COURT FILE NO.: FC-12-FS047180
DATE: 2021/10/18
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Ferdinand Kronberger
Applicant
– and –
Claudia Kudrocova
Respondent
Mr. M. Ruhl, for the Applicant
Ms. T. Frederick, for the Respondent
HEARD: at Kitchener, Ontario,
on October 14, 2021
THE HONOURABLE JUSTICE j. r. hENDERSON
DECISION ON MOTION
INTRODUCTION
[1] Motions brought by both parties were heard today. Collectively, the motions deal with problems winding up a corporation known as KFCCK Food Services Inc. (“KFC”).
[2] The parties were married in 2007, separated in 2012, and divorced in 2015. They have two children. They have been involved in high conflict litigation since their separation.
[3] The parties are equal shareholders in KFC. The main asset of KFC was an A&W franchise, which the parties operated until all of the assets of KFC were sold in October 2017. The net proceeds of the sale, approximately $123,000, have been held in trust by KFC’s corporate lawyer, David Clement.
[4] KFC has not operated as a business since October 2017. In order to wind up the corporation it is necessary for KFC to file corporate tax returns for 2017, 2018, and 2019. Thereafter, any outstanding taxes and liabilities will be paid out of the money held in trust. The parties agree that any remaining trust money will be distributed equally to the applicant and the respondent.
[5] The parties settled the outstanding issues with respect to KFC by way of minutes of settlement dated April 15, 2019, the terms of which were incorporated into the final order of Broad J. dated May 3, 2019 (“the 2019 order”).
[6] Paragraph 9 of the 2019 order reads as follows:
- The parties shall cooperate and jointly file the 2017 and 2018, and 2019 Corporate T2 Income tax returns for KFCCK Food Services Inc. ("KFCCK") forthwith. The parties shall direct Waterous Holden Amey Hitchon LLP, (David Clement) prior to any disbursal of funds held in their trust account on account of the sale of the assets of KFCCK to the parties or for the parties' benefit, to retain the sum of $123,884.00 (the "corporate tax holdback account") to be utilized in resolving the parties' liability equally for outstanding corporate taxes owed to Canada Revenue Agency ('CRA') as a result of Federal and Provincial income taxes from the operation of KFCCK (including any recapture on the sale of KFCCK assets, which closed on or about October 31, 2017). The parties shall cooperate as may be reasonably possible to minimize any tax liability of each on account of interim payments received by them from the proceeds of the sale of the assets of KFCCK.
[7] The order also states at paragraphs 10, 11, and 12 that once the notices of assessment for the corporation are received, the corporate lawyers will be instructed to use the money held in trust to pay any taxes or other liabilities owed by the corporation and to obtain a tax clearance certificate.
[8] Paragraph 13 of the 2019 order reads as follows:
- Any remaining balance in the corporate tax holdback account not required to be paid pursuant to paragraphs 10, 11, and 12 of this Order above, less any outstanding account of Waterous Holden Amey Hitchon LLP, for operating their trust account for the benefit of the parties, shall be divided equally between the Applicant and the Respondent.
ANALYSIS
[9] It is the applicant’s position that the respondent has failed to comply with paragraph 9 of the 2019 order as she has failed to co-operate in the filing of the 2017, 2018, and 2019 corporate tax returns for KFC.
[10] The applicant deposed that KFC’s long-time corporate accountant, Ajay Kaushik (“Kaushik”), prepared draft tax returns for these three years in February 2019 and provided them to respondent’s counsel for review and approval by the respondent. The respondent did not respond to that request; however, the respondent alleges that she did not personally receive the draft tax returns until March 2020.
[11] I find that applicant’s counsel followed up with respondent’s counsel in April 2020 with a request that the respondent do what was necessary to complete the filing of the tax returns, including consenting to filing the draft tax returns, consenting to and/or signing a form T2054, and executing a form T183Corp.
[12] Shortly thereafter, the respondent retained her own accountant, Vivek Joshi (“Joshi”), to provide her with independent tax and accounting advice.
[13] In December 2020 Breithaupt-Smith J. ordered, among other things, that the two accountants communicate with each other directly about the filings, and that the respondent provide her position with respect to the draft tax returns by January 15, 2021.
[14] On December 28, 2020 Joshi provided a long list of requests and questions to Kaushik with respect to the financial affairs of KFC. Thereafter, Kaushik purported to answer all of Joshi’s questions, and Joshi was given copies of, or access to, the records of KFC that he had requested. However, the respondent still did not provide her position with respect to the draft tax returns.
