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  • Minimal! - Court of Appeal Reduces the Post-Employment Duty of Loyalty

    Suppose that your best employee, the up-and-comer you’ve been training for several years, resigns. It’s terrible news for you, especially amid a labour shortage. And, to top it off, their new employer is your main competitor. How long has the employee been planning to leave? Did they plan during working hours? Using your company’s resources? What about the knowledge and contacts gained over the past few years: Will the employee share them with your competitor? If they did so, would it be illegal? At this point, one of your main concerns would be whether the resigning employee’s employment contract contains restrictive covenants, such as non-competition, non-solicitation or confidentiality undertakings. If it did, it would bode well for you provided that the covenants are valid and enforceable. You would otherwise have to rely on the duty of loyalty provided for in article 2088 of the Civil Code of Québec, a safety net that employers have relied on until a recent decision of the Court of Appeal of Québec limited its scope. Sahlaoui c. Médicus1 Mr. Sahlaoui, an orthotist-prosthetist, had been working for Médicus for about ten years, during which time he had built a relationship of trust with clients thanks to the quality of his services. He informed Médicus that he was resigning to start a competing company, Evo. Accusing Mr. Sahlaoui of breaching his duty of loyalty, Médicus sued him and his new company, claiming damages for one year’s lost profits, for hardship and inconvenience. The Superior Court awarded Médicus damages in the sum of $135,238, plus interest. However, the Court of Appeal dismissed Médicus’ recourse in its entirety and reaffirmed the right to freedom of work, concluding that the former employee, both before and after his resignation, had not breached his duty of loyalty. The Court thus considers that the duty of loyalty provided for in the Civil Code of Québec must be assessed in two stages, namely during and after employment. Duty during employment In the course of employment, an employee’s duty of loyalty is significant, especially for key employees and those with a great deal of professional discretion. The close ties that Mr. Sahlaoui had developed with clients during his employment were not enough to convince the Court that he had held a key position in his employer’s business, which, it should be noted, had approximately 350 employees at 15 branches. The Court is of the opinion that seeking new work does not in itself constitute a breach of the duty of loyalty, as it is an extension of the freedom of work. There are legitimate limits to the openness and transparency required under the terms of an employment contract, such that an employee may keep both their intention to change jobs and the steps taken to do so secret.2 On the other hand, the employee, while still employed, must not prepare their departure during working hours with tools provided by the employer. Stealing or hacking confidential information, withholding or misappropriating the employer’s business opportunities, taking client lists and recruiting clients for the employee’s benefit are examples of disloyal acts that the Court mentions. The judges cite with approval a 2007 decision of their court, which held that retaining or “refusing to turn over a former employer’s property in some cases constitutes outright theft, regardless of the notion of loyalty.”3 Duty after employment The Court of Appeal believes that the duty of loyalty is considerably reduced after an employee’s departure. The duty of loyalty set out in the Civil Code of Québec does not impose restrictions on an employee equivalent to those resulting from a well-drafted non-competition clause,4 particularly in terms of duration, because the duty of loyalty remains in effect for only a reasonable amount of time, which rarely exceeds a few months (three to four months).5 In this case, although Mr. Sahlaoui had signed a loyalty, confidentiality and non-competition undertaking to govern his post-employment conduct, the Court disregarded it because such undertaking did not meet the requirements for restrictive covenants established by the courts. Mr. Sahlaoui’s actions were therefore analyzed in terms of the duty of loyalty set out in article 2088 of the Civil Code of Québec. As the Court of Appeal points out, an employee who is not subject to a non-competition clause (or a non-solicitation or confidentiality clause having a term that exceeds the end of employment) may use their personal professional experience, i.e., their expertise, knowledge, network and skills acquired and developed with the former employer, as they see fit. Such employee may compete with their former employer, by soliciting its clientele, for example, without committing a fault.6 In short, the duty of loyalty under the Civil Code of Québec does not prohibit competition, but requires that it be exercised in moderation and only for a short time after employment ends. What it means Because the duty of loyalty is “rather minimal,” to quote the Court of Appeal, any organization would be well advised to protect itself by using restrictive clauses and having a clear plan of action for when an employee leaves to join the competition. To be enforceable, restrictive covenants must be specific and contextual. They must not exceed what is reasonable to protect the legitimate interests of the employer. The following questions are worth considering: When preparing an employment contract, is it possible to predict whether the employee in question will have direct relations with clients or suppliers? Will the employee learn, for example, the manufacturing processes or techniques that the organization strives to safeguard? If so, what restrictive clauses should be included in the employment contract, in particular regarding the nature of the employee’s tasks, reporting level and unique expertise? What needs to be protected? Examples include the confidentiality of information and the business’ reputation and services. The business should also protect itself against competition and solicitation of its clientele, suppliers and employees. To avoid unpleasant surprises, it is important to understand the purpose of each restrictive clause. They should also not be confused between them or thought to encompass the restrictions of another. Do the restrictive clauses meet the reasonable criteria necessary to be enforceable? Will they withstand contestation to the extent possible? Once the employee’s departure is announced, who will take over with clients or suppliers in order to maintain their trust? What security measures will be put in place when the departure is announced to ensure and preserve the confidentiality of certain information? The absence of restrictive covenants at the time of hiring is not disastrous, as the parties may negotiate such undertakings during the course of employment. While an employee cannot be forced to accept them, it is easier to reach an agreement when discussing a salary increase, promotion or other consideration, always making sure that the restrictive clauses are reasonable in light of the employee’s work context and the employer’s legitimate needs and rights. The parties may also agree to certain restrictions as part of an exit agreement. The Médicus decision has, at the very least, clarified the scope of the duty of loyalty provided for in the Civil Code of Québec. The members of our Labour and Employment Law group are available to advise you and answer your questions. Sahlaoui c. 2330-2029 Québec inc. (Médicus), 2021 QCCA 1310, see paragraph 59. See paragraph 35. Concentrés scientifiques Bélisle inc. c. Lyrco Nutrition inc. 2007 QCCA 676. See paragraph 44. See paragraph 48. See paragraph 53.

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  • Abuse of the grievance arbitration process: Arbitrators rule in favour of employers

    An employer grievance is a means that employers can use to obtain compensation for material damages caused by pressure tactics or to recover overpayments resulting from a union’s wrongdoing. Such a recourse can also be filed to claim damages and legal fees from a union that has abused the grievance arbitration process, in particular by raising grounds that are unfounded or filing applications that are dilatory, or doing either in bad faith. Although not very common, abuse of process does exist and can be sanctioned. However, an employer can successfully raise abuse of rights when a union’s actions are reckless, manifestly ill-founded, done in bad faith or dilatory. Two recent cases The decision in Régie intermunicipale de police Richelieu Saint-Laurent et Fraternité des policiers et policières Richelieu Saint-Laurent1 is an interesting example: The arbitrator ordered the union to reimburse the employer part of the legal costs that it had incurred, as well as the sums paid to three of its witnesses. The case can be summarized as follows. As a result of pressure tactics, three police were summoned to a disciplinary hearing before the discipline committee.  The parties agreed in writing to reschedule the hearings before the committee. The officers were finally met in 2014, after which they filed grievances to contest the disciplinary measures taken against them. Arbitration was set for May 2018 and a pre-trial conference was held prior to the hearing. At the hearing, the union raised a preliminary exception on the grounds that the disciplinary measures had been imposed outside the time limit set out in the collective agreement. The employer invited the union to make verifications, maintaining that the parties had agreed to postpone the hearing before the discipline committee. The union upheld its preliminary exception. The employer then filed a grievance, claiming damages arising from the union’s time-barred and unfounded preliminary exception. In January 2019, the parties presented their arguments on the preliminary exception and the employer grievance. On February 14, the union withdrew its preliminary exception during deliberations. The arbitrator allowed the employer grievance in part. He concluded that the exception filed by the union was unfounded and that the latter’s conduct was a clear example of an abuse of legal process. The employer was compensated for the costs incurred in defending itself against the abuse of rights. In Syndicat des professeures(eurs) de l'UQAM (SPUQ) et Université du Québec à Montréal (UQAM),2 the parties had recently renewed their collective agreement and agreed to a clause providing for a reduction in the salary of professors over 70. Shortly after the collective agreement came into force, grievances were filed challenging the discriminatory nature of the clause. UQAM filed an employer grievance alleging abuse of the grievance process by the union. The evidence showed that the union had agreed to the clause even though it knew that it was discriminatory, with the intention of challenging it in arbitration. The union had even asked that the age of the professors be added to the clause, which made its discriminatory nature even more obvious, thereby maximizing its chances of success at arbitration. The arbitrator allowed the employer grievance and ordered the union to reimburse the arbitrator’s fees and disbursements, as well as the professional fees charged by the employer’s lawyer to represent it during arbitration of the union grievance. He concluded that the union’s actions violated the duty to bargain in good faith and constituted an abuse of rights on the union’s part. Key takeaway and helpful tips Abuse of process can take many forms: the use of an unfounded declinatory exception, for example, or the filing of an abusive grievance arising from collective bargaining in bad faith. When confronted with situations not seen in the ordinary course of labour relations, an employer must determine whether there has been abuse of rights. Should abuse of rights be found, the employer could exceptionally claim the professional fees of its lawyers, the cost of summoning witnesses and possibly other damages resulting from the union’s wrongful conduct by filing an employer grievance. However, employers must bear in mind that an ill-founded union grievance, dismissed on the basis that the union’s interpretation of the facts or collective agreement differs from that of the employer, will not necessarily be deemed abusive. In order to win the case, the employer will have to prove that the union’s actions were reckless, manifestly ill-founded, in bad faith or dilatory. It goes without saying that an abuse of procedure by an employer could also be sanctioned by damages. The members of our Labour and Employment Law team are available to advise you and answer your questions. 2021 QCTA 319. 2021 QCTA 296.

