Pensions Newsletter – July 2017

Welcome to the 18th issue of the Blakes Pensions Newsletter. This newsletter provides a summary of recent jurisprudential developments that affect pensions and benefits and is not intended to be legal advice.

For additional information or to discuss how any aspect of these developments may affect you, please contact a member of the Blakes Pensions, Benefits & Executive Compensation group.

IN THIS ISSUE

FAMILY LAW

COLLECTIVE AGREEMENTS

APPLICATION OF ERISA IN CANADA

ENTITLEMENT TO COMMUTED VALUE OF PENSION BENEFITS

NEGLIGENT MISREPRESENTATION

CURRENCY CONVERSION FOR TAXATION OF STOCK OPTIONS

LOSS OF ENTITLEMENTS UNDER INCENTIVE PLANS FOLLOWING TERMINATION

FAMILY LAW

Melis v. Zwanenburg, 2017 ONSC 613

Caroline Melis (the wife) and Cornelis Johannes Zwanenburg (the husband) married in 1986 and separated in 2004. Pursuant to the subsequent divorce order, the wife was required to pay C$3,200 per month in spousal support. As part of the equalization process, the wife also paid to the husband C$217,244, plus interest, from her federal pension. The wife brought a motion to terminate or reduce the spousal support payments since the reduction in her income following her retirement constituted a “material change in circumstances” according to the divorce order.

In deciding the quantum of continuing spousal support, the court needed to determine the central “double recovery” issue of whether the unequalized portion of the wife’s pension should be included as income. To make this determination, Justice Beaudoin considered the following definitions and principles delineated by the Supreme Court of Canada in Boston v. Boston, which is considered the leading case on the issue of double recovery:

  • Double recovery occurs where a pension that was once equalized as property is also treated as income from which the payor spouse must make spousal support payments. In such a case, the payee spouse effectively shares in the pension twice.
  • After receiving an equalization payment from the payor spouse’s pension, a payee spouse must use the funds to generate income at least by the time the pension begins to pay out.
  • The general rule is that double recovery should be avoided. In deciding spousal support payments, courts should focus on assets that were not equalized.
  • As an exception to the general rule, double recovery may be permitted where the payee spouse made a reasonable effort to use the equalization payment to produce income but, despite this, is still confronted with economic hardship from the marriage or its breakdown.

Applying the above, the court held that the husband did use the C$217,244 pension equalization payment in an income-producing way. The husband had set aside appropriate funds in his RRSP and was not required to sell the matrimonial home to generate additional income. However, the court ultimately decided that an appropriate support order could be achieved without resorting to including the unequalized portion of the wife’s pension in her income.

In this case, double recovery was avoided notwithstanding that the exception to the general rule applied.

Ontario Superior Court of Justice Decision

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Almendral v. Tan, 2017 MBQB 54

The applicant (Almendral) brought a motion to dismiss the respondent’s (Tan) claim for an equal division of family property, including her pension, on the basis that Tan failed to meet the limitation period stipulated in The Family Property Act (Manitoba) (FPA), which imposes a non-mandatory three-year limitation period for equalization claims, and The Pension Benefits Act (Manitoba) (PBA), which requires strict compliance with a three-year limitation on application to divide pension benefits. Tan sought an extension of time pursuant to the FPA.

Almendral argued that the FPA did not apply because the parties never cohabited. In the alternative, she argued that Tan missed the limitation period and an extension was not warranted since he was capable of filing the petition at an earlier date. She also submitted that if Tan had no right to equalization of her pension under the FPA, he also did not have a right under the PBA, since the FPA is paramount to the PBA.

Tan argued that, due to orders obtained by Almendral enjoining her employer from dividing her pension and Tan from proceeding with an application for a pension division pending a case conference, he understood that he needed to wait before filing his petition for equalization under the FPA.

The court noted that, although the FPA allows for an extension of the limitation period while the PBA does not, this is justified due to the different cohabitation requirements under the two acts and the additional rights to an accounting and equalization of family assets under the FPA. Therefore, the court found no conflict between the limitation periods in the FPA and PBA.

