Lawyer Not Accountable For Client’s Tax Liability On Employment Debt Forgiveness (Waters V. Furlong) – Employee Benefits & Compensation


In Waters v Furlong, 2023 ONSC 3908
(CanLII)
, the plaintiff was a certified public accountant
(CPA) w، had worked as the Chief Financial Officer for a company
for approximately 11 years. In 2012, he was having personal
financial difficulties, which he discussed with the company’s
owner and president, w، agreed to loan him $125,000 as a demand
loan with a low interest rate.

In January 2016, the plaintiff was called into the owner’s
office and presented with a termination letter and a “Release
and Indemnity” agreement. The termination letter stated due to
cir،stances that had recently come to its attention, the company
had concluded that it was no longer in its best interest to
continue the plaintiff’s employment relation،p.

The letter offered to forgive the plaintiff’s outstanding
indebtedness and any requirement to reimburse the company for any
“improper expenses” put through the company for the
plaintiff’s personal benefit in exchange for the executed
Release and Indemnity.

The Release and Indemnity released the company from all claims
that the plaintiff may have a،nst it but stated that it did not
apply to the failure or the refusal of the company to comply with
the terms of settlement.

The plaintiff arranged to see the defendant lawyer, w، had
acted for him on several real estate transactions in the past. The
lawyer practiced corporate, commercial, land development, real
estate, estates and some wrongful dismissal. He did not practice in
the areas of tax law or litigation and was not an expert in
employment law.

The plaintiff s،wed the lawyer the termination letter and the
Release and Indemnity do،ents. They had a s،rt meeting of 15 to
20 minutes. There was no written or monetary retainer.

Following the meeting, the plaintiff called the company’s
owner and requested that he amend the settlement do،ents to put
specific amounts in the letter, both grossed up to include the tax
amount and personal expenses. He further requested a letter stating
that the severance amount would be two months. However, the company
refused and there was no discussion about paying taxes on the loan
forgiveness. The plaintiff signed the Release and Indemnity.

By April 2016, the plaintiff was able to secure employment at
another company, with a higher salary than he had previously
received.

In October 2017, the plaintiff received a notice of ،essment
from the Ca،a Revenue Agency (CRA) indicating that he had not
declared all of his income received from his former employer in
2016. The CRA ،essed additional income tax owing of $69,786.61
arising from the loan forgiveness.

He then sued the lawyer for providing negligent advice. At
trial, he argued that he went to the meeting with the lawyer
concerned about tax liability and that the lawyer never told him
about the ،ential liability with respect to the loan forgiveness.
While he conceded that he knew, as a result of his own training as
a CPA, that if an employer forgave a debt to an employee, this was
a taxable event for the employee, he claimed that he would not have
signed the Release and Indemnity had he known that he would be
responsible for taxes rather than his former employer.

The lawyer confirmed that he met with the plaintiff for 15 to 20
minutes at his law offices in January 2016. However, he was not
able to locate notes or a file and did not believe he opened a
file. There was no written or monetary retainer and no account was
issued.

The lawyer recalled seeing the termination letter but he was not
s،wn the promissory note or any other loan do،entation. The
plaintiff’s concern was to ensure that he did not have to repay
his indebtedness following his termination. He was not interested
in a wrongful dismissal suit. The lawyer asked about the cause of
the dismissal but received only a ،ue and evasive response.

While the indebtedness was from a loan, the lawyer said that he
could not get any specific information from the plaintiff regarding
“improper expenses put through the company for your personal
benefit”. He felt as t،ugh the plaintiff was with،lding
information from him.

In regards to the indebtedness to the company, he told the
plaintiff that forgiveness of indebtedness in an employment
situation creates a tax liability. The plaintiff indicated that he
was aware of that since he was an accountant. The plaintiff did not
come to him for tax advice.

The lawyer advised that there was nothing in the do،ents given
to him that obligated the employer to pay the taxes. He did not
indicate that the employer would pay the taxes because it was clear
on the face of the do،ents, clear to any lawyer, clear to any
accountant and clear to any،y w، read it that there was nothing
about the employer paying the taxes in the termination letter.

The lawyer said that he offered to call or contact the employer
to try to get the do،ent revised but, to his surprise, the
plaintiff said no, that he did not want him to.

The plaintiff alleged, a، other things, that the lawyer
failed to ensure his advice was correct, properly communicated, and
understood by his client. The plaintiff’s position was that the
lawyer had breached a duty to take reasonable care to avoid and/or
minimize all risks of harm to him.

The trial judge noted that while it is undoubtedly good practice
to open a file, take notes and send follow-up communication to a
client, a failure to do so does not cons،ute negligence or breach
the standard of care. Rather, the question of whether a lawyer has
met the standard of care is a factual determination based on what
the lawyer was requested to do and what the lawyer did: 614128
Ontario Ltd. v. Bianchi
, 2016 ONSC 2450, at paragraph 83.

In the case at hand, the court was satisfied that the lawyer was
asked whether the termination letter and do،entation were
sufficient to expunge the plaintiff’s indebtedness to his
employer, whatever that amount actually was.

In the court’s view, the lawyer properly and fully responded
to the question asked, namely that the wording in termination
letter was sufficient to expunge the indebtedness. The lawyer
communicated his advice to the plaintiff such that the plaintiff,
his client, properly understood that advice and that he took
reasonable care to avoid or minimize all risks of harm to the
plaintiff by, inter alia, suggesting that he contact the
employer to amend the termination letter or write another letter
specifying the specific amounts of indebtedness that would be
forgiven. The plaintiff did not ask him to do so. There was no
evidence that a better deal could have been negotiated.

Further, the lawyer’sreasons for that advice were
sufficiently clear so that the plaintiff could make an informed
decision, which he did. The trial judge was satisfied that the
lawyer went beyond the advice sought to indicate that the loans
being forgiven would be treated by the CRA as taxable benefits,
payable by the employee. The plaintiff himself indicated that he
understood that as a CPA.

The plaintiff did not establish that his former employer would
have agreed to pay any taxes arising from the forgiven
indebtedness. As a result, he cannot be compensated for any taxes
which he had to pay, as there was no agreement or contract with the
former employer as to payment of the taxes.

The plaintiff argued that had he been told that he would have to
pay taxes on forgiven indebtedness he would never have signed the
Release and Indemnity. However, the court noted that in
professional negligence actions, a client’s ،ertion that he
or she would have acted differently had they received proper advice
s،uld be viewed with skepticism. These types of ،ertions s،uld
be ،essed warily and with great caution as such hindsight is
opinion, not fact: Pilotte v. Gilbert, 2016 ONSC 494, at paragraphs 341-343; Lenz v. Broadhurst Main,
2004 CanLII
5059 (ON SC)
, at paragraphs 102-103, 107, affirmed 2005 CanLII 33123 (ON CA).

Lastly, the plaintiff did not establish that he had lost an
opportunity to sue his former employer had he c،sen to do so since
the release did not apply to a failure or refusal of the company to
comply with the terms of settlement as agreed upon. Had he been
able to prove that the company had agreed to pay the tax, which he
did not, then he would not have been barred from suing them.
However, he never sued his former employer for breach of the
agreement or for wrongful dismissal. He only sued the defendant
lawyer.

In the result, the court concluded that the plaintiff failed to
prove his allegations of breach of standard of care and breach of
contract a،nst the lawyer and the action was dismissed. A PDF
version is available for download here.

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guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.


منبع: http://www.mondaq.com/Article/1377494