and $53,321. The benefits comprised the life insurance policies paid by the plaintiff. Based on this, the total compensation for 2011-2014 would be approximately $300,000 annually.

[188] Several versions of the reconciliation were prepared by Ms. Matthews at the direction of Victor Spear. She was to prepare a document that lowered the bonus earned by the plaintiff by eliminating inter-company sales and only including the financial documentation of Innova Medical and Innova Québec. Victor Spear told her that he did not want the group company sales included. He was familiar with the documentation such that he could direct her as to what should be taken out.

[189] At one point, the defendant went off side the bank covenants due to Oculab. She recalls a management meeting with Victor and David Spear in January in which she advised them that they were close to going off side the bank covenants. She believes that the plaintiff advised the same thing but cannot recall. She recalls that she was very concerned. She was definite in her recollection that prior to the defendant actually going off side the bank covenants, Victor and David Spear were warned about the danger. One could see from the financial documents at the management meeting that things were going very poorly regarding Oculab.

[190] As regards the three letters to the banks indicating that the plaintiff's annual earnings for 2011 and 2012 were $300,000, she testified that the letters were consistent with the internal records, which indicated the plaintiff's earnings to be $302,974 and $308,169 for those two years. As regards the bank letters indicating that the plaintiff's income was 300,000, she stated that for such a letter, they would never use the exact numbers (e.g. $302,974 or $308,169), but would round the compensation to $300,000.

Judy Lin

[191] Judy Lin received her BA in Engineering in 1992, MA in Economics in 1995 and her CGA in 1998. She is employed with Grant Thornton LLP as a tax partner. She began in February 2008 as a manager and became senior manager in 2013. Today, she has clients, supervises staff regarding professional work in the compliance and advisory areas. In 2008, she supervised staff to do tax compliance appraisals and tax advisory services.

[192] Tax advisory services involve advising the client regarding certain transactions and acting in a planning-type advisory capacity. Compliance involves tax filing, preparation of returns, using historical data to comply with tax laws and file returns.

[193] In 2013, she was the senior manager on the tax side doing compliance work, i.e. filing tax returns. Along with another manager, she was involved with the defendant regarding the preparation and filing of tax returns. She supervised the other manager, whose name she cannot remember. She dealt with the plaintiff and Heather Maione. She was not involved with Victor or David Spear. In preparing tax returns, they would obtain the trial balances, financial statements from the client, collect information from the client and determine how tax positions were to be taken in the returns. Regarding business losses on a client statement, it was the practice of Grant Thornton either to carry forward the losses or to use the losses. Regarding debt forgiveness, Grant Thorton's practice was to get solid facts from the client and to determine the tax treatment in compliance with the law.

Cross-examination

[194] Ms. Lin does not remember the plaintiff and does not remember meeting with him. Debt forgiveness is different from writing off a bad debt. She has no recollection of a write off of an Oculab loan regarding the defendant.

Dennis Tmej

[195] Dennis Tmej received his B.Com from the University of Toronto and his CPA in 1987. He has been practicing in the area of income tax for 22 years. He has been with Grant Thorton for seven years, focusing on income tax aspects of mergers and acquisitions, corporate reorganizations and shareholder matters. At Grant Thorton, he administers client affairs regarding tax matters, deals with prospects, referrals and matters of a tax planning nature. He does not deal with compliance and tax return preparation.

[196] There is a difference between the audit and tax sides of Grant Thorton. The audit practice provides levels of opinion on financial statements for corporations and other entities, from audits, insurance engagements (the highest opinion level) to Notices to Readers (the lowest level). On the tax side, there is the preparation or review of tax returns and tax planning, as needed.

[197] As regards the difference between debt forgiveness and writing off a bad debt, there is no difference from an economic point of view. The only difference is the basis for recognizing it in one form or another, namely accounting versus income tax.

[198] Mr. Tmej first became involved in the defendant corporation in October 2014 regarding the proposal to amend the defendant corporation's tax returns regarding Oculab for 2013.

[199] He became involved in October 2014 in providing tax planning advice for the defendant regarding Oculab, as well as future tax planning, likely asked by Warren Tom. The defendant wanted to know whether an amalgamation of the defendant and Oculab would be effective regarding the ability to claim losses of Oculab. He found a discrepancy between what was reported in 2013 and what they advised the losses were. This was due to a debt forgiveness income inclusion in the 2013 returns. The inclusion of income was for the amount of the commercial obligation. The amounts differed due to the debt forgiveness income inclusion and the deductions taken against the inclusion.

