Why Employers Cannot Deduct Tax Obligations from Wrongful Dismissal Settlements

Taxes. People hate taxes. From paying taxes to wrestling with the provisions of the Income Tax Act there really is no joy when it comes to taxation.

A 2015 decision of the Ontario Superior Court of Justice, RJM56 Investments Inc. v Kurnik, 2015 ONSC 6893 (CanLII) presented two questions with respect to the interplay between employment-law settlements and taxation:

1. Must an employer withhold tax from an amount paid to an employee’s lawyers on account of incurred legal fees? And
2. Can an employer deduct the amount it must pay on account of EI, CPP, and EHT from the amount payable as a settlement?

While the answer to both questions may, or at least should, be obvious to any lawyer who practices in this area, Justice S.A.Q. Akhtar’s decision is an important, recent imprimatur of some rather fundamental principles employed daily by Ontario employment lawyers.

Two Employers Under One Umbrella Both Get Soaked by Judge

Sometimes being under an umbrella is a good idea; like when it is raining. Other times, however being under the same umbrella as someone else is not such a good thing.

In employment law, the issue of whether two companies are a “common employer” or ‘stand under the same umbrella’ can be important when calculating a dismissed employee’s length of service; the same being one of the critical factors for calculating a dismissed employee’s entitlement to reasonable notice of termination.

In the case of Dear v Glamour Designs Ltd., 2015 ONSC 5094 (CanLII), the Honourable Justice S.A.Q. Akhtar held that there were simply too many interconnecting factors between two related companies to say that the two were anything but a common employer. The employers were found to be one and the same for the purposes of calculating the employee’s length of service.