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  • Personnel placement and recruitment agencies : what are the constraints of the new regulation?

    In June 2018, amendments made to the Labour Standards Act ("LSA") included additional obligations and responsibilities for personnel placement agencies and temporary foreign worker recruitment agencies (the "Agencies"). However, these amendments were only supposed to come into effect on the date the government adopted a regulation setting out the standards and procedures for giving effect to the amendments to the Labour Standards Act. On April 10, 2019, the Quebec Minister of Labour, Employment and Social Solidarity published a Draft "Regulation respecting personnel placement agencies and recruitment agencies for temporary foreign workers" (the "Draft Regulation"). Although the introductory text to the Draft Regulation states that "the impact study shows that the proposed measures will have an insignificant impact on enterprises", on the contrary, our analysis of the Draft leads us to conclude that it will impose significant constraints on the Agencies. The beneficiaries of this reform appear, rather, to be the Agency workers and client enterprises. Agency Licence The Draft Regulation establishes a mandatory licensing scheme for Agencies: To obtain an operating licence issued by the Commission des normes, de l'équité, de la santé et de la sécurité du travail ("CNESST"), the Agencies and their officers must meet a series of criteria relating to integrity, transparency and solvency. These Agencies and their officers must be in good standing with various governmental departments and bodies, both in terms of compliance with the laws and the payment of fees or contributions. For example, an Agency may be disqualified if "in the 5 years preceding the application, the person, partnership or other entity has been condemned by an irrevocable decision of a court relating to discrimination, psychological harassment or reprisals, as part of employment" or because of criminal or penal convictions connected with the carrying on of the activities covered by the license application. All licences must be renewed every two years and, in the absence of new facts, a period of two years must elapse before a new licence application can be filed following a denial. Applications for a placement agency licence must be supported by the payment of security in the amount of $15,000 (to guarantee the protection of employees' rights under the LSA). Protection Of The Rights Of Agency Employees The Draft Regulation requires Agencies to take various measures to promote the exercise by employees of the rights protected by the Labour Standards Act ("LSA"). For example: The Agency must provide the employee it assigns to a client enterprise with a document describing his or her working conditions and identifying the enterprise in question. It must also provide the employee with the information documents made available by the CNESST concerning employees' rights and employers' obligations in respect of labour. The Agency must remind the client enterprise of its obligations regarding employee health and safety. The Agency may not charge fees to an employee for his or her assignment or training. Finally, restrictions on the hiring of Agency employees by a client enterprise may not exceed six months following the beginning of the assignment. Administrative Measures And Appeals The CNESST may suspend an Agency's licence at any time in the event of a breach of the requirements and, once the Draft Regulation has come into force, the Agency will be able to appeal the CNESST's decision to the Administrative Labour Tribunal (the “ALT”). Procedures For The Forthcoming Adoption Of The Draft Regulation Anyone wishing to make comments on the Draft Regulation is invited to submit them in writing to the Minister during the 45-day period beginning on April 10, 2019. We expect that various associations will be up in arms to get the Minister to relax what amounts to a very restrictive regulatory framework. At the end of this 45-day consultation period, the Minister may proceed with the formal publication of the Regulation, which will come into effect 15 days after publication. Agencies that are already operating on the date the Draft Regulation comes into effect may continue to operate, provided they apply to the CNESST for a licence within 45 days of that date. Note: All the provisions of the Labour Standards Act ("LSA") relating to Agencies will become law at the same time as the Regulation, including section 41.2 of the LSA, which prohibits a placement agency from remunerating an employee at a lower rate of wage than that granted to the employees of the client enterprise who perform the same tasks in the same establishment solely because of the employee's employment status. For the complete version (only available in French) of the draft regulation, click here.

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  • The award of moral damages following a collective dismissal

    A recent Superior Court decision in Peintures Industrielles Évotech1 ruled that the grievance arbitrator had acted within his jurisdiction in awarding moral damages to employees dismissed abruptly when the Company moved its operations to Ontario. Context of the Évotech case Évotech, which manufactures, distributes and sells industrial paint, was negotiating the renewal of a collective agreement that had expired several months before. When the lease of one of its two premises located in Québec was about to expire, Évotech moved its inventory and equipment to Cornwall in the neighbouring province of Ontario. The move made perfect sense for Évotech. Its Québec facilities had fallen into disrepair and had become unsafe. In addition, the relocation to Cornwall allowed the Company to benefit from significant subsidies. The plant director thus summoned all the employees to the cafeteria to announce the closure of the plant. Employees were told that they would receive a compensatory payment in lieu of notice equal to eight weeks of work in addition to the termination pay provided by the collective agreement. Several security guards were present when the director read a brief statement confirming the immediate dismissal and notifying the employees that they had to make an appointment to collect their belongings. According to the evidence, the employees were in shock. The union filed two grievances to contest the employer’s decision, alleging that the move resulted in giving work to persons excluded from the bargaining certificate, contrary to the provisions of the collective agreement. Seized with the grievances, arbitrator Charles Turmel concluded in his award that the move of operations and the collective dismissal contravened the clause of the collective agreement limiting the right to allocate work2. The arbitrator ordered the employer to pay to each dismissed employee $1,000 as moral damages, in addition to the equivalent of three weeks of salary per year of service. It is to be noted that these amounts were in addition to the 8 week indemnity for collective dismissal and the supplemental indemnity under the collective agreement. According to the arbitrator, awarding moral damages to the employees was justified by the [TRANSLATION] “suddenness of their dismissal”3. Furthermore, the arbitrator ordered Évotech to pay to the union $10,000 in damages for having failed to negotiate in good faith the renewal of the collective agreement, thus blaming the company for having undertaken the negotiations for the renewal of the collective agreement while planning the move of its operations. The decision in judicial review On April 10 on this year, the Superior Court allowed in part the application for judicial review and modified some of the conclusions of the arbitration award, which it deemed to be unreasonable. Madam Justice Chantal Tremblay confirmed that the arbitrator’s conclusion that the cessation of the employer’s operations in Québec constituted a relocation rather than a closure, fell within a range of reasonable outcomes. Moreover, the judge confirmed that the employer had failed to comply with the clause of the collective agreement prohibiting the Company from giving work to employees excluded from the bargaining unit. The Court considered that awarding $1,000 in moral damages to each of the employees also fell within a range of reasonable outcomes, in view of the circumstances surrounding the collective dismissal. However, the Court intervened to modify the conclusion of the arbitrator concerning the indemnity equal to three (3) weeks of salary per year of service on the ground that it failed to take into account the employees’ duty to mitigate their damages and the indemnities already paid by the employer. Lastly, the Court set aside the arbitrator’s conclusion ordering the employer to pay $10,000 in damages to the union on the ground that a complaint alleging bad faith negotiations must be brought before the Tribunal administratif du travail (the Québec equivalent to a Labour Board). Comments In the context of the judicial review, Justice Tremblay considered that awarding moral damages fell within a range of reasonable outcomes and that there was no reason for the Superior Court to intervene. However, one must consider that a refusal of the arbitrator to award such damages could have also fell within that range of reasonable outcomes. The Évotech case involves the discretionary power of the grievance arbitrator to award moral damages to employees to remedy harm which may not be compensated in nature4. Although such damages have recently been awarded in the context of abusive dismissal5, the implementation of unfair and unreasonable working conditions for some employees6 or within the context of a breach of a collective agreement, as the time provided for notifying the union of any subcontracts7, awarding moral damages as a result of a sudden collective dismissal is a first. On June 12, the Court of Appeal allowed the motion for leave to appeal of the employer on the basis of two issues, namely, the interpretation of a section of the collective agreement and the power of the Superior Court to modify the conclusions of an arbitration award instead of setting the award aside8. Until the Court of Appeal issues its decision, employers will have to keep in mind that they could be liable for damages in case of closures without prior notice. We are carefully monitoring this case and will keep you informed of any developments. Peintures Industrielles Évotech c. Turmel, 2017 QCCS 1375, statement of appeal and motion for leave to appeal, 2017-05-05 (C.A.), 500-09-026780-171. Peintures Industrielles Évotech inc. c. Syndicat des employés de Sico inc., section Évotech (CSN) (union grievance | Hgjf8576), 2015 QCTA 809. Id., para 152. Droit de l’arbitrage de grief, 6e édition, Éditions Yvon Blais, 2012, para IX-34. Kugler c. IBM Canada Limited, 2016 QCCS 6576. Centre intégré universitaire de santé et de services sociaux du Nord-de-l’Île-de-Montréal c. Jobin, 2017 QCCS 1583. Syndicat canadien de la fonction publique, section locale 2881 et Centre intégré universitaire de santé et de services sociaux de l’Ouest-de-l’Île-de-Montréal (Centre de santé et de services sociaux de Dorval-Lachine-LaSalle) (griefs syndicaux), 2016 QCTA 893. Peintures industrielles Évotech c. Syndicat des employés de Sico inc. (CSN), section Évotech, 2017 QCCA 932.