[200] He spoke with Warren Tom about his findings and advised that the only remedy was to try to have the filings amended. He was asked to assist in making submissions to CRA regarding filing an amended return, which he did. The amended filings were accepted by CRA. The benefit to the defendant was to restore the non-capital or operating losses that had been utilized.

Cross-examination

[201] Dennis Tmej was not involved in the 2013 tax filings.

Warren Tom

[202] Warren Tom has a B.Com in accounting and a B.Com in computer sciences. He earned his CPA in 1984 and maintains his designation. He is also a certified insurance professional.

[203] To maintain one's CPA, one must maintain membership in the provincial association, which entails payment of membership fees and maintenance of professional development standards with required hours of professional development. One has to maintain membership in the Institute to use the CPA designation. It also allows access to training courses.

[204] He worked at Arthur Andersen and, thereafter, from 1982 to 1987, worked with Lobe Foods Corporation in its financial area as a taxation specialist. He was promoted to Manager of the Corporation, reporting in the corporate finance area; then became Operations Director of retail sales where he ran 12 to 13 supermarkets. He moved from Ottawa to Toronto, where he worked for Grand and Toy as a controller. Thereafter, he worked for Rogers for one year and went back to Grand and Toy as director of retail operations. He then moved to Thomas Cook as VP of corporate retail and ran the travel agencies across Canada. He joined the CAA in South-Central Ontario for the Toronto market and thereafter joined First On Site, a restoration company, as head of the company in Ontario. Finally, he moved to Innova in 2014 as President.

[205] The defendant was challenged with a number of fundamental business issues. It was not making a large profit, there were cash flow gaps, and sales had stagnated. Mr. Tom wanted a turnaround. He was interested in turning around a business, not just running a stable business.

[206] In 2014, sales were flat, Oculab had collapsed, and business was not going well in terms of overall profitability. Mr. Tom put together a recovery plan that called for a significant restructuring, fundamental changes to peoples' structures and how money was spent. He delayed undertaking a major structural change, but changed the sales approach, put in place performance metrics and focused on day-to-day operations.

[207] Sales increased from $40 million to $46 million from 2014 to 2015.

[208] The defendant had shared computer files. Different people in the organization had different access to the computer drives. He had access to 15 to 20 drives. They were set up by functional areas (HR, accounting, senior management, etc.). He testified that the search ability function was not very easy and one may have to go through three or four subfolders in order to find a document.

[209] Regarding the Oculab losses, he spoke with Grant Thornton's audit partner, Jim Menzies. He suggested they bring in tax manager, Dennis Tmej, which they did. Warren Tom wanted to know how best to utilize the loss carry-forwards. He was told that that would be difficult as they had been treated as capital losses, not non-capital losses in 2013 or 2014 due to the forgiveness of debt. Capital losses could be used against capital gains and non-capital losses could be used on a more general basis against operating income.

[210] He testified that Victor and David Spear had no recollection of forgiving the debt and wanted the tax treatment changed from treating losses as capital losses to non-capital losses. Treating losses as non-capital losses as opposed to capital losses was more favourable. Capital losses would only shelter capital gains which were taxed at 50%. The auditors maintained that they had received approval from the plaintiff.

[211] Mr. Tom testified that he had looked through all meeting minutes, emails, journal entries for references to writing off the debt and authorization. He found nothing. They wanted to reverse the write-off in the accounting records and set up an allowance for doubtful accounts. In order to change the tax treatment, they had to have accounting records match the tax treatment. An amended return would change the capital loss to a non-capital loss.

Cross-examination

[212] As regards the 2013 tax return, Mr. Tom did not know whether David and Victor Spear had signed the returns, but both are directors of the defendant. Grant Thornton gave a favourable opinion regarding the financial statements and not a qualified opinion. Mr. Tom had no knowledge as to whether Oculab could pay the loan to the defendant by 2013.

[213] He looked through all of the management meeting minutes, looking for anything related to the plaintiff's bonus program, compensation, Oculab write-off decision, insurance policies, etc., as well as emails and another communications between the plaintiff and Victor Spear regarding compensation, debt write-off, etc.

