After termination of the plaintiff’s employment, the employee sought to avoid payment of taxes on a wrongful dismissal settlement. In Canada, tax is always deductible on a “retiring allowance”, and severance paid as a settlement is a type of retiring allowance.
EMV Automotive USA Inc. (“EMV”) had offered the plaintiff, among other terms: (1) a lump sum payment of $441,667 USD, less applicable deductions; and (2) release of claims acceptable to EMV.
The employee liked the employer’s offer. She said that she would accept it, provided that: (1) the release be mutually acceptable; and (2) the settlement funds be paid in a tax effective manner – without tax withholdings, using a 1099 US income tax form.
The employee requested that payment of the severance be made in a different manner, in order to avoid payment to CRA of $143,300 in taxes.
At the hearing, the employee argued that the exchange of emails was binding.
The defendant’s position was that the employee’s request to alter the form of release and payment method was a counter-offer rather than acceptance of the defendant’s offer. The defendant claimed that those terms introduced new essential terms to the agreement, and emphasized that conditional acceptance of an offer is a counter-offer.
The Court’s decision:
1. As to the form of release, the Court agreed with the employee, and held that a requirement of a mutually acceptable form of release has to do with performance of an agreement. It does not affect the terms of a settlement agreement.
A settlement agreement may be binding without a finalized mutual release. The execution of release will likely be considered as a step in completion of settlement negotiation rather than an essential term of the agreement.
2. As to the tax treatment of the settlement funds, the Court sided with the defendant/employer. It found that it was a “condition of fundamental performance” to the parties.
The defendant offered to the plaintiff a settlement amount, less applicable deductions. A tax deduction of 32% on the settlement amount was contemplated here (30% is the norm).
The Court turned to the defendant’s evidence – failure to withhold and remit the taxes could lead to negative tax consequences for the employer, including liability for the employee’s unpaid taxes. By paying to the employee an amount without any tax deductions, the employer risks penalties for misclassifying the nature of the settlement payment and for failing to make required deductions.
3. The Court held that the parties had not reached an agreement as to a fundamental term – the settlement amount. The employee’s request for settlement funds to be paid in a “tax effective manner” was viewed as a change of an essential term, making the original offer void. As a result, there was no binding settlement agreement.
In employment matters, the settlement amount is one of the most important terms of a settlement agreement. A party may choose to accept the amount offered, less applicable deductions, or negotiate other payment arrangements, such as transferring some amount into the party’s RRSP account, to take a tax savings advantage, or another method, such as the one addressed in this case.
Parties should be cautious when concluding a settlement. If a party seeks an important term as part of an agreement, then the party must obtain clear acceptance of that term by the other side. As the case shows, conditional acceptance of an offer will likely be a counter-offer.
Link to judgment: https://www.canlii.org/en/bc/bcsc/doc/2025/2025bcsc658/2025bcsc658.html