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  • Put that perimeter in your pipe and smoke it: the imminent broadening of the prohibition on smoking within a nine-meter radius

    On November 26, 2016, the new provisions of the Tobacco Control Act1 (the “Act”) will come into force. One of these provisions will considerably expand the scope of the rule which currently prohibits smoking within a nine-meter radius of any door leading to an enclosed place governed by the Act. This broadening comes about in two ways. The prohibition of smoking within a nine-meter radius of doors will apply to more areas Not only will smokers have to respect the ban within a nine-meter radius of any door, they also will have to observe the nine-meter rule around openable windows and air vents leading to an enclosed place where smoking is forbidden.2 Broadening of the areas where smoking is prohibited within a nine-meter radius The prohibition currently applies within a nine-meter radius of doors leading to any of the following enclosed spaces:3 Facilities maintained by a health and social services institution and premises where services are provided by an intermediate resource; Facilities operated by a childcare centre or day care centre; Enclosed spaces where community or recreational activities intended for minors are held.4 Beginning on November 26, 2016, smoking will also be prohibited within a nine-meter radius of any door, openable window or air vent leading to the following enclosed spaces:5 Facilities maintained by a health and social services institution and premises where services are provided by an intermediate resource; Premises or buildings placed at the disposal of an educational institution; Facilities operated by a childcare centre or day care centre; Enclosed spaces where activities of a sports or recreational, judicial, cultural or artistic nature are carried on, or where conferences, conventions or other similar events are held; Enclosed spaces where community or recreational activities intended for minors are held; Enclosed spaces where the activities held may be attended only by persons explicitly or implicitly invited or authorized by the host; Enclosed spaces used by a non-profit legal person or by an association, circle or club, whether a legal person or not, to which only members and their guests have access; Enclosed spaces where prevention, assistance and support services, including temporary lodging services, are offered to persons in distress or persons in need of assistance; Tourist accommodation establishments and the buildings of outfitting operations; Enclosed spaces where meals for consumption on the premises are ordinarily offered to the public in return for remuneration; Establishments operating under a public house, tavern or bar permit; Bingo halls; Workplaces; Premises used for detention; All other enclosed spaces to which the public has admittance.6 Notes The effect of this broadening is a significant expansion in the scope of the smoking prohibition within a nine-meter radius of any door leading to an enclosed place enumerated by the Act. The fact that the prohibition will apply within a nine-meter radius of any door, openable window and air vent leading to a workplace is in itself a significant change not only for smokers, but for all of Quebec’s employers. It is worth recalling that the Act also contains provisions regarding the operators of the spaces listed above: The obligation to post notices visible to the people using the place or business, indicating the areas where smoking is prohibited;7 Prohibition from tolerating smoking in an area where it is prohibited.8 Let us not forget that, in November 2015, the legislator reinforced the Act by increasing the liability of the administrators and executives of companies subject to respect it, increasing the amounts of the fines they are subject to and making it easier for the prosecution to prove the violations.9 In addition to being vigilant, companies should ensure that a policy regarding the use of tobacco products10 is in place and should also inform employees, clients, visitors and suppliers of the content of their tobacco control policy. CQLR, c. L-6.2. An Act to Bolster Tobacco Control, Bill n°44 (assented to on November 26, 2015), 1st sess., 41st legis., ss. 6 and 76. Except if the activities referred to are held in a dwelling. Tobacco Control Act, see note 1, ss. 2 and 2.2. Except if the activities referred to are held in a dwelling. Bill n°44, see note 2, s. 6. S. 10 of the Act. S. 11 of the Act. In this regard, please refer to our Need to know newsletter entitled “Tobacco Control and E-cigarettes: New Challenges for Businesses“ (March 2016), online under “Publications”. Such a policy should also seek to control the use of marijuana, as well as the use of any substance that can be smoked.

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  • The Canadelle case and the importance of contesting certain CNESST decisions promptly

    On June 17, 2016, the Superior Court1 affirmed the 2014 decision of the Commission des lésions professionnelles2 (“CLP”) in Canadelle, s.e.c. and Commission de la santé et de la sécurité du travail.3 This decision put an end to the jurisprudential controversy regarding the application of sections 31 and 327 of the Act Respecting Industrial Accidents and Occupational Diseases4 (“AIAOD” or “the Act”), and settled the following question of law: Does a final decision from the Commission des normes, de l’équité, de la santé et de la sécurité du travail (“CNESST”), recognizing a link between a new diagnosis and an employment injury or initial incident, bar an employer from subsequently seeking a transfer of costs under section 327(1) of the AIAOD? The CLP’s decision After reviewing the factors that can give rise to the application of section 31(1) of the AIAOD, the CLP (represented by a panel made up of three administrative judges) clarified what had previously been a controversial question of law, namely, whether or not a transfer of costs can be sought under section 327 of the Act in cases where a decision of the CNESST recognized a link between the new diagnosis (which purported to be an employment injury arising out of or in the course of care within the meaning of section 31 of the Act) and where the initial event had not been contested. The CLP’s conclusions can be summarized as follows: An injury or illness that arises in the course of a file and is considered a “new diagnosis” can be related either to the employment injury within the meaning of section 2 of the AIAOD or to the care or lack of care within the meaning of section 31, but it cannot be linked to both at the same time. Consequently, when the CNESST renders a decision recognizing the relationship between a new diagnosis and the employment injury or the initial event and this decision is not contested,5 that finding bars a request for the transfer of costs under section 327(1) of the AIAOD. Therefore, an employer that wishes to demonstrate that the new diagnosis actually results from one of the situations to which section 31 of the AIAOD applies must contest the CNESST decision before it becomes final and irrevocable.6 If the decision does in fact become final and irrevocable, the effect would be to establish a link between the employment injury and the new diagnosis, which means that the new diagnosis is considered an employment injury under section 2 of the Act. An employer failing to contest such a decision, or abandoning its challenge of such a decision, has the effect of rendering any subsequent request made under section 327 of the AIAOD inadmissible. The powers granted to the CLP (now the Administrative Labour Tribunal) under section 377 of the AIAOD do not authorize it to challenge or modify a final and irrevocable CNESST decision. The Superior Court’s decision After analyzing the CLP’s decision, the Superior Court found that it was reasonable and that there was no basis on which the Court should interfere with it. Accordingly, the CLP’s conclusions, as summarized above, remain applicable. Commentary The Canadelle decision serves as a reminder that, upon receipt of a CNESST decision, it is vital for an employer to immediately perform a further analysis of the decision in order to be able to make its position known and assert its rights in a timely manner. In cases where a decision recognizes a connection between the new diagnosis and the employment injury or the initial event, once the period provided for in the Act for contesting such a decision has expired, it is too late to allege that the injury arose out of care (or lack thereof) unless one can show reasonable grounds for being relieved from the obligation to apply for a review of the decision within the time period provided for by the Act. When in doubt, the holdings in Canadelle suggest that employers ought to act with an abundance of caution, which might include “preventive” challenges of decisions recognizing a new diagnosis where there is a chance of a remedy being available under section 31 of the AIAOD. 2016 QCCS 2806. On January 1st 2016, when An Act to group the Commission de l’équité salariale, the Commission des normes du travail and the Commission de la santé et de la sécurité du travail and to establish the Administrative Labour Tribunal, S.Q. 2015, c. 15, came into force, the Commission de la santé et de la sécurité du travail (CSST) was replaced by the “Commission des normes, de l’équité, de la santé et de la sécurité du travail” (“CNESST”) and the CLP was replaced by the Administrative Labour Tribunal. For more details about this reform, see the Right to Know newsletter entitled “Bill 42 and the reorganization of the Quebec labour-related institutions” (July 2015). 2014 QCCLP 6290. CQLR, c A-3.001. It should be noted that the CLP draws a distinction between situations where the CNESST renders no specific decision regarding the new diagnosis claimed to be covered by section 31 of the AIAOD, and situations where the CNESST renders a decision finding a link between the new diagnosis and the initial event or the recognized employment injury. (See para 20 of the decision). Section 358 of the AIAOD states that contestation of a CNESST decision must be filed within thirty (30) days of the notification of the decision.

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  • The lack of conclusive scientific evidence is not necessarily a fatal bar to proving causation in relation to an occupational disease, according to the Supreme Court of Canada