[214] He testified that Victor Spear is a careful individual, intelligent in certain areas but not in others, deeply involved in certain aspects of the defendant and not in others. As regards these last statements, he testified that Victor Spear tends to pass over operational areas and is not strong on the financial side. He has little understanding and grasp of financial statements or other financial components that the average person would understand easily. Warren Tom stated that he could not say whether this was because he was not listening or he was not strong on running a business. Sometimes Victor understood financial issues and sometimes not, depending on the issue.

Credibility

[215] I found Stephen Hale's evidence to be credible. He answered the questions posed straightforwardly and candidly. Where he made errors, he readily admitted that. His evidence was consistent in both examination in chief and cross-examination.

[216] I found that the evidence of Victor Spear was not credible. His evidence lacked candor. It was not straightforward or forthright, but often seemed contrived. Often, he attempted to avoid answering difficult questions, did not answer questions straightforwardly or candidly, and appeared to obfuscate and to blame others for everything that occurred. He took responsibility for little or nothing that occurred. His answers were often self-serving. His evidence was often not consistent with the documentation. He further tried to explain away certain documentation.

[217] In cross-examination, he admitted to being precise in his optometry practice, but would not admit to being precise generally in his life or in the business. While he had helped to build the company, he would not take credit or responsibility for building it from a two-person to a 70 person business, indicating that all of the employees contributed to its growth. He would not indicate that he had some business acumen, despite the fact that he had been in the business since 1986 and was also a practicing optometrist with his own private practice. He seemed unwilling to take responsibility for anything related to the business, despite the fact that he was an owner. It often appeared from his answers that he was trying to distance himself from the "business" of his company and would not take responsibility for any of his obligations as an owner.

[218] While he testified that he did not have business or financial acumen, emails such as that dated October 23, 2011 to the plaintiff, in which he discusses expenses regarding Oculab, concerns over their expenditures in general, cost-containment, EBITA targets, their leveraged debt and the financial status in Europe, the US and Canada, would suggest his grasp of business and financial matters was greater than he purported or wished to admit.

[219] I note that he retained authority as regards increases in salary for all staff. Further, it was he who negotiated the employment contract with the plaintiff. His testimony in this regard begs credulity.

[220] He stated that he knew the plaintiff's base salary was $250,000, contradicting his previous denial of knowledge of the plaintiff's salary. Further, in contradiction of previous testimony, he indicated that after the contract expired in December 2010, the plaintiff raised the issue of an increase in salary and Victor told the plaintiff that the defendant had a formula to reward performance and there was no need for change. This, of course, contradicts his previous testimony indicating that he deferred the discussion to another time as they were at the end of the management meeting.

[221] Where his evidence differs from the evidence of other witnesses, I prefer the evidence of the other witnesses, unless otherwise indicated.

[222] I found the evidence of David Spear to be, for the most part, credible, straightforward and candid. His evidence often differed from that of his brother, Victor Spear.

[223] I found the evidence of the other witnesses, including Karen Matthews, Heather Maione, Judy Lin, Dennis Tmej and Warren Tom, to be credible.

The Law

[224] The following issues were raised in this action:

Cause for Dismissal; and Cumulative and After-Acquired Cause

[225] In wrongful dismissal cases, the onus is on the employer to establish, on a balance of probabilities, that the employee was discharged for a good reason, or for "just cause". Misconduct alone is not sufficient – the question is "whether, in the circumstances, the behaviour was such that the employment relationship could no longer viably subsist": McKinley BC Tel, 2001 SCC 38, [2001] 2 S.C.R. 161, at para 29. Just cause need not arise from a single incident; it may be "cumulative" in nature, arising from multiple incidents that may or may not be related: see for example Trotter v Chesley (Town), [1990] O.J. No. 292 (Ont. Dist. Ct.), at para 41.

[226] An employer may also rely on employee misconduct that was discovered after the dismissal as just cause. This is sometimes known as "after-acquired cause". However, that cause must have existed at the time of termination, and be sufficiently serious to warrant dismissal: see Lake Ontario Portland Cement Co. v Groner, 1961 CanLII 1 (SCC), [1961] S.C.R. 553, at para 28.

Entitlement to Reasonable Notice

[227] An employee dismissed without just cause is entitled to reasonable notice of their termination, unless the contract of employment clearly specifies otherwise: Machtinger v HOJ Industries Ltd., 1992 CanLII 102 (SCC), [1992] 1 S.C.R. 986, at para 20.

