Law Times

Law Times • January 26, 2015 Page 7 www.lawtimesnews.com COMMENT Rulings on CRA general duty of care a positive development By david roTfleisch For Law Times he Canada Revenue Agency has his- torically had a wide prerogative in its interactions with Canadian taxpayers. Past decisions have always held that CRA owed a duty of care only to the minister of revenue with no private law duty of care owed to taxpayers. Two recent cases, however, may signal the end of the era of non- accountability at the CRA as a general duty of care may be developing. McCreight v. Canada (Attorney General) holds that CRA investigators may owe a duty of care to suspects under investigation even if they are not the taxpayers themselves. According to the case, the CRA had been conducting an investigation into two tax advisers, a chartered accountant and a research and development consultant retained by taxpayers, and seized boxes of materials. The CRA did not complete its investigation by the deadline for it to return the materials. The CRA investigator sought approval to lay an information charging various taxpayers as well as the tax advisers with fraud and conspiracy under the Income Tax Act and the Criminal Code. The Department of Justice approved. A year later, the Justice Department withdrew all charges against the tax advisers but not before the CRA investigator swore another information alleg- ing 23 additional offences. It was not until six years later that the court, following a preliminary inquiry, discharged the tax advisers on all counts. In later pro- ceedings, the court held that the CRA investigator had sworn the information primarily to retain possession of the seized documents. Among other claims, the tax advisers brought a cause of action for negligence by the CRA investigator. Following the test set out in Hill v. Hamilton-Wentworth Regional Police Services Board, the Ontario Court of Appeal held it was "at least argu- able" that a cause of action for negligence by the CRA investigator could succeed and allowed the tax advis- ers' action for negligence to proceed to trial. Similarly, the Supreme Court of British Colum- bia, in Leroux v. Canada Revenue Agency, held that the CRA owed the taxpayer a duty of care. In Ler- oux, a prolonged CRA audit resulted in, among other things, the imposition of gross negligence penalties. Along the way, the CRA seized the taxpayer's origi- nal documents without authorization and refused to return them. The CRA later told the taxpayer the originals had been shredded accidentally and he had to provide further supporting documentation. The court found the CRA owed a duty of care that it had breached. However, the taxpayer's claim failed on cau- sation as he could not prove his losses were the result of the CRA's negligence. The taxpayer has since ap- pealed to the B.C. Court of Appeal, and the CRA has cross-appealed the finding of a duty of care. What Leroux and McCreight suggest is a po- tential shift in how the courts will review the ac- tions taken by CRA employees in the context of civil claims arising from a regular or criminal tax investigation. It is worth noting that the court in Ler- oux emphasized that "while being wrong is not being negligent, nor are [the auditor]'s mistakes in fact or law negligent, it is the misuse and misapplication of the term 'grossly negligent' that is objectionable." We have yet to see how widely or narrowly courts will interpret Leroux and McCreight. The court in Ler- oux cautioned that "an audit may not necessarily place a taxpayer in a close and direct relationship with the auditors" and McCreight simply allows the negligence claim to proceed to benefit from a full factual record at trial. That said, both of these cases are highly germane to any discussion on whether the CRA owes a general duty of care to a subject of an investigation and are a welcome development for taxpayers and counsel alike who have experienced the department's increasingly aggressive tactics. LT uDavid Rotf leisch is the founding tax lawyer of Rot- f leisch & Samulovitch PC, a Toronto-based boutique tax law firm. With more than 30 years of experience as both a lawyer and chartered professional accountant, he has helped startup businesses, resident and non-resident business owners, and corporations with tax, wills, and estate planning matters as well as voluntary disclosures and tax dispute resolution. u SPEAKER'S CORNER Employers reminded about confidentiality provisions abour and employment cases are a regular testing ground for con- fidentiality provisions in binding settlement agreements, with the goal typically to foster an environment for negotiation conducive to reaching a settlement or to create a broader protec- tion against disclosure. The Divisional Court's judgment in Wong v. Globe & Mail is a glaring example of the conse- quences of a breach. In Wong, the court upheld the arbitra- tor's decision compelling Jan Wong to repay the full amount of the settlement, $209,912, for breaching the confidential- ity provision by disclosing in her book that she had received a "big fat cheque" for settling her employment litigation with the Globe. Wong had served as a Globe journalist for 21 years. In September 2006, she wrote an article about the assassination of a stu- dent at Dawson College in Montreal. The article subjected her to personal attacks in various forums, which triggered the onset of a severe depression that seriously un- dermined her mental health. From October 2006 to May 2008, Wong was largely off work due to her dis- ability. In May 2008, the Globe asserted she was neither sick nor unable to work and requested her to return to work under the pain of dismissal. She refused and the company dismissed her. As a consequence, the union