    Last June 24th, the Supreme Court of Canada (the “Supreme Court”) rendered judgment in the case of British Columbia (Workers’ Compensation Appeal Tribunal) v. Fraser Health Authority1 (“Fraser”). Briefly, this case involved seven laboratory technicians from the same hospital who had breast cancer. Each of them filed a claim for compensation under the Workers Compensation Act (the “Act”), alleging that their cancer was an occupational disease. In British Columbia, one of the applicable criteria for determining whether there is an occupational disease is that the work must have been of “causative significance” in the development of the illness. Background The claims for compensation were denied by the Workers Compensation Board (the “Board”). The workers appealed this decision to the British Columbia Workers’ Compensation Appeal Tribunal (the “Tribunal”). In a majority ruling, the Tribunal overturned the Board’s decision, holding that a decision-maker can infer causation based on “ordinary common sense”, even in the absence of scientific proof thereof. Following a reconsideration, a judicial review and an appeal, the Tribunal’s decision was set aside and, accordingly, the workers’ claims were dismissed. The workers then filed an appeal to the Supreme Court. Decision of the Supreme Court The Supreme Court considered two issues: (1) the jurisdiction of the Tribunal to reconsider its own decision, and (2) the evidence necessary to establish whether the work done as a laboratory technician was of “causative significance” in the development of the breast cancer. We will focus on the second issue in this newsletter. A majority of the Supreme Court held that a finding of causative significance could be made even in the absence of medical evidence positing or refuting the existence of a causal link. The scientific standards are more stringent than the legal standards for the purposes of establishing causative significance. Furthermore, the Tribunal can take into account other evidence in assessing whether a finding of causative significance can be made. In this case, the two scientific reports that were filed could not establish a link between the cancers and the lab technicians’ work. The Supreme Court nevertheless held that the Tribunal’s decision was reasonable because it was based on other evidence, particularly the higher incidence of breast cancer at the complainants’ workplace, and the fact that the determination of causative significance was a matter that was within the Tribunal’s expertise. It should be noted that Justice Côté gave a strong dissenting opinion on the issue of the evidence necessary to establish causative significance, and on the expertise of the Tribunal. For her, the Tribunal’s decision was based on mere speculation and failed to properly consider the criterion of causative significance. She also stressed, as the British Columbia Court of Appeal had also noted, that the Tribunal did not have expertise in medical matters. Impact in Quebec? Could the Administrative Labour Tribunal (“ALT”) be tempted to follow the principles laid down in Fraser? Firstly, it should be noted that there are several significant distinctions between the relevant law in Quebec and British Columbia. Indeed, British Columbia tribunals must apply the statutory concept of “causative significance” to determine whether a worker has suffered from an occupational disease, while the same concept is not present in the Quebec statute, i.e. the Act respecting industrial accidents and occupational diseases2 (the “AIAOD”). Where the presumption under section 29 of the AIAOD does not apply, section 30 of the same statute places the burden on the worker to show that his disease is “characteristic of” the work he was doing or “directly related to the risks peculiar to that work”.3 There is a further distinction. In its decision, the Supreme Court acknowledges section 250(4) of the British Columbian statute, which provides that where the evidence is “evenly weighted” between the worker and the employer, the Tribunal must resolve it “in a manner that favours the worker”. There is no equivalent under Quebec law. At best, the introductory section of the AIAOD states that [t]he object of this Act is to provide compensation for employment injuries and the consequences they entail for beneficiaries.4 This does not relieve the party on whom the burden of proof lies from establishing the facts he alleges on the balance of probabilities. Evidence of equal probative value on both sides should therefore lead to an adverse decision against the party who holds the burden of proof. Since section 30 of the AIAOD states that the burden is on the worker, he must adduce evidence with greater probative value than the evidence against him.5 If he fails to do so, his claim should be dismissed. Furthermore, both the dissenting judge in the Supreme Court and the British Columbia Court of Appeal cited the fact that the British Columbian Tribunal does not have expertise in medical matters. This principle originally emerged from the decision in Page v. British Columbia (Workers’ Compensation Appeal Tribunal),6 which has been referred to on numerous occasions in the British Columbian case law. In that case, the judge held that the Tribunal could not reject the uncontradicted medical expertise of a psychiatrist who had diagnosed a post-traumatic syndrome and substitute its own expertise — since it had no expertise. On the other hand, in Quebec, the occupational health and safety division of the ALT has medical expertise by virtue of its specialization.7. The ALT can even take judicial notice of [translation] “basic notions where they are generally recognized by the medical community, are not the subject of scientific controversy, do not require special expertise, and have been articulated many times in proceedings before the tribunal.”8 In addition, section 26 of the Regulation respecting evidence and procedure of the Administrative Labour Tribunal9 provides that the “Tribunal shall take judicial notice of generally recognized facts and of opinions and information within its field of specialization”. Furthermore, section 84 of the Act to establish the Administrative Labour Tribunal provides that medical assessors can assist at the hearings.10 In short, the scope of the ALT’s expertise is quite different from that of the British Columbian Tribunal. Additionally, the Supreme Court’s decision in Snell v. Farrel,11 which has been applied by various Quebec tribunals, including the Commission des lésions professionnelles (now the ALT), noted that the scientific standards for establishing a causal link are more stringent than the legal standards. Tribunals should not apply the stricter scientific standard, but rather, the standard of proof mandated by law. Therefore, a tribunal could infer a causal link between the work done and the occurrence of the disease even in the absence of conclusive positive or scientific evidence of the existence of such a link. In other words, a worker can prove his disease is “characteristic of” his work or “related to the risks peculiar to his work” without adducing expert evidence. Thus, in some cases, using similar reasoning to that in the Fraser case, decisionmakers have inferred a causal nexus based only on circumstantial evidence.12 2016 SCC 25. R.S.Q., c. A-3.001. Ibid, s. 30. Ibid, s. 1. Richard (Succession de) et Centre hospitalier Pierre Le Gardeur, 2011 QCCLP 3347, para. 430 and following. 2009 BCSC 493. Luc Côté and Catherine Dubé-Caillé, « La connaissance d’office et la spécialisation de la Commission des lésions professionnelles: de la théorie à la pratique », in S.F.C.B.Q., vol. 360, Développements récents en droit de la santé et sécurité au travail (2013), Cowansville, Éditions Yvon Blais, p. 137; Stéphanie Rainville, « La connaissance d’office de la Commission des lésions professionnelles, une revue de la jurisprudence récente », in Santé et sécurité au travail, vol 17, Cowansville, Éditions Yvon Blais, 2013, p. 225. Vereault et Groupe Compass (Eurest/Chartwell), 2006, no. AZ-50391746 (CLP); Cléroux et SIDO ltée, 2012 QCCLP 3847. R.R.Q., 1981, c. A-3.001, r. 12. R.S.Q., c. T-15.1, s. 84. [1990] 2 SCR 311. Tevan et Centre de réadaptation de l’Ouest de Montréal, [2000] No. AZ-00304563 (C.L.P.), Laverdière et Maison du Bingo de Lévis, 2010 QCCLP 7894.

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  • Hiring in the New Year? What to do when a new recruit overpromises and underdelivers?

    A recent decision1 by the Commission des relations du travail (“CRT”) highlights the plight of an employer faced with an employee who oversold his abilities during the job interview and later proves incapable of delivering on his promises. In this case, Laurentian Bank Securities inc. (“Laurentian”) successfully defended against a claim for dismissal without good and sufficient cause filed by a former employee. The facts of the case are commonplace. The employee had been a highly successful Investment Adviser with Desjardins Wealth Management (“Desjardins”) for a number of years. During a job interview with the vice-president of Laurentian, the employee estimated that he could transfer to Laurentian 75% of his portfolio, the total of which was worth $37 million of assets under managements. His performance potential led to an offer of employment from Laurentian and enabled him to negotiate a generous compensation and benefits package. During the first days of his new employment, days which prove crucial from the perspective of client retention, the employee made minimal efforts to retain the client base he had built over the years and, ultimately, few clients transferred their assets to him at Laurentian. Several months into his employment, he was far from reaching his initial earnings objectives. The disparity between his performance and projected earnings became amplified with each annual performance review. Efforts made by Laurentian to support the employee’s progress – encouraging him to utilize his business development budget, prepare a business plan, etc. – proved unproductive. After three years of service with Laurentian, the employee was dismissed for a failure to meet job requirements. From the employee’s perspective, his lack of success was the result of a number of external factors unrelated to his abilities (for example, he was placed in an open-plan office that did not permit the requisite confidentiality to call his clients; he was denied a transfer to another branch; Laurentian hired the very Investment Adviser whose book of business he had bought several years earlier, and this new employee unfairly solicited his clients; he was defamed by his former Desjardins partner, which explained why his clients broke off their relationship with him after his transfer to Laurentian). Moreover, the employee raised his health condition as a mitigating factor; the pressure at work caused him to develop depression, which left him unmotivated to solicit new clients. The constellation of explanations given by the employee to rationalize his poor performance did not sway the CRT. Ultimately, the employee was regarded as an industry veteran, well aware of performance expectations. This factor appears to have been decisive in the CRT’s weighing of the evidence, as can be seen from a summary of its analysis below. In cases of administrative dismissal, it is the onus of the employer to demonstrate good and sufficient cause. In keeping with the principles developed under applicable case law, the CRT must verify that the employer’s action was not arbitrary, discriminatory or unreasonable, and that the employer fulfilled its obligations imposed by applicable case law. The CRT’s findings in respect of the applicable criteria are summarized below: Whether the employee was informed of the company’s policies and the expectations set by the employer The employee was experienced in the financial services industry and familiar with the job requirements of an investment adviser. Moreover, the goals set for him by Laurentian were standard for such a position. Under the circumstances, the CRT concluded that Laurentian’s expectations were reasonable and sufficiently transparent. Whether the employee’s shortcomings had previously been identified The employee was repeatedly informed, both formally and informally, that his performance was inadequate. He had even been notified in writing that he was required to prepare a business plan to improve his job performance. Whether the employee received the necessary support to address his shortcomings and achieve the performance objectives The employee received appropriate support from Laurentian in order to meet his objectives (e.g. by utilizing a business development fund, launching an advertising campaign, working alongside other advisers, etc.). Whether the employee received a reasonable time to adjust The employee was employed by Laurentian for three years and was advised of his shortcomings at least as early as his first annual evaluation. He benefited from a reasonable time to adjust his performance. Whether the employee had been advised that a failure to improve would lead to dismissal The employee could not claim that he did not see the dismissal coming. He was clearly informed that his job was in jeopardy following his second annual evaluation. The case serves to remind employers of the importance of setting firm and reasonable performance objectives early on in the employment relationship. Should a dismissal for lack of competence prove inevitable, what will serve the employer well in the event that litigation arises is evidence that the employee was advised of his performance deficiencies, that resources were offered to support the employee in realizing his objectives, and that the employee was notified that a failure to improve would jeopardize his employment. While the process may require time and patience, it must be followed to avoid possible liabilities stemming from an unfavourable ruling of unjust dismissal. _________________________________________ 1 Daniel Denis v. Valeurs mobilières Banque Laurentienne inc., 2014 QCCRT 0517.