[228] As regards the law on fixed term versus indefinite term contracts, where an employee continues to work beyond the expiration of the contract without any qualifications being made, the contract becomes an indefinite term contract, terminable only on reasonable notice: Howard A. Levitt, The Law of Dismissal in Canada, (Reuters: Toronto, 2016), at s. 11:20.

Damages for Wrongful Dismissal

[229] Damages for wrongful dismissal are calculated based on the notice period the employee was entitled to before the termination of their employment. Therefore, in the case of an indefinite term contract, the court must first determine the appropriate notice period, applying the Bardal factors, as set forth in Bardal v Globe & Mail Ltd., 1960 CanLII 294 (ON SC), [1960] O.J. No. 149 (Ont. H.C.J.), including the character of the employment, the length of the employee's service, the employee's age, and the availability of similar employment, having regard to the employee's experience, training and qualifications.

[230] Additionally, a terminated employee must take steps to mitigate his or her damages by taking reasonable steps to pursue alternative employment. Michaels v Red Deer College, 1975 CanLII 15 (SCC), [1975] 2 S.C.R. 324; Evans v Teamsters, Local 31, 2008 SCC 20, [2008] 1 S.C.R. 661, at paras. 97-100.

Interpretation of Employment Agreements Generally

[231] Provisions in agreements that are ambiguous are to be construed against the interest of the drafter of the agreement: see Consolidated Bathurst Export Limited v Mutual Boiler & Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888. In the employment context, any ambiguity is to be resolved in favour of the employee: see Amberber v IBM Canada Limited, 2017 ONSC 6470, 280 5 A.C.W.S. (3d) 774, at paras 39-40.

Allegations of Dishonesty

[232] As regards allegations of dishonesty in the context of just cause for dismissal, the Supreme Court, in McKinley v BC Tel, concluded unanimously that a contextual approach was required and that acts of dishonesty must be considered in context to determine if they constituted a just cause. As Iacobucci J. explained at paras. 48-49 and 53:

The test is whether the employee's honesty gave rise to a breakdown in the employment relationship. This test can be expressed in different ways. One could say, for example, that just cause for dismissal exists where the dishonesty violates an essential condition of the employment contract, breach is the faith inherent to the work relationship or is fundamentally or directly inconsistent with the employee's obligations to his or her employer.

In accordance with this test, a trial judge must instruct the jury to determine: (1) whether the evidence established the employee's deceitful conduct on a balance of probabilities; and (2) if so, whether the nature and degree of the dishonesty warranted dismissal. In my view the second branch of this test does not blend questions of fact and law. Rather assessing the seriousness of the misconduct requires the facts established at trial to be carefully considered and balanced. As such it is a factual inquiry for the jury to undertake.

Underlying the contextual approach is the principle of proportionality. An effective balance must be struck between the severity of an employee's misconduct and the sanction imposed.…

Analysis

Was the Plaintiff Terminated Without Cause?

[233] It is the position of the plaintiff that he was terminated without notice and without cause. It is clear that at the time of termination, there was no reason given for cause and the only reason provided was that, from an organizational point of view, Victor felt he could no longer work effectively with the plaintiff, and that it was easier to terminate the plaintiff than to leave the company himself. At that time, Victor and subsequently David confirmed with the plaintiff that he would receive his severance pay and all entitlements.

[234] It is the position of the defendant that cause was discovered after the termination, including payment of the insurance policies by the company without reconciliation of the amounts owing by him for payment of the premiums and reimbursement to the defendant on an annual basis; and an unauthorized write-off by the plaintiff of $6.8 million for the Oculab loan. Further, it is the position of the defendant that there were other things that cumulatively justified termination for cause, including the plaintiff's indication on his CV at the time of his hiring that he was a "CA".

[235] As regards the insurance policies, the evidence indicates that the plaintiff spoke with Victor Spear regarding the purchase of a "Key Man" policy which would be paid for out of his bonus and a disability insurance policy which provided for broader coverage than that offered by the company. The evidence further indicates that Victor Spear gave approval and signed the initial deposit cheques as well as the Insurance Agreement indicating that the company would pay premiums on a monthly basis. It is clear from the insurance documentation that the "Key Man" policy designated the beneficiary as the defendant, such that the defendant benefitted from the policy in the event that the plaintiff died while in the defendant's employ. The evidence further indicates that when the three year fixed term employment contract of the plaintiff expired on December 10, 2010, he wrote an email with appended memorandum requesting an increase in his compensation to pay for the "Key Man" policy that he had just purchased. The evidence indicates further that having had no response from his memorandum, the plaintiff again raised the issue at the first management meeting in January and that Victor Spear said that they would discuss it at a different time.