The court held that, because the enjoining orders prevented Tan from filing a petition, the situation was beyond Tan’s control. The court exercised its discretion under the FPA and granted Tan an extension to proceed with his petition for an equalization of assets under the FPA. The court left the other issue of whether there existed a common-law relationship (and, therefore, any right to a property equalization) under the FPA to the trial judge.

Court of Queen’s Bench of Manitoba Decision

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S. (B.M.) v. S. (J.M.), 2017 BCSC 591

The parties married in 2002 and separated in 2007. The family assets included the respondent’s pensions and RRSPs. The main issue in this case was the interpretation of the following provision included in the consent order issued previously by Justice Voith of the Supreme Court of British Columbia (Voith Order):

The Plaintiff shall be entitled to one half of the increase in the Defendant’s pensions and RRSPs accumulated between December 1, 2001 and December 30, 2007, including any pensions or RRSP earned but not yet paid during this period as a result of the Defendant’s retirement.

Counsel for the claimant argued that the Voith Order created a proprietary interest in the RRSPs such that the claimant’s interest in them continued to accumulate even after December 30, 2007. However, the Supreme Court of British Columbia (SCBC) disagreed and held that the Voith Order did not create any proprietary interest in the respondent’s pensions or RRSPs, but rather only an interest in their increased value between two specific dates. The SCBC relied on another decision in concluding that the entitlement to one half of the increase of the respondent’s assets is a “compensatory award” that does not contain any proprietary interest in the pensions or RRSPs themselves.

Supreme Court of British Columbia Decision

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Virc v. Blair, 2017 ONSC 1766

Pursuant to a previous court order, the husband owed C$1,283,595.86 to the wife. Seeking to enforce the order, the wife made a request for garnishment of a pension in pay to the husband. The pension was a retirement compensation arrangement (RCA), which Royal Trust Corporation of Canada (Royal Trust) administers.

The husband argued that the RCA is a pension exempt from garnishment pursuant to the Pension Benefits Act (Ontario) (PBA). The wife argued that the RCA is not a pension exempt under the PBA.

The court turned to the legislation to determine whether an RCA is exempt from garnishment. The PBA defines “pension plan” to include “any other prescribed type of plan.” Regulation 909 under the PBA exempts RCAs from the application of the PBA and the regulations.

The Income Tax Act (Canada) (ITA) specifically defines RCAs in subsection 248(1). The court referenced an affidavit filed by the wife and sworn by a senior trust officer for Royal Trust. The affidavit stated that the husband’s RCA is an RCA as the term is defined in the ITA and is not subject to pension legislation in Canada.

In light of the clear wording of the legislation and the evidence shown in the affidavit, the court dismissed the husband’s dispute to the notice of garnishment.

Ontario Superior Court of Justice Decision

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Slongo v. Slongo, 2017 ONCA 272

This case is an appeal of the trial decision (Slongo v. Slongo, 2015 ONSC 2093), which was summarized in the July 2015 Blakes Pensions Newsletter.

The parties married in 1984 and separated in 2007. The separation agreement provided that the husband would pay child support and spousal support, both of which were subject to change based on certain events or circumstances that were specified in the agreement, including the husband’s cessation of employment prior to age 65.

At age 53, the husband accepted an early retirement package from his employer, under which he elected to receive the commuted value of his pension. Soon thereafter, the husband began work as a consultant to his former employer.

The husband terminated child-support payments for the youngest child in 2012, when the child was 20 years old. The motion judge found the youngest child was not entitled to child support under the separation agreement and dismissed the wife’s claim for retroactive and ongoing child support.

As for spousal support, the motion judge accepted there was a material change in circumstances based on the specified circumstances listed in the separation agreement, and a variation in the support amount was warranted. However, the motion judge chose not to set the amount of spousal support in the range of C$6,000 to C$8,000 per month, which was suggested by the Spousal Support Advisory Guidelines (Guidelines). Instead, the motion judge increased the existing spousal support to a lesser amount of C$5,000. The motion judge reasoned that, although the wife had contributed to the husband’s ability to receive income, there was an element of luck in the husband’s employer’s decision to make available an early pension payout. Further, the motion judge found that the wife poorly managed her finances and equalization payments and that her annual expenses were unreasonable.

The Court of Appeal dismissed the appeal concerning child support but allowed the appeal as it related to spousal support. The court held that the motion judge arrived at an incorrect quantum of spousal support because he departed from the range of spousal support produced by the Guidelines.