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  • Ditomene c. Boulanger, the next round: the Court of Appeal holds that procedural fairness rules need not be followed in the context of an employer’s investigation into alleged harassment

    In a unanimous decision dated November 17, 2014,1 the Court of Appeal of Québec held that the procedural fairness rules applicable in administrative and public law do not apply in the context of a psychological harassment investigation conducted by an employer. As a result, the Court set aside the judgment of the Court of Québec ordering the lawyer who conducted the investigation to pay $3,000 in damages.2 The Court of Québec at first instance concluded that the external investigator retained by the employer committed a fault by failing to comply with the obligations imposed by employer’s policy and by her contracts for services, which in particular, required her to ensure “the fairness of the investigative process”. In its judgment, the Court of Quebec identified the following breaches: refusal to provide the employee with the complaints made against him, refusal to provide him with a copy of the policy, refusal to provide him with the witnesses’ and complainants’ versions of the facts, failure to ensure that the investigation was conducted by the same individuals from the beginning to end, unnecessary request for a written undertaking of confidentiality, late notices to appear, and insufficiency of the report regarding the complaints made against the appellant. After having dismissed the employee’s main appeal, the Court of Appeal allowed the external investigator’s cross-appeal. The Court was of the view that the only question that the trial judge had to ask himself was whether the external investigator breached her obligations and committed a fault in the execution of the fact-finding mission conferred on her by the employer which made her extra-contractually liable to the employee under investigation. This question cannot be answered by simply referring to the rules of procedural fairness applicable in an administrative and public law context. According to the Court, such procedural fairness rules do not apply to an employer (even in the public sector) who conducts an investigation in order to determine the existence of psychological harassment and, if warranted, addresses it through the imposition of disciplinary measures against the harasser.3 The Court added that such an investigation, even one conducted by a third party mandated for that purpose, is inherently linked to the exercise of the employer’s authority to manage and discipline and need not be subject to procedural requirements comparable to those applicable to, among others, administrative or judicial tribunals or the adversarial process applicable before such bodies. As a result, an employer may adopt a policy which refers to the principles of natural justice or procedural fairness, but the applicable rules remain of those applicable in the realm of civil liability. Thus, even in the absence of an employer policy, in the case of a bungled investigation which results in a sanction being undeservedly and harmfully imposed on an employee, the employer or the investigator could be held liable to the extent a fault has been committed. In the Ditomene case, the Court of Appeal was of the opinion that the language used in the employer’s policy (specifically, the obligation to ensure the “fairness of the process”) did not impose a duty to ensure full compliance with the principles of procedural fairness as they have been developed in a public law context or with the rules applicable before a body exercising jurisdictional duties, nor did it require that the investigation be transformed into an adversarial process. The Court of Appeal concluded that there may be cases where an investigator’s conduct or way of doing things would constitute a fault which could possibly result in a determination of liability, but this was not the case in the circumstances of the Ditomene case. _________________________________________ 1 2014 QCCA 2108 (the “Ditomene case”). 2 2013 QCCQ 842. 3 On this subject, the Court of Appeal refers notably to the case of Université de Sherbrooke v. Patenaude, 2010 QCCA 2358 (see in particular, paragraph 39 of this judgment).

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  • An employer can file a counter claim against an employee in the context of proceedings instituted by the Commission des normes du travail in order to enforce the right of set-off

    In Commission des normes du travail v. Compagnie d'assurances Standard Life du Canada,1 (the “Standard Life of Canada case”), the Court of Québec allowed an employer to file a counterclaim against an employee in the context of proceedings instituted by the Commission des normes du travail (“CNT”) on behalf of that same employee. In so doing, the Court authorized Standard Life of Canada (the “Employer”) to request, by way of a counterclaim, the enforcement of the right of set-off between the amounts owed to the employee and the amounts owed by the employee to the Employer. However, the Standard Life of Canada case runs contrary to the majority of the case law coming out of the Court of Québec2 according to which the employer cannot file a counterclaim against his employee or ex-employee in the context of proceedings instituted by the CNT on the grounds that such an employee or ex-employee does not constitute a “plaintiff” within the meaning of the Code of Civil Procedure.3 In the Standard Life of Canada case, the CNT claimed the amount of $2,301 on behalf of an employee for unpaid vacation. For its part, the Employer argued that he had set off this amount against salary advances that had been made to the employee under a reimbursement agreement. The Employer was therefore claiming from the employee the remaining balance of the advances due after set-off by way of a counterclaim. The CNT argued that the Employer was not authorized to set off these amounts and that its counterclaim should have been filed as a separate case. Accordingly, the CNT was seeking to have Standard Life’s counterclaim dismissed and struck out. In its judgment, the Court of Québec relied on a decision of the Court of Appeal4 to conclude that the employee was a “party” to the action instituted by the CNT and that, accordingly, the Employer could enforce any right against the CNT which could be validly asserted against the employee herself.5 In the specific case where an employer seeks to set off amounts owed to an employee and the amounts the employee owes the employer, the Court will have to satisfy itself that the employer had a debt that is certain, liquid and exigible prior to proceedings being instituted by the CNT, in which case there may be extinction of the debt up to the lesser of the two amounts owed.6 The Court of Québec also bases its conclusion on the proportionality rule as set out in the Code of Civil Procedure.7 In fact, allowing the CNT’s motion to dismiss would require the Employer to institute separate proceedings against the employee. The Court was of the view that the interests of justice would not be as well served in such circumstances as opposed to if the crossclaim was dealt with at the same time as the action filed by the CNT given that both claims originated from the same source. Lavery will monitor the Standard Life of Canada case and keep you informed of any significant developments. _________________________________________ 1 2014 QCCQ 4523. 2 Particularly see Commission des normes du travail v. 9175-0489 Québec inc. (Steak frites Saint-Paul), 2013 QCCQ 3884 (C.Q.); Comité paritaire de l’industrie des services automobiles de la région de Montréal v. Hewitt Équipements ltée, 2012 QCCQ 1485 (C.Q.) and Commission des normes du travail v. Groupe Dubé Entrepreneur Général inc., 2012 QCCQ 6896 (C.Q.). 3 RLRQ c. C-25. 4 Commission des normes du travail v. Motos Daytona inc., 2009 QCCA 1833 (C.A.) (“Motos Daytona inc.”), quoting Maltais v. Corp. du parc régional du Mont Grand-Fonds inc., D.T.E. 2002T-715 (C.A.). 5 Prec., note 1, par. 11 and 12. 6 Motos Daytona inc., prec., note 4. 7 Prec., note 3, article 4.2.

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  • The Asphalte Desjardins matter: the Supreme Court of Canada overturns the decision of the Québec Court of Appeal