[15] In the applicant’s motion, he requests an order that the respondent comply with paragraph 9 of the 2019 order by consenting to the filing of the draft tax returns, and by consenting to and/or signing the form T2054 and the form T183Corp within 30 days.
[16] In her two motions, the respondent requests an order that Kaushik answer the questions raised by Joshi, that Kaushik provide Joshi with all of the documentation that he requested, that Joshi be granted access to KFC’s records, and that the court order that $1,000 be released from the money held in trust for payment of Joshi’s account for independent tax and accounting advice.
[17] In my view, the completion and filing of the tax returns has taken far too long. I find that the applicant acted reasonably by arranging for KFC’s accountant to prepare draft tax returns and send them to the respondent’s counsel in 2019. I make no finding as to whether the respondent personally saw the draft tax returns prior to 2020.
[18] I accept that once the draft tax returns were prepared by Kaushik, there were some understandable delays because the respondent needed to retain an independent accountant, and because the respondent changed legal counsel. I also accept that there were some delays attributable to the effect of COVID-19. However, I agree with the applicant’s submission that the respondent has not diligently attended to the filing of the tax returns. Prior to the return of this motion it was difficult to ascertain the respondent’s position.
[19] Moreover, from the nature of Joshi’s inquiries and questions, it appears as if Joshi has undertaken to do much more than provide independent tax and accounting advice. It appears as if Joshi has embarked upon an audit of the financial statements of KFC, including financial statements that go back to the date of the separation. I find this is far beyond the scope that was contemplated by paragraph 9 of the 2019 order.
[20] In oral submissions counsel for the respondent conceded that Joshi had received access to all of the business records that he had requested, and that many of Joshi’s questions have now been answered. Respondent’s counsel stated that only three questions raised by Joshi remain unanswered, namely question numbers 9, 10, and 11 set out in Joshi’s email of December 28, 2020. Those questions all relate to shareholder loans and/or the payment of dividends.
[21] Counsel for the applicant submits that the above-mentioned three questions are not relevant to the issues before the court because the answers could only affect the personal tax liability of the parties, not the corporate tax liability. Counsel points out that the parties have already released all claims with respect to personal tax liability.
[22] I generally accept this statement by the applicant’s counsel, but I cannot conclude that Joshi’s questions in this respect are completely irrelevant. I note that Kaushik did not provide a direct answer to these questions.
[23] Accordingly, I will order that the applicant instruct Kaushik to provide further and better answers to Joshi’s question numbers 9, 10, 11 within 30 days.
[24] Regarding the respondent’s request for payment out of the trust money, I find that the money that is held in trust belongs to the corporation, not to the individuals. Any payment out of trust to the respondent would not be a corporate expense.
[25] Moreover, if money were paid out of trust to the respondent, then because the parties are equal shareholders it is logical that an equal sum would be paid out to the applicant. This would raise issues as to whether the money was being paid out as a dividend or a return of capital. Also, it could create a need for another set of financial statements. Accordingly, the respondent’s request for a payment out of the money held in trust is dismissed.
[26] Further, because Joshi has already had access to all the records that he has requested, the respondent’s request for further production of records and further access to records for Joshi is also dismissed.
[27] Still further, there is no motion for contempt before the court, and therefore the applicant’s request to set a date for a contempt proceeding is dismissed.
CONCLUSION
[28] In summary, it is ordered that the applicant instruct Kaushik to provide further and better answers to Joshi’s question numbers 9, 10, and 11 set out in his email dated December 28, 2020, within 30 days.
[29] It is further ordered that within 30 days after Kaushik provides the further and better answers above-mentioned, the respondent shall comply with paragraph 9 of the 2019 order by signing the draft tax returns, consenting to and/or signing form T2054, and by executing form T183Corp, unless the respondent is specifically instructed not to do so by Joshi, such instructions to be provided in writing with supporting reasons and forthwith produced to the applicant.
[30] All other requests in these motions are dismissed.
[31] If either party wishes to make submissions as to costs, I direct that the party seeking relief shall deliver written submissions, no longer than five pages, to the trial co-ordinator at Kitchener within 20 days of the release of this decision, with responding submissions to be delivered within 10 days thereafter. If no submissions are received within this time frame, the parties will be deemed to have settled all of the costs issues as between themselves.
J.R. Henderson J.
Released: October 18, 2021
COURT FILE NO.: FC-12-FS047180
DATE: 2021/10/18
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Ferdinand Kronberger
Plaintiff
– and –
Claudia Kudrocova
Defendant
DECISION ON MOTION
J. R. Henderson J.
Released: October 18, 2021