The wife was entitled to the expenses she incurred given the length of the marriage, her role in it and her age. As per the double recovery case of Boston v. Boston (discussed above in the Melis v. Zwanenburg summary), she was not required to immediately use the equalization assets in an income-producing way. She was also unable to comply since the husband elected to retire early. Further, the good fortune involved in the husband receiving an early pension payout did not justify the motion judge in departing from the Guidelines.

The Court of Appeal reversed the motion judge’s ruling on spousal support and set the ongoing spousal support at the mid-range produced by the Guidelines.

Ontario Court of Appeal Decision

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Gorrie Estate v. Gorrie, 2017 MBQB 74

Mr. and Mrs. Gorrie married in 1980 and separated in 2010. Following Mr. Gorrie’s death, counsel for his estate brought an application to the Manitoba Court of Queen’s Bench to share equally in the value of Ms. Gorrie’s pension accrued during the period of their marriage, pursuant to the provisions of The Family Property Act (Manitoba) (FPA) and The Pension Benefits Act (Manitoba) (PBA). Ms. Gorrie sought to retain her pension and to receive a lump sum spousal-support payment.

Ms. Gorrie’s pension claim, which effectively sought to alter the normal equalization payment, was rejected by the court for a number of reasons. First, the same court held previously that a claim for an unequal sharing under the FPA may not be made following death. The FPA also clearly states that a court does not have the discretion to alter equalization on the death of a spouse or common-law partner. The court also noted the following:

  • There was no evidence to establish that an unequal sharing of family property ought to be ordered
  • The fact that the estate dropped all other claims but the pension claim meant that Ms. Gorrie has already received more than she would on a formal accounting and equal division
  • The PBA mandates an equal division of the pension unless a waiver of spousal entitlement has been provided

Having dismissed Ms. Gorrie’s claims, the court ordered that Ms. Gorrie’s pension is to be divided in accordance with the PBA and regulations made thereto, which division will satisfy the accounting provisions under the FPA, with payment made to the estate of Mr. Gorrie.

Court of Queen’s Bench of Manitoba Decision

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Levine v. Levine, 2017 BCSC 801

Following a marriage breakdown, the wife sought an unequal division of her pension in her favour on the basis that the husband has always been underemployed.

Under the Family Law Act (British Columbia) (FLA), pensions are family property and subject to equal division. In a previous case, the same court decided that the default position for dividing a pension is the FLA and that while the court has discretion to depart from the FLA formula, it should be exercised sparingly. The court in this case found no reason to stray from the FLA formula and held that the portion of the wife’s pension accrued during the period of cohabitation is to be divided equally under the FLA.

Court of Queen’s Bench of Alberta Decision

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Paulsen v. Paulsen, 2017 ONSC 2937

Years after her marriage to Mr. Paulsen broke down, Ms. Paulsen brought an application seeking the equalization of property, including the parties’ two defined benefit pension plans. Although the parties disputed the actual date of separation, by either interpretation, Ms. Paulsen had missed the six-year limitation period pursuant to subsection 7(3)(b) of the Family Law Act (Ontario) (FLA). The issue for the Ontario Superior Court of Justice to determine was whether to grant Ms. Paulsen an extension of the limitation period.

Pursuant to subsection 2(8) of the FLA, the limitation period for equalization may be extended if the applicant can prove, on a balance of probabilities, that (1) there are apparent grounds for relief, (2) relief is unavailable because of a delay that has been incurred in good faith, and (3) no person will suffer substantial prejudice by reason of the delay.

The first part of the test was met as Mr. Paulsen’s counsel conceded there were, in fact, apparent grounds for relief. On the second point, the court determined that neither party understood the nature of their pensions as divisible property following separation. The court then determined that Ms. Paulsen did not have a positive duty to inquire as to whether the pensions were divisible property, because her lack of understanding as to the nature of the pensions was “blamelessly ignorant.” Therefore, the delay in her application was incurred in good faith. Finally, the court found no evidence suggesting that Ms. Paulsen’s failure to make a timely claim substantially affected Mr. Paulsen financially, and the court, therefore, determined Mr. Paulsen did not suffer substantial prejudice by reason of the delay.