    On July 25, 2014, the Supreme Court of Canada rendered its decision inQuébec (Commission des normes du travail) v. Asphalte Desjardins inc.1 In this ruling, which overturned a judgment by the Québec Court of Appeal,2 the Supreme Court concluded that an employer who receives notice of termination within a reasonable time period, as stipulated under article 2091 of the Civil Code of Québec3 (“C.C.Q.”), cannot, in turn, unilaterally and immediately terminate a contract of employment of an indeterminate term without having to give the employee notice of termination or pay an indemnity in lieu of such notice.On March 19, 2013, the majority of the Québec Court of Appeal reversed the prevailing trend in the case law which held that where an employee gives notice to his employer of his intention to resign, the employer may waive the notice, provided it compensates the employee for the remainder of the period.What follows is a brief analysis of the decisions rendered by the Québec Court of Appeal and the Supreme Court of Canada in this matter.The decision of the Québec Court of AppealIn its decision, the Québec Court of Appeal proceeded with an analysis of the legal principles in dispute: the option of a party to an indeterminate term employment contract to unilaterally terminate it by giving reasonable notice of termination to the other party (article 2091 of the C.C.Q.) and the obligation of the employer to provide the minimum notice of termination of employment stipulated in the Act respecting Labour Standards4 (the “Act”) before terminating the employee’s contract of employment (section 82 of the Act). Essentially, a majority of the Court of Appeal concluded that the right to reasonable notice of termination set out in article 2091 of the C.C.Q. benefits the party who receives it. However, the option to give notice is not elevated to the status of a “right” which may be invoked against the party who receives said notice. Consequently, in a case like that of Asphalte Desjardins inc., the latter could, in its capacity as employer, waive the notice of termination given by its employee, completely or in part, without having to provide the notice of termination of employment stipulated at section 82 of the Act. In reality, it was the employee who had terminated the contract and not the employer.We should point out that in the specific case of Asphalte Desjardins, the employee in question, a project manager who had access to the company’s confidential information, was resigning in order to go work for a competitor. Asphalte Desjardins inc.’s decision to request that the employee leave immediately instead of on the announced departure date was due in part to the risk to the employer by maintaining the employment of an employee with access to sensitive information, while knowing full well that the employee would be working for a competitor in a few weeks.The decision of the Supreme Court of CanadaThe Supreme Court of Canada overturned the Québec Court of Appeal’s decision and concluded that an employer who receives reasonable notice of termination cannot, in turn, unilaterally terminate a contract of employment with an indeterminate term without itself giving notice of termination or paying an indemnity in lieu of such notice which includes at least the notice of termination of employment provided at section 82 of the Act.The Court found that a contract of employment with an indeterminate term is not terminated when notice of termination is given. On the contrary, the contractual relationship continues to exist until the date specified in the notice of termination. Consequently, even after one of the parties to an indeterminate term contract of employment delivers notice of termination to the other party, both parties are bound to continue performing their obligations under the contract until the notice period expires. This includes the obligation of the party wishing to terminate the contract of employment prior to the expiration of the notice period provided by the other party, to in turn give notice of termination. In the opinion of the Court, it is inappropriate to deal with the issue from the perspective of “renunciation” of the notice period, and such an approach cannot have the effect of permitting a party to derogate from its obligations to the detriment of the other party’s rights.In essence, if the employer refuses to allow the employee to continue his or her employment and to pay him or her during the notice period provided, the employer will in effect be “terminating the contract” within the meaning of section 82 of the Act. However, this would not be the case if the employee were to announce his or her immediate resignation, offering, nonetheless, to continue working for a certain time. In such a case, the Court specifies that if the employer does indeed want the employee to leave immediately, there is a meeting of minds and notice of termination is unnecessary given that a contract for an indeterminate term can be terminated by agreement between the parties. Moreover, the Court added that the notice period chosen unilaterally by the employee cannot be imposed on the employer, a useful clarification in cases where an employee might give an unreasonably long notice period.5Finally, the Court concluded that the Commission des normes du travail may claim an indemnity equal to three weeks’ salary on the employee’s behalf in respect of the balance of the notice given by the employee, together with the amount due in respect of the annual leave.ObservationsIt is worth noting that the fact that the departing employee had announced that he would be leaving to go work for one of Asphalte Desjardins inc.’s competitors does not appear to have played a particularly strong role in the reasons of the Supreme Court of Canada. Having been called upon to resolve a controversy in the case law, the Court elected to clarify certain general legal principles based on an analysis of the provisions set out in the Act respecting Labour Standards and the Civil Code of Québec, and set aside the analysis of the Court of Appeal. The Supreme Court also held that employees are “vulnerable” parties.6 The Court went on to add that since the employee had not claimed the full indemnity stipulated in sections 82 and 83 of the Act, “it is preferable to leave the question of whether the notice period provided for in section 82 of the Act and the equivalent indemnity provided for in section 83 are matters of directive or protective public order for another occasion”.7From an employer’s standpoint, it may appear unfair to have to pay an indemnity to an employee who has just announced that he or she is resigning in order to work for a competitor, whereas it would appear natural to refuse the right of the departing employee to remain on the job given his or her likely access to sensitive information. In practical terms, isn’t an employee who resigns to go work for a direct competitor in a position to benefit from the notice of termination given, to the detriment of the employer? For an employer, having to pay the salary of an employee who has chosen to join the competition most certainly adds insult to injury, especially in those cases where, due to the circumstances, it is quite clearly the company that is the “vulnerable” party.In any case, a subsequent decision on the directive or protective public order nature of sections 82 and 83 of the Act will most certainly be an interesting development and could serve to complete the analysis developed by the Supreme Court in the Asphalte Desjardins case.Lavery will be monitoring the application of this Supreme Court decision and will keep you informed of any prevailing trend in the case law or noteworthy development in this regard. _________________________________________1 2014 SCC 51 (“Asphalte Desjardins”).2 Asphalte Desjardins inc. v. Commission des normes du travail, 2013 QCCA 484.3 LRQ c C-1991.4 CQLR c N-1.1.5 Asphalte Desjardins, par. 44.6 Id., par. 64.7 Id., par. 71.

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  • Employee or Self-employed Worker? The Court of Appeal of Québec Rules