[236] The evidence indicates that thereafter, the annual financial statements and other documents, provided to the owners of the defendant, David and Victor Spear, set forth the plaintiff's salary and bonuses, as well as the payments made for the insurance premiums. The matter of increasing the compensation was not pursued further. On three occasions, David and Victor Spear signed letters to banks confirming the plaintiff's compensation at $300,000, which represented a rounded off figure regarding his actual compensation with the defendant, which was actually between $302,000 and $308,000. It was the evidence of Karen Matthews that it was normal practice to use rounded off numbers such as that above, rather than the actual figure, when writing a bank letter for purposes of a personal mortgage or loan. Further, the evidence indicates that the plaintiff was never actually paid annual bonuses earned from 2011 to 2014. The defendant maintains that there was never any change in the compensation and that the plaintiff's failure to reconcile the amounts paid by the company for insurance with his bonus was deceitful and fraudulent, such that after-acquired cause is established. The plaintiff maintains that, given that all of the figures were presented on an annual basis to the defendant owners in the financial statements, nothing was hidden and nothing further was raised as regards his compensation, the plaintiff believed and understood that the defendant's principals had accepted the amount paid out for the insurance policies as part of his compensation. Moreover, the defendant's principals, Victor and David Spear, had signed correspondence to three banks regarding the amount of the plaintiff's compensation, namely $300,000, which was apparently used for purposes of securing a personal loan.

[237] I note that there was much evidence in the form of financial documents and records which were not adduced by the defendant company, such that all evidence as regards financial documentation and reporting was not able to be ascertained and was not before this Court.. Further, there were a number of different reconciliations that were prepared by the defendant, at the direction of Victor Spear, following the termination of the plaintiff, none of which can actually be verified based on the incomplete financial documentation produced by the defendant. While Victor Spear denied this, Karen Matthews testified that he had instructed her to lower the amount of bonus owed to the plaintiff by removing the inter-company sales. As I have found above, where the testimony of other witnesses varies from that of Victor Spear, I prefer the testimony of the other witnesses, if I have found them credible, which I did in the case of Karen Matthews. I note that she no longer works for Innova and has no reason to tailor any evidence. I therefore prefer her evidence in this regard.

[238] Based on the evidence that was before me, I do not find that the plaintiff attempted to intentionally hide from the owners, Victor and David Spear, that there was no reconciliation of the payments to the insurance company at the end of the year or at the end of his employment. There was no nefarious, deceitful or fraudulent attempt on the part of the plaintiff to hide the fact that the company was paying his policy premiums, with all of his bonus going toward the payment of the policy premiums. The evidence clearly indicates that the financial information, including the information concerning payment of the policies, payment of the plaintiff's bonuses and compensation, were set forth in the financial documentation provided to the principals of the defendant company, Victor and David Spear, on a regular basis at the management meetings, and were available for them to review in the management drives. I find, based on the evidence and testimony before me that the plaintiff understood and believed that the defendant had accepted his compensation as it existed from 2011 to 2014, and as reported in the regular financial documentation provided to the owners.

[239] I do not find the protestations of the principals of the company, and particularly Victor Spear, that they did not understand the complexities of reading the financial documentation and found the management drives hard to negotiate, to be an answer to not reviewing the financial statements. Indeed, I find these answers to be incredulous, given that they were owners of the company. Good corporate policy would suggest that they should have been regularly reviewing the financial documentation provided to them by the plaintiff and the Accounting Department regarding their own Corporation. Further, they should have been reviewing the cheques and backup documentation to the cheques that they were signing for the Corporation, given that they had maintained signing authority for the Corporation to, as Victor Spear testified, maintain control. Indeed, based on the testimony of David Spear, he did not look at the cheques he was signing to verify the information, sometimes signing cheques that he should not have and admitted that such conduct was a weakness on his part, and led to some mistakes. I note that David had a B.Com. I further note that Victor was in charge of IT, although he testified that he found it difficult to negotiate the computer drives. Again, I do not find this to be a persuasive response. In the event that either of the owners had questions, did not understand some of the financial information in the documentation or could not find a document in the management drives, they were able to seek the assistance of their employees as necessary. It appears, from their testimony, that they did not do this. To not review the documentation and to fail to pay attention to what was happening financially in their Corporation was, in my view, either laziness, negligence or wilful blindness.

