Lawyer Not Responsible for Client’s Tax Liability from Employee Debt Forgiveness (Waters V. Furlong) – Employee Benefits and Compensation

in Waters v Furlong, 2023 ONSC 3908 (CanLII), the plaintiff was a certified public accountant (CPA) who had worked as the CFO for the company for approximately 11 years. In 2012, he had personal financial difficulties, which he discussed with the owner and president of the company, who agreed to lend him $125,000 as a low-interest loan application.

In January 2016, the plaintiff was summoned to the owner’s office and presented with a notice and a “Release and Indemnification” agreement. In the termination letter, it stated that, in light of the circumstances it had recently become aware of, the company had concluded that it was no longer in its best interest to continue to employ the plaintiff.

The letter offered to forgive the plaintiff’s outstanding debt and any requirement to reimburse the company for any “unauthorized expenses” made through the company for the plaintiff’s personal benefit in exchange for the release and indemnification made.

The release and indemnification released the company from any claims the plaintiff may have against it, but said it did not cover the company’s failure or refusal to comply with the terms of the settlement.

The plaintiff arranged a meeting with the defendant’s lawyer, who had acted for him in several real estate transactions in the past. Attorney practiced corporate, business, land development, real estate, real estate and some wrongful dismissal. He did not practice tax law or litigation and was not an expert in employment law.

Plaintiff showed the attorney the termination letter and release and indemnification documents. They had a short meeting of 15 to 20 minutes. There was no written or monetary deposit.

After the meeting, plaintiff called the owner of the company and asked him to amend the settlement documents to include specific amounts in the letter, both increased by the amount of tax and personal expenses. He further requested a letter stating that the strict amount would be two months. However, the company refused and the payment of taxes from the loan waiver was not discussed. The claimant signed the declaration and indemnification.

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

In October 2017, the claimant received a bill from the Canada Revenue Agency (CRA) stating that he had failed to report all of his income received from his former employer in 2016. The CRA assessed an additional income tax of $69,786.61 resulting from the Sorry Loan .

He then sued the attorney for negligent giving of advice. He claimed in court that he had gone to an appointment with a tax liability lawyer and that the lawyer had never told him about the potential liability associated with the loan forgiveness. Although he admitted that he knew, based on his own CPA training, that if an employer forgives an employee’s debt, it is a taxable transaction for the employee, he argued that he would not have signed the release and indemnification statement. if he knew that he would be liable for taxes rather than his former employer.

The lawyer confirmed that in January 2016 he met with the plaintiff for 15 to 20 minutes at his law offices. However, he was unable to find the notes or file and did not believe he had opened the file. There was no written or monetary deposit and no bill was issued.

The lawyer recalled seeing the statement, but she did not show him the promissory note or other loan documentation. The plaintiff’s interest was to ensure that he did not have to pay his debt after the termination. He was not interested in unfair dismissal. The lawyer asked about the reason for the dismissal, but received only a vague and evasive answer.

While the indebtedness was from a loan, the attorney said he could not get any specific information from the plaintiff regarding “unauthorized expenditures made by the company for your personal benefit.” He felt as if the prosecutor was withholding information from him.

Regarding the company’s indebtedness, he informed the plaintiff that a tax liability arises by forgiving the debt in the employment relationship. The plaintiff stated that he knew about this because he is an accountant. The plaintiff did not come to him for tax advice.

The lawyer pointed out that there is nothing in the documents presented to him that obligates the employer to pay taxes. He did not suggest that the employer would pay taxes because the documents made it clear, clear to every lawyer, accountant and anyone who read it, that there was nothing in the law about the employer paying taxes. termination letter.

The lawyer said he offered to call or contact the employer and try to review the document, but to his surprise the plaintiff said no, that he didn’t want to.

The plaintiff claimed, among other things, that the lawyer did not ensure that his advice was correct, properly communicated and understood by the client. The plaintiff’s position was that the lawyer had breached the duty to exercise reasonable care to avoid and/or minimize any risk of harm to him.

The judge noted that while it is undoubtedly good practice to open a file, make notes and send follow-up communications to the client, failure to do so does not amount to negligence or a breach of the standard of care. Rather, the question of whether the attorney met the standard of care is a factual determination based on what the attorney was asked and what the attorney did: 614128 Ontario Ltd. against. Bianchi, 2016 ONSC 2450in the paragraph 83.

In that case the court was satisfied that the solicitor was asked whether the notice of termination and the documentation were sufficient to wipe out the claimant’s debt to his employer, whatever that amount might be.

In the opinion of the court, the lawyer answered the question properly and fully, in such a way that the wording in the letter of termination was sufficient to erase the debt. The lawyer communicated his advice to the plaintiff in such a way that the plaintiff, his client, properly understood the advice and took reasonable care to prevent or minimize all risks of harm to the plaintiff by Besidessuggesting that he contact the employer to modify the notice or write another letter stating the specific amounts of debt that will be forgiven. The plaintiff did not ask him to do so. There was no indication that a better deal could be negotiated.

Further, the solicitor’s reasons for this advice were sufficiently clear for the claimant to make an informed decision, which he did. The trial judge was satisfied that the solicitor went beyond the advice he sought to suggest that the loans that were forgiven would be treated by the CRA as taxable benefits paid by the employee. The plaintiff himself stated that he understood this as a CPA.

Plaintiff has not shown that his former employer agreed to pay any taxes resulting from the forgiven debt. As a result, he cannot be compensated for any taxes he had to pay because there was no tax payment agreement or contract with the former employer.

Plaintiff claimed that if he had been told that he would have to pay taxes on the forgiven debts, he would never have signed the Release and Indemnification. However, the court noted that in cases of professional negligence, the client’s claim that he would have acted differently if he had received proper advice should be viewed with scepticism. These types of claims should be viewed cautiously and with great caution, as such hindsight is opinion, not fact: Pilotte v. Gilbert, 2016 ONSC 494in paragraphs 341-343; Lenz v. Broadhurst Main,
2004 CanLII 5059 (ON SC)in paragraphs 102-103, 107confirmed 2005 CanLII 33123 (ON CA).

Finally, Plaintiff has not shown that he lost the opportunity to sue his former employer if he chose to do so because the dismissal did not relate to the company’s failure or refusal to comply with the agreed terms of the settlement. If he had been able to prove that the company 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 contract or wrongful termination. He sued only the defendant attorney.

As a result, the court concluded that the plaintiff failed to prove his claims of breach of standard of care and breach of contract against the attorney and dismissed the action. A PDF version is available for download here.

The content of this article is intended to provide a general guide to the issue. Professional advice should be sought regarding your particular situation.

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