    The Court of Appeal of Québec recently ruled on the criteria for distinguishing between an employment agreement and a contract for services in the case of Bermex international inc. v. Agence du revenu du Québec.1It is worth noting that regardless of the fact that the parties labelled their agreement as a contract for services or an agreement with a self-employed worker, such a description is not binding on a court.The courts have developed certain criteria for analysing an individual’s legal status in order to determine whether he or she is an employee or a self-employed worker.Among these criteria, the relationship of subordination, that is, whether a person carries out work under the direction or control of another person, has always been a determining factor.But what if an individual is not, strictly speaking, “under the direction or control of another person”,2 due to the fact that he or she is the one running the business?This was the question the Court of Appeal was called upon to answer.This is an interesting decision because the Court adopted a liberal interpretation of the relationship of subordination by taking into account the degree of integration of the worker into the company, a criterion derived from the common law.In this article, we will benefit from the collaboration of Mtre Martin Bédard, an expert in tax law, to provide a brief overview of the tax implications which may arise from erroneously labelling the relationship between the parties.THE FACTSThis article addresses the appeal from a decision of the Court of Québec dismissing the contestation by four companies of notices of assessment issued by the Agence du revenu du Québec (the “Agence”). At the heart of the dispute over whether an actual relationship of subordination existed, and ultimately whether the individual in question was an employee rather than a self-employed worker, was the status of the principal director and officer of the appellant companies.The appellants, Bermex International (“Bermex), Finition Chez Soi (“Finition”) and Confortec 2000 (“Confortec”) carry on business in the furniture industry. These three companies are controlled by Groupe Bermex Inc. (“Groupe”) and the voting shares of Groupe are held by Gestion Richard Darveau Inc.Richard Darveau is a chartered accountant as well as the principal director and officer of the three appellant companies. He describes himself as a business management consultant.Following a tax assessment of the four companies, the Agence concluded that Mr. Darveau was not a self-employed worker but rather an employee of the companies. Accordingly, the Agence was of the view that the management fees paid to Mr. Darveau were to be considered employment income and as such, they should be included in the companies’ payroll.For the years 2003, 2004 and 2005, the management fees paid to Mr. Darveau were $800,000, $900,000 and $900,000 respectively. For his part, Mr. Darveau declared these amounts as business income on his personal tax returns.THE LOWER COURTSBermex, Finition, Confortec, and Groupe unsuccessfully contested the notices of assessment issued by the Agence.The assessments were upheld.The Court of Québec also dismissed the appeal of the assessments filed by the companies. It concluded that the assessments were presumed to be valid3 and that the appellants had the burden of [translation] “demolishing”4 this presumption, something they failed to do.Below is a non-exhaustive list of the facts arising out of the judgment of the Court of Québec:  There was no written agreement between Mr. Darveau and the companies regarding his work as a consultant; The services rendered take up approximately 85% of the time worked by Mr. Darveau; Mr. Darveau acts as a consultant for practical, daily and short-term needs; He attends the annual conventions in the industry as President and CEO of the Groupe; Mr. Darveau has the authority to give discounts to clients; He works mainly from an office on Bermex’s premises; The companies provide Mr. Darveau with secretarial, reception, photocopy, and equipment services, including paper supplies, forms, catalogues, brochures, and stationery; His travel expenses and meals are reimbursed; The companies assume the consequences of any management errors committed by Mr. Darveau; The services rendered by Mr. Darveau appear to be uniform, without any particular nuance related to the nature of each individual company’s activities; The amount of the fees are uniform from one month to another and are sometimes billed in advance without any later adjustment being made on the basis of the time actually worked;5 Mr. Darveau provided no financial statement in relation with these services.Therefore, the judge concluded that a number of elements entered into evidence and already accepted by the case law weighed heavily against the existence of a contract for services, particularly in light of the high degree of integration of Mr. Darveau into the activities of the companies.THE APPELLANTS’ ASSERTIONSThe appellants raised a number of grounds for appeal.First, they argued that the trial judge erred in dismissing an objection made against the admission into evidence of the questionnaire completed by the auditor. The form contained answers given by Mr. Guy Bouillé, the company’s controller, in the presence of Mr. Darveau.The second ground for appeal was based on the presumed validity of the notices of assessment and the burden of proof on the person or entity who wishes to challenge them. The appellants maintained that they had satisfied their burden and had rebutted the presumption of validity of the disputed notices of assessment.The appellant also argued that the intent of the parties should have been taken into consideration in determining the nature of the contract binding them. They took the position that Mr. Darveau had multiple titles, including employee, president and CEO and self-employed worker within the Groupe, but that in reality, he was simply a self-employed worker providing services to the related companies.Finally, the appellant asserted that the judge erred by failing to address the issue of the lack of a relationship of subordination between the appellants and Mr. Darveau. In their view, in the absence of such a relationship, [translation] “the analysis should not be pushed further”.6 More specifically, they were of the view that, to the extent that the companies are entirely controlled by Mr. Darveau, it would be difficult to conclude that there was a relationship of subordination between the appellants and their so-called employee.Finally, the appellants faulted the judge for importing the common law criterion of integration into Quebec law in order to determine whether an employment relationship existed between the parties.THE DECISION OF THE COURT OF APPEALa. The Admissibility of the Questionnaire :At the outset, the Court of Appeal dismissed the appellants’ argument regarding the inadmissibility of the questionnaire completed by the Agence’s auditor. According to the Court of Appeal, the trial judge was right to admit the answers provided by Mr. Bouillé and set down in writing in the form into evidence. They were verbal declarations of which the auditor had personal knowledge and, as such, they were admissible into evidence.Furthermore, the Court was of the opinion that the trial judge was in a better position to evaluate the reliability of Mr. Darveau’s statements. Having concluded that they were sufficiently reliable, the Court saw no reason to intervene in this respect.b. The Presumption of Validity of the Notices of Assessment:Again, the Court of Appeal upheld the position of the trial judge, concluding that he applied the correct test by holding that the appellants were required to [translation] “demolish” the presumption of validity with prima facie evidence demonstrating in what way the facts on which the assessment was based were incorrect.Furthermore, with respect to Mr. Darveau’s testimony, the Court noted that the assessment of a witness’ credibility is a matter for the trial judge.7c. The Intent of the Parties:As did the trial judge, the Court of Appeal concluded that the intent of the parties to enter into a contract for services was not clear from the evidence presented in the case.d. The Integration Criterion:The appellants argued that the fundamental criterion distinguishing an employment contract from a contract for services is the relationship of subordination and that, on the contrary, the evidence failed to reveal the existence of such a relationship.The trial judge concluded that a high degree of integration of the worker into the activities of the client could indicate the presence of a relationship of subordination with the company. According to this analysis, a high degree of integration points toward a relationship of subordination:8[Translation]“By allusion, the judge considers relevant the fact that a person performs work which is an integral part of the purpose of the corporation. The relationship of subordination may therefore translate into a high degree of integration of the worker into the activities of the client; this would point toward a relationship of subordination”.After discussing the position of two Quebec labour law authors and a decision of the Federal Court of Appeal, the Court of Appeal approved of the use of the criterion of the worker’s integration into the company in order to determine the existence of a legal relationship of subordination. The Court therefore confirmed that there exists no contradiction on this subject between the civil law and the common law.9The fact that Mr. Darveau is a shareholder of the appellant corporations allowed him to enjoy some liberty of action, thus giving the impression that he acts as a self-employed worker. It is not surprising that as an officer, Mr. Darveau manages his own schedule, his work, his remuneration, and that he is not directly under the supervision of another authority. This liberty was not due to the alleged contract for services, but resulted instead from his status as an officer. Accordingly, one would not be prevented from arriving at the conclusion that in the execution of his duties, Mr. Darveau was an employee and not a self-employed worker.The Court of Appeal specifically insisted on the fact that it is the appellant corporations who assumed any risk of loss and who benefited from the profits: [translation] “Indeed, a company does not assume the errors of an outside consultant”.10 Mr. Darveau brought with him no [translation] “expertise which would require the intervention of an external person in a field that that person knows better than any other, as he acknowledges, he dealt only with the daily problems of his companies.11The Court added that to accept the appellants’ theory would result in the absurd consequence that no relationship of subordination can exist between a person who controls a company and the company itself and that any agreement between the officer and the company he or she controls could not constitute an employment agreement.The appeal was therefore dismissed.TAX ASPECTSThe Court of Appeal of Québec therefore follows a jurisprudential trend which originated from the Tax Court of Canada and the Federal Court of Appeal over the last few years. The courts allowed for the integration of the common law criteria12 into the wider analysis of the Quebec control test.13 As a result, it is permissible to take into account the criteria of control, ownership of tools, expectation of profits and risk of losses as well as the integration into the company when determining a person’s status as a self-employed worker as opposed as that of an employee.Such a determination has significant consequences on tax treatment, both for the client and the worker.An employer is required to withhold provincial and federal income tax from the wages of its employees and remit the amounts deducted within regulatory deadlines. The employer is also required to withhold employee contributions to the Canada Pension Plan (CPP), Employment Insurance (EI), the Quebec Pension Plan (QPP) and the Quebec parental insurance plan (QPIP) from the employee’s wages.Finally, the employer must pay employer contributions, which are generally based upon its total payroll. Employer contributions include those to the CPP, IE, QPP and QPIP, Health Services Fund, Commission de la santé et de la sécurité du travail, Commission des normes du travail, and the Workforce Skills Development and Recognition Fund.The employer will generally be responsible for the contributions which are to be withheld from the employee’s wages, but not for non-deductible income tax, except in the case of employees who are not Canadian residents.Furthermore, the employer may be subject to fines for amounts not withheld or for unpaid contributions. At the federal level, the penalty is 10%, which may be increased to 20% in the case of repeated breaches, a breach that has been committed knowingly, or in circumstances amounting to gross negligence. At the provincial level, the penalty is 15%.Finally, the employer is required to pay interest at the prescribed rate on these amounts (the prescribed rate is currently 6%, both at the federal and provincial levels).Conversely, in the case of a self-employed worker, the co-contracting client is not required to make such payroll deductions. The self-employed worker alone is responsible for making his or her government remittances in accordance with the requirements of the Income Tax Act.However, if the self-employed worker is not a Canadian resident, payroll deductions must be made by the client. Failure to do so renders the client subject to penalties and interest.Furthermore, a self-employed worker must generally collect the GST and the QST on the services rendered to the client. A self-employed worker who would have erroneously been determined to be an employee may find himself or herself in default if he or she failed to pay these taxes and may therefore be subject to penalties of 5% on amounts due, plus 1% per month up to a maximum of 10%.Tax authorities normally have three (3) years to issue a new assessment to a taxpayer. The time period is extended to four (4) years for corporations other than Canadian-controlled private corporations, such as public corporations or corporations controlled by non-residents. However, this period no longer applies where a corporation made a false or erroneous declaration. In such a case, the tax authorities are not subject to any time limit for issuing a new assessment. Such a situation may occur where the determination of the worker’s status turned out to be incorrect.In the event that an employer notices its mistake before the tax authorities intervene, it may remedy its default with respect to missed payroll deductions by making a voluntary disclosure. If the voluntary disclosure is accepted, this should limit the amounts due with respect to what should have been withheld or contributed as well as the applicable interest; the penalties will not then be claimed.It must also be noted that the investigative powers granted to Revenu Québec and the Canada Revenue Agency allow them to verify a company’s entire staff register in the event an error is found in the processing of a worker.Therefore, the choice of a worker’s status should be made by taking into account the situation of all the workers insofar as a wide-ranging verification could have a much larger impact on the audited company.CONCLUSIONThe Court of Appeal acknowledges that the subordination concept should be given a liberal interpretation. More specifically, it teaches us that it is possible to analyse and consider the integration of an individual into the activities of a company in order to determine his or her true status.The “integration” criterion is especially useful in the case of high-ranking executives, professionals or highly specialized workers insofar as the classic criterion of subordination is often absent in such cases.It should be noted that an incorrect qualification of the employment contract may have a significant financial and legal impact on both the company and the individual in question, both from a tax and an employment law perspective. It is therefore crucial to conduct a proper analysis of each individual’s true status._________________________________________1 2013 QCCA 1379.2 Article 2085 of the Civil Code of Québec.3 Under section 1014 of the Taxation Act, CQLR c I-3.4 Expression used by the trial judge and later employed by the Court of Appeal.5 At para 33 of the judgment of the Court of Appeal, the trial judge is quoted as saying [Translation] “This uniformity is surprising in the absence of a lump-sum contract”.6 Para 44 of the Court of Appeal judgment.7 The Court of Appeal note that the trial judge was of the view that Mr. Darveau’s credibility was affected by some of the answers he provided.8 Para 50 of the Court of Appeal judgment.9 Paras 53 to 56 of the Court of Appeal judgment.10 Para 59 of the Court of Appeal judgment.11 Para 60 of the Court of Appeal judgment.12 Wiebe Door Services Ltd., [1986] 2 C.T.C. 200 (C.A.F.), confirmed by 671122 Ontario Ltd. v. Sagaz Industries, [2001] 4 C.T.C. 139 (C.S.C.).13 Combined Insurance Co. v. MRN, 2007 CarswellNat 601 (C.A.F.) and Grimard v. R, [2009] 6 C.T.C. 7 (C.A.F.), reversing 9041-6868 Québec inc. v. MRN, 2005 CarswellNat 5615 (C.A.F.).

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  • Quarterly legal newsletter intended for accounting, management, and finance professionals, Number 20