[240] As regards the Oculab write-off of $6.8 million, I do not find this to constitute cause for termination of the plaintiff.

[241] Again, it is the position of the plaintiff that the defendant's principals, Victor and David Spear, were aware of the Oculab loan, the fact that it was very unlikely that it could be repaid to the defendant, given the fact that Oculab had no assets left, and that the plaintiff had discussed the write-off of the loan with them. Again, the write-off was clearly indicated in the financial documentation presented at the management meetings attended by the principals, David and Victor Spear. In the event that Victor did not understand the meaning of "W/O", despite the fact that by that time he had been in business for over 20 years, he could and should have asked about its meaning. It is difficult to believe that he and his brother, David, did not discuss this, given that David admitted that he did understand the meaning of "W/O".

[242] I am satisfied, based on the evidence before me, and based on my assessment of credibility, that the plaintiff did discuss the write-off with the principals. While Victor and David deny this, as with many other things, it is likely that they either did not pay attention as they should have, or did not understand and ask further questions, which they were entitled to do and should have done as owners of the defendant. I note that they were not arm's-length owners who were absent from the business, but rather were intimately involved in the business.

[243] I note as well that, according to the evidence, no income taxes were paid in 2013 and 2014. The Company incurred no actual damages as a result of the Oculab write-off. While I do not find this determinative, I do take note of it.

[244] As regards the plaintiff's use of the term "CA" on his resume at the time of his employment in 2007, there is no evidence to indicate that the defendant required a CA for the position, that they advertised for a CA, that they raised the CA designation in the context of the interview had with the plaintiff prior to hiring him, nor that the plaintiff raised it in the interview in order to obtain the position. There is no evidence, other than the evidence of the defendant's principals at trial to indicate any reliance on the "CA". I find that evidence of the owners of the defendant to be self-serving. If, because the plaintiff permitted his membership in the CICA to lapse, he should not be using the designation, that is not an issue between the plaintiff and defendant, particularly in the circumstances, given the evidence and the findings that I have made, but rather is an issue as between the plaintiff and the CICA.

[245] Based on all of the evidence, viewed together, I do not find sufficient evidence to support the defendant's allegations of cause, after-acquired cause or cumulative cause for termination.

Damages

[246] On the basis of my findings, as set forth above, the plaintiff is entitled to reasonable notice, or payment in lieu thereof. Based on the Bardal factors, I am of the view that he is entitled to notice in the amount of 18 months. He was 59 years old when he was terminated from his position as President of the defendant company, with which he had worked for 6 years and 8 months. He made concerted efforts to find a comparable position but remained unemployed for 30 months. It was his position that the task of finding new employment was made much more difficult by the nature of the termination and the fact that no references were provided by the defendant. I am satisfied based on the evidence presented that he made significant and reasonable attempts to mitigate his damages.

[247] As regards the insurance policy, the policy remains to this day in the name of the defendant as owner and beneficiary. I am satisfied that it should have been transferred to the plaintiff at the time of termination. The premiums have, since one month after the plaintiff's termination, i.e. August 31, 2014, been paid out of the policy, reducing its value monthly since that time. I am satisfied that the policy should have been transferred into the name of the plaintiff, as at the date of termination of the payments, August 31, 2014, and that that date should be used to calculate the amount owing to the plaintiff. The defendant is to pay to the plaintiff the difference between the value of the policy as at August 31, 2014 and the value of the policy today.

[248] While, in the normal course of events, the value owing would have been measured from the end of the notice period, in this case, given that the premium payments were stopped one month after the plaintiff's wrongful termination, which eroded the value of the policy from that date, this has to be taken into consideration in the award of damages.

Counterclaim

[249] The defendant brought a counterclaim for overpayment of the plaintiff regarding the insurance policy premium payments. The defendant had, both in the termination letter of August 14, 2014 and in the statement of defence, claimed the amount of $130,290. This was thereafter amended to $193,778. It was the testimony of Victor Spear that he requested that Karen Matthews recalculate the amounts, to ensure that they were accurate. He also told her to eliminate the inter-company sales in calculating the plaintiff's entitlement to annual bonuses. Karen Matthews testified that Victor Spear directed her to lower the bonus amounts payable, which Victor Spear denied in his testimony. As previously indicated, where the evidence of witnesses differed from that of Victor Spear and where I found those witnesses to be credible, I preferred their evidence to his. In this case, I note that Karen Matthews no longer works for the Corporation and has no self interest in the answers she gave. I found her credible and prefer her evidence to that of Victor Spear.