Having satisfied the three-pronged test under subsection 2(8) of the FLA, the court ordered the limitation period be extended.

Ontario Superior Court of Justice Decision

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COLLECTIVE AGREEMENTS

Kentville (Town) and Kentville Police Assn. (APA, Local 107), Re, 2017 CarswellNS 183

This matter involved an interest arbitration between the Town of Kentville, Nova Scotia (the Town), and the Kentville Police Association, being Local 207 of the Atlantic Police Association (the Union). The Town and the Union were parties to a collective agreement with effective dates of April 2008 to March 2014 (2008 Agreement). Under the 2008 Agreement, the parties had agreed to a seven per cent contribution rate for the police’s defined contribution plan. One of the issues before the arbitrator was defining the contribution rate under a new collective agreement, with effective dates of April 2014 to March 2019 (New Agreement).

The Union had called for increases in contribution rates of 0.5 per cent per year, starting in 2015. This arrangement would bring the parties to a contribution rate of nine per cent by 2019 (when the New Agreement terminates).

The Town argued that the pension contribution rate should remain at seven per cent. It submitted that, since it was the only municipality with a defined contribution plan, there were no comparators. Further, there were no other interest arbitrations where contested contribution rates resulted in an order to increase the rates. Also, the employees had negotiated a “me too” clause in the collective agreement with the Town that provided that any improvements made to any other group of Town employees regarding benefits would be extended to them under the agreement. Therefore, any increase to the police’s contribution rates would also have to be extended to other groups.

The arbitrator stated that no evidence was presented to suggest that the current pension contribution rate of seven per cent was so inappropriate that the Union would object to its continued application, particularly because the rate would be calculated on newly increased wages, effectively increasing the net contribution amount. Further, the arbitrator noted that another Union had agreed to seven per cent.

Turning to the “me too” clause, the arbitrator noted that the Union was not aware of it prior to the hearing and might have altered its position if it knew of the clause. Also, the Town never would have agreed to changing the contribution room since such an agreement would have had an adverse cost impact on the Town beyond what it would pay to the police. Therefore, the arbitrator held the pension contribution rate should remain at seven per cent for the duration of the New Agreement.

Since the wages were increased in the New Agreement, the other pension issue in this arbitration was whether pension contributions should be paid retroactively on the wage increases. The arbitrator heard arguments from the parties and considered various cases but ultimately decided that it was not for an interest arbitrator to create a compromise since there were valid arguments for and against the general principle of retroactivity. Since the only written clause between the parties providing for retroactivity related to salary, and not pensions, the arbitrator declined the Union’s request to add a provision for retroactive pension contributions.

Nova Scotia Labour Arbitration Decision

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APPLICATION OF ERISA IN CANADA

Walter Energy Canada Holdings, Inc. (Re), 2017 BCSC 709

Earlier decisions in this case (Walter Energy Canada Holdings, Inc. (Re), 2016 BCSC 107; 2016 BCSC 1746) were summarized in the December 2016 Blakes Pensions Newsletter.

The Walter Canada Group brought an application to the British Columbia Supreme Court to determine the validity of a claim made by the United Mine Workers of America 1974 Pension Plan and Trust (the 1974 Plan). Both the Walter Canada Group and its U.S. parent, Walter Energy, Inc. (Walter Energy) filed for creditor protection and bankruptcy in their respective jurisdictions.

The 1974 Plan’s claim against the Walter Canada Group in the CCAA proceedings was for unfunded pension liabilities owed by another subsidiary of Walter Energy, on the basis that the U.S. Employee Retirement and Income Security Act of 1974 (ERISA) applied. ERISA provides that a subsidiary may be jointly and severally obligated for the withdrawal liabilities of the parent, if the subsidiary is within the parent’s “controlled group.” Since both the Walter Canada Group and the subsidiary owing money to the 1974 Plan are within Walter Energy’s “controlled group,” the 1974 Plan submitted that the Walter Canada Group ought to be liable for its unfunded pension liabilities of approximately C$1.25-billion.

Tasked with the unprecedented question of whether ERISA applies in Canada, the court undertook a conflict of laws analysis. The court first characterized the 1974 Plan’s claim as one that challenges the separate legal personalities of the entities within the Walter Canada Group.