launched a grievance for unpaid sick leave and wrongful termination. With the assis- tance of the arbitrator, the parties reached a settlement. As part of the settlement, the Globe agreed to pay Wong a lump sum representing the amount she would have gotten during her sick leave and as well as a second payment representing two years' pay of $209,912. The Globe's awareness of Wong's in- tention to write a book about her expe- rience of suffering from depression in the workplace prompted it to insert a specific confidentiality provision in the settlement agreement. The par- ties agreed "not to disclose the terms of this settlement" and, if Wong disclosed them, she "will have an obligation to pay back . . . all payments paid." In May 2012, Wong pub- lished her book in which she disclosed the Globe had paid her a settlement. "I can't disclose the amount of money I received," she wrote at one point. "I'd just been paid a pile of money to go away," she also noted. In response, the Globe immediately applied to the arbitrator, who remained seized of the matter, for an order that Wong forfeit and repay $209,912 for breaching the confidentiality provision. Having concluded she had disclosed a term of the settlement and thus breached the confidentiality provision, the arbitra- tor ordered Wong to repay $209,912. Wong applied to judicially review the arbitrator's decision. The central issue in her application for judicial review was whether she had standing to bring it. In essence, she ar- gued the union had failed to fairly repre- sent her and, as such, her case fell within three exceptional situations, articulated in Yee v. Trent University, in which an in- dividual may have standing to pursue ju- dicial review. She reinforced her position by arguing that she, alongside the union, had signed the settlement agreement and that it was she who was liable for the re- payment of $209,912. Having found that the union's repre- sentation wasn't deficient, the court re- fused Wong's argument about standing. It clarified that despite the very serious fi- nancial consequences for her, the impact of the ruling wasn't the deciding factor on the issue of standing. The court went on to consider, among others, Wong's argument that she hadn't breached the settlement agreement because she understood she could speak about the terms of the settlement as long as she didn't reveal the actual amounts paid. I pause to remind that in Dumbrell v. Regional Group of Companies Inc., the On- tario Court of Appeal made it clear that a party's subjec- tive understanding as to the meaning of a contract wasn't admissible for the purpose of interpreting it. Having found Wong's argument to be "an indefensible one," the court observed that in her book, she expressly referred to the "size" of the payment through charac- terizations such as "a big fat cheque," "paid a pile of money," and "a vastly swollen bank account." The court went on to point out that the one thing the Globe wanted from this set- tlement was confidentiality. It paid for it but didn't get it. In its view, the confiden- tiality provision was clear and unambigu- ous. Given that the second lump sum was a term of the settlement, the court found the arbitrator's conclusion was reasonable and dismissed the judicial review. Before assessing the practical impact of Wong, we should pause to consider whether the court's reasoning applies to all settlement agreements in Ontario. Even if a confidentiality provision seems airtight, it must still be reasonable and the disclosure must still be proven. In Wong, both the arbitrator and the court deemed the clause to be reasonable because the parties had reached the set- tlement agreement "after much back and forth between the parties" and "numer- ous changes were made to the proposed terms" that ultimately permitted Wong to disparage the Globe after approximately 11 months. In Tremblay v. 1168531 Ontario Inc., the Human Rights Tribunal of Ontario found that the employee had breached the confidentiality provision by disclosing on her Facebook page that there was a settle- ment and that she received monetary compensation. The tribunal observed that a contra- vention of settlement undermines the administration of justice by discrediting the human rights system and generating disincentives to negotiation. In finding that an award of monetary compensation could bolster both the private and public importance of complying with settlement terms, the tribunal reduced the amount owning to the former employee under the settlement by $1,000. Wong and Tremblay are examples of rare cases where employees publicly com- mented on their settlement terms. They serve to educate employees that arbitra- tors, judges, and adjudicators are unani- mous in their view that parties must respect negotiated confidentiality provi- sions in settlements. Nevertheless, in most cases proving a breach of a settlement term remains to be a legal challenge for employers. The lesson that emerges is that they must not only in- sert a well-crafted confidentiality clause into the settlement agreement, they must fortify it with the forfeiture provision in case of an unauthorized disclosure. It's helpful to keep in mind that there's a distinction between a penalty and a forfeiture provision. The former involves a payment of money stipulated as in ter- rorem of the offending party; the latter represents the loss of something, often money, held as a security for the enforce- ment of an obligation. LT uNikolay Chsherbinin is an employment lawyer at Chsherbinin Litigation and au- thor of The Law of Inducement in Cana- dian Employment Law published by Car- swell, a Thomson Reuters Business. He's available at 416-907-2587, nc@nclaw.ca, or nclaw.ca. Labour Pains Nikolay Chsherbinin T L

• Cover