[250] In this case, I found that, at most, the issue of the defendant's payments of the insurance premiums in full was attributable to an assumption made on the part of the plaintiff that the defendant had accepted the increase he sought to pay for the premiums. While the documentation and financial information was presented to the Spear brothers on a regular basis, they did nothing to raise an issue or change the situation. Either the defendant owners were singularly uninterested or uninformed about their own company's financial records and statements as presented in management meetings, or there was, at the least, a misunderstanding. I found that this did not justify cause for termination.

[251] Because of the ongoing neglect of the defendant principals or, at its highest, the misunderstanding between the plaintiff and the principals, as well as the dearth of evidence, there is no basis on which to conclude that the defendant was entitled to a set-off. Even were I to make such a finding, I do not have sufficient evidence to determine the actual amount that could or should be set off, nor do I have sufficient evidence to determine whether the bonus should or should not include inter-company sales.

[252] Pursuant to the original contract of employment which expired December 31, 2010, the incentive compensation or bonus is defined as follows:

The Employee will be paid an annual bonus of 3.5% on the incremental increase of Net Profit over Base Net. Additionally, the Employee will receive further incentive compensation 0.35% on the incremental increase of Gross Sales over the Gross Net. Incentive Compensation of Gross Sales will be adjusted as a percentage of Net Profit over Base Net if the Net Profit for the year is below Base Net. Incentive Compensation relates only to the financial performance of INNOVA.

[253] The relevant terms were defined in the contract as follows:

"Base Net" shall mean net income of INNOVA for the fiscal year ending August 31, 2007, before tax but after extraordinary items, all determined in accordance with GAAP ("EBT").

"Gross Base" shall mean the gross sales of INNOVA from the fiscal year ending August 31, 2007, as declared on the year end financial statements attached to the corporate governmental tax returns.

"Net profit" shall mean net income of INNOVA for the fiscal year before tax but after extraordinary items, all determined in accordance with GAAP ("EBT")

"Gross Sales" shall mean the gross sales of INNOVA for the fiscal year, as declared on the year end financial statements attached to the corporate governmental tax returns.

[254] The financial documentation produced by the defendant does not include sufficient documentation of financial statements and income tax returns which would assist this Court in attempting to calculate the actual bonus to be received by the plaintiff and verify the veracity of amounts. The defendants failed to produce a significant amount of financial documentation which may have been of assistance. In this case, there was no expert opinion as regards calculation of the bonus pursuant to the Employment Agreement and whether the inter-company sales would or would not be included. Nor is there sufficient evidence adduced by the defendant to support its subsequent calculations regarding the reconciliation.

[255] I note that David Spear disagreed with his brother's testimony as regards inter-company sales and testified that they were sales made on the books at cost. There is no documentation for calculating the inter-company sales over the period 2011 to 2014. Accordingly, it is not possible to determine what the bonuses were for that period of time, based on the documents before the Court.

[256] Finally, I do note that in the original termination letter, the defendant, perhaps realizing that there was a misunderstanding, offered to forgo repayment of any amounts that they had calculated owing by the plaintiff to them. While I do not find this determinative one way or the other, I do make note of it.

[257] There is no basis for an award of punitive damages.

[258] Accordingly, for all of the above reasons, I dismiss the defendant's counterclaim in its entirety.

Conclusions

[259] In conclusion, my findings are as follows:

1. The plaintiff was terminated without cause and is entitled to reasonable notice in the amount of 18 months, plus benefits for the period of the termination notice;

2. The plaintiff is entitled to have the insurance policy transferred into his name as at the termination of the premium payments, August 31, 2014 and the defendant is to pay to the plaintiff the difference between the value of the policy as at August 31, 2014 and the value of the policy today;

3. The defendant's counterclaim is dismissed in its entirety.

Costs

[260] I would urge the parties to agree upon costs, failing which, I would invite the parties to provide any costs submissions as regards the trial and the amount previously awarded at the pre-trial motion in writing, to be limited to three pages, including the costs outline. The submissions may be forwarded to my attention, through Judges' Administration at 361 University Avenue, within thirty days of the release of this Endorsement.

Carole J. Brown, J.

Released: March 7, 2018