Having characterized the claim, the court determined which choice of law rule applied (as the 1974 Plan asserted its claim in Canadian proceedings, it was agreed that Canadian choice of law principles would apply). A claim that seeks to set aside the separate legal personalities is subject to the Canadian choice of law rule that an entity’s legal personality is governed by the law of the place in which it was incorporated or organized. The corporations and partnerships within the Walter Canada Group were incorporated and organized under British Columbia and Alberta law, and since ERISA is not part of British Columbia or Alberta law, the court rejected the 1974 Plan’s claim as British Columbia and Alberta law do not permit the separate legal personalities of the members of the Walter Canada Group to be ignored. Under Canadian conflict of law rules, the 1974 Plan’s claim against the Walter Canada Group was determined to be governed by Canadian substantive law, rather than U.S. substantive law (including ERISA).

Supreme Court of British Columbia Decision

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ENTITLEMENT TO COMMUTED VALUE OF PENSION BENEFITS

Boucher v. Ontario (Superintendent Financial Services), 2017 ONFST 5

This proceeding heard by the Financial Services Tribunal arises out of the Superintendent of Financial Service’s refusal to order the Ontario Pension Board (OPB) to transfer the commuted value of the applicant’s pension benefits under the Public Service Pension Plan (Plan) to his prescribed retirement savings arrangement.

The tribunal concluded that the applicant was not entitled to a transfer of the commuted value of his pension benefits into a prescribed retirement savings arrangement on termination of employment for a number of reasons. First, the applicant was over the age of 55 when he terminated his employment with the Ontario Lottery and Gaming Corporation. Since he terminated employment within 10 years of reaching the normal retirement date, the Pension Benefits Act (Ontario) (PBA) entitled him to an immediate early retirement pension. The PBA provides that where a member is entitled to an immediate pension on termination, that member is not entitled to a commuted value transfer unless such a transfer is permitted by the terms of the pension plan. In this case, the Plan did not permit the transfer as he had reached age 55 at the time of termination.

Further, by operation of the PBA and the Financial Services Commission of Ontario Act, 1997, the tribunal did not have the jurisdiction to order the transfer. Finally, in response to the applicant’s allegations that OPB breached its duty of care obligations under the PBA by providing incorrect information regarding his portability options, the tribunal observed that the limited evidence put forward by the applicant was in any event irrelevant as the regulations specifically exempt the Plan from the duty of care provisions of the PBA.

The tribunal ordered the superintendent to carry out its decision to refuse to make an order with respect to the applicant’s pension entitlements.

Financial Services Tribunal Decision

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NEGLIGENT MISREPRESENTATION

Costigan v. Canadian Pacific Railway Company, 2017 ABQB 294

Lawrence Costigan (Costigan) was outsourced from Canadian Pacific Railway (CPR) to IBM and then from IBM to BP Canada. CPR advised Costigan that it would recognize his service at IBM for the purposes of determining pension entitlements under the CPR plan (Plan) but did not advise Costigan as to whether service with BP Canada would also be recognized for purposes of early retirement eligibility under the Plan. At the time of his transition from IBM to BP Canada, Costigan raised the issue with IBM but was given the unclear answer that the terms of employment with IBM and BP Canada would be “comparable.”

Years later, when Costigan tried to draw an early pension from CPR, he was informed that his service with BP Canada did not count as pensionable service under the Plan. Costigan brought a claim against IBM for negligent misrepresentation and breach of a duty of good faith and fair dealing.

On both issues, the Court of Queen’s Bench of Alberta found against Costigan.

The court held that Costigan did not establish negligent misrepresentation because CPR’s recognition of service with IBM was not considered a term of employment with IBM. Therefore, IBM was not negligent or misleading in representing the terms of employment at IBM and BP Canada as comparable. Similarly, IBM’s failure to provide a clear answer as to the details of CPR’s pension plan was not a negligent failure, as it was not a party to the agreement between Costigan and CPR. Further, if Costigan relied on IBM’s assurance of comparability as an assurance about his CPR pension, that reliance was unreasonable since the CPR termination letter was completely clear that only time with IBM, and not with any other employer, would count towards satisfaction of the early retirement criteria. Even on the most favourable interpretation, Costigan did not rely on a representation from IBM but only an offer to further investigate. Therefore, IBM made no representation on which Costigan could have reasonably relied.

Finally, the court found that Costigan did not establish a breach of duty. There was no precedent to support Costigan’s claims that IBM had a duty both to ascertain the impact of termination on Costigan’s external financial arrangements (i.e., his CPR pension) and to inform Costigan of the impact.

The court dismissed Costigan’s claims against IBM.

Court of Queen’s Bench of Alberta Decision

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Feldstein v. 364 Northern Development Corp., 2017 BCCA 174

This case is an appeal of the trial decision (Feldstein v. 364 Northern Development Corporation, 2016 BCSC 108), which was summarized in the April 2016 Blakes Pensions Newsletter.

364 Northern Development Corp. (364) extended an offer of employment to Cary Feldstein (Feldstein), who suffers from cystic fibrosis. Prior to accepting the offer, Feldstein inquired about the eligibility requirements for long-term disability (LTD) benefits under 364’s benefits plan. Eugene Nizker, 364’s chief information officer (Nizker), advised Feldstein that a “proof of good health” clause in 364’s benefits plan summary related to the three-month continuous employment waiting period before benefits coverage came into effect. Feldstein understood that this meant that if he worked at 364 for three months without illness, he would satisfy the “proof of good health” requirement, notwithstanding his existing condition.

Approximately a year after accepting the offer of employment, Feldstein’s health declined dramatically and when he applied for LTD benefits, he discovered he was not eligible for the full benefits he expected to receive. Feldstein brought a claim against 364 for negligent misrepresentation and was awarded damages at trial for lost LTD benefits as well as aggravated damages.

In its appeal to the British Columbia Court of Appeal, 364 claimed the employment contract between the parties precluded Feldstein from suing in tort and the trial judge erred in concluding Feldstein had established the test for negligent misrepresentation. It also argued that the trial judge erred in in assessing damages and awarding aggravated damages.

Availability of Tort Claim

The Court of Appeal found the trial judge correctly held that the employment contract did not exclude tort liability, because the subject matter of Nizker’s pre-contractual statement did not become an express term of the contract. Therefore, the statement was not subject to the exclusion clause contained within the contract.

Negligent Misrepresentation

The Court of Appeal affirmed the trial judge’s conclusion that Feldstein had met the test for negligent misrepresentation. Nizker’s statement that “proof of good health” was synonymous with the three-month waiting period new employees had to complete before benefits vested was clearly inaccurate and misleading. It was also open to the trial judge to conclude Nizker did not exercise reasonable care, since he knew or ought to have known how important LTD benefits were to Feldstein, due to Feldstein’s “repeated inquiries” on the matter.

Further, the trial judge was correct in finding Feldstein’s reliance on Nizker’s representation to be reasonable. Notwithstanding that Feldstein knew that 364 could alter its benefits plan at any time, that fact did not affect the reasonableness of Feldstein’s reliance on Mr. Nizker’s statement, which related to 364’s benefits plan, in its current form.

Damages and Aggravated Damages

In dismissing 364’s argument that Feldstein could not have found employment offering LTD benefits at least as great as those offered by his previous employer, the Court of Appeal found it was open for the trial judge to conclude it was a “hot market” for software engineers and that Feldstein had impressive skills and experience that would likely cause potential employers to regard him as an attractive candidate.

The Court of Appeal also dismissed 364’s argument that the damages awarded were not reasonable, on the basis that the degree of probability to satisfy the reasonable foreseeability requirement is a “real risk.” In this case, Nizker, having known that Feldstein suffered from cystic fibrosis, should have foreseen a real risk that Feldstein would suffer as a result of the negligent misrepresentation.

With respect to aggravated damages, the Court of Appeal struck out that part of the trial judge’s award, finding the trial judge made an error in law. The trial judge incorrectly depended on a breach of contract case where the judge recognized that unwarranted delays in receiving disability benefits led to mental distress. Since that case was decided in the context of a contractual breach and not a tort, it was inapplicable. Further, even if an award of aggravated damages could be made in the context of a negligent misrepresentation case, the Court of Appeal stated that some form of offensive conduct by the defendant, lacking in this case, is a necessary prerequisite to the granting of such relief.

Order

The Court of Appeal dismissed the appeal but varied the trial judge’s order so as to strike out the award for aggravated damages.

British Columbia Court of Appeal Decision

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CURRENCY CONVERSION FOR TAXATION OF STOCK OPTIONS

Ferlaino v. R., 2017 FCA 105

This case is an appeal of the trial decision (Ferlaino v. The Queen,2016 TCC 105), which was summarized in the July 2016 Blakes Pensions Newsletter.

Natale Ferlaino (Ferlaino) was granted stock options (denominated in U.S. dollars) in 2000 and 2002, which he exercised in 2010 and 2012. The amount of employment benefit was determined in U.S. dollars but had to be converted to Canadian dollars for tax-reporting purposes. In declaring his benefit, Ferlaino calculated his cost of the shares using the exchange rate at the time the options were granted (when the U.S. dollar was worth approximately C$1.5) and calculated the sale price of the shares (he sold the shares immediately upon exercise) using the exchange rate at the time of exercise (when the two currencies were close to par). As a result, Ferlaino’s tax cost of the shares dramatically increased, consequently decreasing the value of the declared benefit and netting Ferlaino substantial tax savings.

In confirming the Minister’s reassessments of Ferlaino’s 2010 and 2012 taxation years, the Tax Court of Canada ruled that under section 7 of the Income Tax Act (Canada) (ITA), both the sales price and the cost base of the shares to which the relevant options related must be valued based on the currency exchange rate at the time of the exercise of those options.

On appeal, the Federal Court of Appeal affirmed the Tax Court of Canada’s decision, finding that any tax implications arising from the exercise of stock options, including the conversion of foreign denominated amounts, are solely triggered on the exercise date.

The taxable transactions in this case occurred at the time Ferlaino exercised his options, since that was the date the shares were acquired in exchange for an “amount paid” within the meaning of subparagraph 7(1)(a)(ii) of the ITA, and when the value of Ferlaino’s employment benefits could be ascertained under that same provision. Only at that point was Ferlaino required to calculate his reportable benefits by converting all relevant amounts, using the currency exchange rate applicable on the date of the exercise.

Federal Court of Appeal Decision

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LOSS OF ENTITLEMENTS UNDER INCENTIVE PLANS FOLLOWING TERMINATION

Carroll v. ATCO Electric Ltd, 2017 ABQB 267

In April 2010, John Carroll (Carroll) was informed that his employer, ATCO Electric Ltd. (ATCO), would not pay him a bonus for 2009 due to poor job performance. One month later, Carroll’s employment with ATCO was terminated. Carroll brought an action against ATCO, claiming damages for failure to pay a bonus for 2009 and damages relating to his termination, which the parties agreed was without cause, including loss of entitlements during the common law notice period under an executive bonus plan, a stock option plan and a share appreciation rights (SAR) plan.

2009 Bonus

The court dismissed Carroll’s claim for damages relating to ATCO’s failure to pay him a bonus for 2009. Under the bonus program, ATCO clearly had the discretion to determine whether Carroll was entitled to a bonus. Relying on previous cases involving contractual performance, the court concluded that it should not interfere with ATCO’s exercise of a discretion that was properly conferred under the contract of employment.

Damages Relating to Without Cause Termination

The stock option plan and the SAR plan each clearly stated that any entitlement would cease upon actual cessation of employment, without regard to any common law notice periods. The court viewed these provisions as expressly eliminating Carroll’s entitlements under the plans, as well as any rights to pursue damages under common law. In contrast, the executive bonus plan did not specifically eliminate any entitlement upon termination of employment, since it included a signed acknowledgement granting the board of directors the discretion to authorize a bonus notwithstanding the employee’s termination of employment.

The court decided to measure damages relating to the foregone bonuses during the common law notice period (which the court determined to be 24 months) by determining the amount of bonus that Carroll likely would have earned had he worked during the entire notice period. Accounting for the particular circumstances of Carroll’s situation, the court estimated there was a 25 per cent chance in each of 2010 and 2011 (the years representing the notice period) that Carroll would have received his full bonus of C$144,000. Therefore, the court assessed Carroll’s damages at a total of C$72,000.

Court of Queen’s Bench of Alberta Decision

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