    CONTENTS  Life Insurance Policy: How to Extract Funds from a Corporation with No Tax Impact Constructive Dismissal Analyzed in the Context of a Business Acquisition The Right of Withdrawal, a Controlled Form of Contractual Freedom Transfers of Residences Involving a Spousal Testamentary Trust LIFE INSURANCE POLICY: HOW TO EXTRACT FUNDS FROM A CORPORATION WITH NO TAX IMPACTLuc Pariseau with the collaboration of Martin Bédard, articling studentIndividual shareholders who wish to withdraw funds from a corporation can face some tax challenges that are sometimes difficult to overcome. Nevertheless, there are various ways of achieving this objective that limit or eliminate the negative tax consequences to the shareholder and the corporation, provided certain conditions are complied with. The transfer of a life insurance policy by an individual shareholder to a corporation where the two are in a non-arm’s length relationship is often an effective way of accomplishing this.The technique is simple. The individual transfers his policy to his corporation and receives a consideration equal to the fair market value of the policy, as determined by an actuary. The consideration paid by the corporation may be in the form of money or a promissory note that will be paid when the corporation has the necessary cash available. By operation of the ITA, the proceeds of disposition are deemed to be equal to the cash surrender value of the policy transferred at the time of the disposition.1The shareholder is then taxed on the difference between the cash surrender value of the policy and its adjusted cost base, and the resulting gain, if any, is considered to be income from property and not a capital gain.2 Assuming that the cash surrender value of the policy is low and that its fair market value is high, the shareholder will benefit from a significant disbursement of funds with little or no negative tax impact.The fair market value of a policy will be higher than its cash surrender value, for instance, where the insured’s health condition has deteriorated since he or she took out the policy. This will also be the case where the theoretical premium for a comparable policy would be higher than that paid for the policy in question for financial reasons attributable to the type of policy purchased or to changes in pricing.As for the corporation, it ends up making a non-deductible outlay of funds and acquiring an interest in an insurance policy with an adjusted cost base equal to its cash surrender value. Thus, upon the death of the shareholder, in addition to receiving the insurance proceeds, the corporation will also benefit from an increase in its capital dividend account equal to the indemnity received, less the adjusted cost base of the policy.3The Canada Revenue Agency acknowledges the validity of this type of planning, but seems to be uncomfortable with the result.4 It has submitted this issue to the Department of Finance which has indicated that it is studying the issue. However, no amendment has been made to the statute to date, more than 10 years after the issue was raised for the first time in 2002.In addition, there are certain advantages to the corporation holding the insurance policy and paying the premiums, particularly the fact that the after-tax cost of the premiums is often lower to the corporation than it would be to the shareholder.The foregoing analysis is obviously general in nature and a more detailed assessment is advisable for any individual who is in a position to transfer a personally owned policy to a corporation.________________________________  1 Subsection 148(7) of the Income Tax Act (“ITA”).  2 Subsection 148(1) and paragraph 56(1)(j) ITA.  3 Subsection 89(1) “capital dividend account” d) ITA.  4 CRA, Technical Interpretation 2002-0127455, “Non arm’s length disposition” (May 7, 2002); CRA, Technical Interpretation 2003-0040145, “Transfert d’une police d’assurance-vie” (October 6, 2003); ARC, Technical Interpretation 2008-0303971E5, “Transfer of a life insurance policy” (May 27, 2009).CONSTRUCTIVE DISMISSAL ANALYZED IN THE CONTEXT OF A BUSINESS ACQUISITIONGuy Lavoie and Élodie Brunet with the collaboration of Brittany Carson, articling studentIn the case of St-Hilaire c. Nexxlink inc.1 the Court of Appeal of Québec analyzed the concept of “constructive dismissal” in the specific context of a business acquisition.In this case, Nexxlink was the subject of an acquisition that resulted in a series of changes to the business, some of which affected the employment conditions of Mr. St-Hilaire. Believing that this had resulted in substantial changes to the essential conditions of his employment contract, Mr. St-Hilaire left his employment shortly after the transaction, alleging that he had been constructively dismissed. He claimed $525,000 in damages from Nexxlink.The Court of Appeal affirmed the decision of the Superior Court, holding that Mr. St-Hilaire had not been constructively dismissed.According to the criteria laid down by the Supreme Court of Canada, constructive dismissal involves [translation] “1) a unilateral decision by the employer, 2) a substantial change or changes to the essential terms of the employment contract, 3) the employee’s refusal of the changes, and 4) the employee’s departure.”2 These criteria are assessed from the perspective of a reasonable person placed in the same situation.3In the context of the transaction in this case, the change in the title of Mr. St-Hilaire’s position from vice-president, business development to vice-president, infrastructure equipment sales did not amount to a substantial change in his employment conditions nor a demotion, but rather a change in the organization of the business, which was within the management rights of Nexxlink.With respect to the changes alleged by Mr. St-Hilaire to his responsibilities and target market, these were only fears. In the context of a business acquisition, some of the senior executives’ duties may be changed or clarifi ed over time: [translation] “a period of uncertainty or adjustment is entirely foreseeable”. According to the Court, a reasonable person placed in the same context as Mr. St-Hilaire could have foreseen that he would have retained his client accounts, and that various opportunities could be expected within the new business.With regard to Mr. St-Hilaire’s compensation, it consisted primarily of a base salary of $170,000, a $40,000 bonus plan, and 20,000 stock options at the time he started his employment.Contrary to Mr. St-Hilaire’s allegations, the Court found that the criteria for awarding the annual bonus had not been substantially changed. Moreover, even if this had been the case, his employment contract expressly stated that the bonus plan could be changed simply upon the approval of the board of directors. As for the cancellation of the stock options, even if this could be considered to be a reduction in Mr. St-Hilaire’s compensation, he never complained about it before leaving the company. According to the Court, Mr. St-Hilaire undoubtedly did not feel that this was an essential condition.In conclusion, the Court of Appeal found that Mr. St-Hilaire was aware of the role that was reserved for him in the new business. The structure he complained of was temporary and uncertain. In the context of this transaction, the allegations of constructive dismissal were ill founded.The interest of this decision lies in the fact that it relativizes the concept of constructive dismissal in the specific context of a business acquisition, in addition to reiterating the principle that the structure of a business is not bound to remain static.________________________________  1 2012 QCCA 1513 (C.A.)(affi rming 2010 QCCS 2276 (S.C.)).  2 Id., para. 29, citing Farber v. Royal Trust Co., [1997] 1 S.C.R. 846 (hereinafter “Farber”).  3 Farber, para. 26.THE RIGHT OF WITHDRAWAL, A CONTROLLED FORM OF CONTRACTUAL FREEDOMCatherine MéthotThe right of withdrawal, also referred to as an “opting out” clause, is the right given contractually or by law to a party to withdraw from a transaction without justifi cation prior to it being actually entered into. Although the withdrawal clause may procure a high degree of freedom, one cannot invoke it in a cavalier manner. Indeed, a withdrawal clause cannot be used in a malicious or abusive manner, nor can it run against the requirements of good faith. Furthermore, to be valid and effective, a withdrawal clause must be enforceable and explicit.The Court of Appeal of Québec recently reminded us of these principles in the case of London v. Kyriacou.1 In this case, the owners of a day-care centre (the “Sellers”) accepted from Mrs. Kyriacou and Mrs. Teologou (the “Purchasers”) an offer to purchase the daycare centre. The sale was initially scheduled to take place on September 29, 2006. This date was thereafter postponed several times and the terms of the offer were also amended on several occasions as the months went by. Among other things, the parties agreed to increase the sale price by $150,000.00 conditionally to the day-care centre being granted a government subsidy within 15 months from the date of the sale. As soon as autumn 2006, the Sellers introduced the Purchasers to the parents of the children attending the day-care centre as being the new owners of the facility from January 2007. In May 2007, the Purchasers began operating the day-care centre and acting like true owners, particularly by having repairs made at their own cost and establishing a new educational program. From May 2007, the parties exchanged several draft sale agreements and the transaction was to take place in August 2007. However, on August 10, 2007, following receipt of a letter from government authorities confi rming that the day-care centre would be subsidized beginning in March 2008, the Sellers notifi ed the Purchasers that they were withdrawing from the negotiations. They also changed the locks of the day-care centre and denied access thereof to the Purchasers.The Purchasers brought a motion for the transfer of title before the Superior Court of Québec to force the Sellers to carry out the transaction. The Sellers opposed the motion, among other things alleging that the initial offer to purchase included an opting-out clause, which they were entitled to rely upon. The clause read as follows: “After due diligence is said and done and all conditions have been agreed upon, if one of the parties’ purchaser or vendor refuse to go ahead the other will be liable for professional fees occurred.”In the first instance, the Superior Court refused to apply the clause because the Sellers had acted in bad faith all along the negotiation process, that further, the clause was not explicit and that had it been explicit, the Sellers, by their actions (particularly by encouraging the respondents to operate the day-care centre and the substance of the discussions on the sale agreement) waived its application. The Superior Court found from the evidence that all the conditions mentioned in the original offer had been satisfied and that there had been an agreement on all the new elements raised thereafter by the Sellers. In short, the terms of the transaction had been agreed upon by the parties and it only remained to make it offi cial by executing an agreement. The Superior Court therefore ordered the parties to sign the agreement and the Court of Appeal affirmed that decision.Although including an opting-out clause in a contract or a letter of offer may constitute a very attractive strategy, the decision summarized in this bulletin articulates the importance of carefully drafting it and demonstrates that one is better to consult a professional before relying on it.________________________________  1 2013 QCCA 37.TRANSFERS OF RESIDENCES INVOLVING A SPOUSAL TESTAMENTARY TRUSTDiana DarilusThe sale of a house by a spousal testamentary trust and the purchase of a new residence in replacement of the former may result in adverse tax consequences if all required precautions are not taken prior to the fact.EXEMPTION FOR PRINCIPAL RESIDENCEWhen a spousal testamentary trust gains possession of a house following the death of a taxpayer and thereafter wishes to dispose of it, the availability of the principal residence exemption to reduce the taxable capital gain resulting from the transfer must be ascertained.Furthermore, the tax act1 provides for certain presumptions when a taxpayer disposed of a house in favour of a spousal testamentary trust through a tax rollover upon death so the trust can benefit from the principal residence exemption for the years during which the deceased taxpayer owned the house.Generally a spousal testamentary trust may benefit from the principal residence exemption upon the sale of the house for all the years during which the deceased taxpayer or the trust itself owned it, to the extent that several conditions are met.One of these conditions is that when the trust was the owner of the residence, the residence must have been ordinarily inhabited by a specified beneficiary, by the spouse or common-law partner or the former spouse or common-law partner of such beneficiary or a child of such beneficiary. A specified beneficiary generally means any person benefi cially interested in the trust who ordinarily inhabited the housing unit (or has a spouse or common-law partner or former spouse or common-law partner or a child who ordinarily inhabited the housing unit).Furthermore, prior to designating the house as principal residence for the years of ownership by the deceased taxpayer while he or she was living or by the trust itself, the trust must also ascertain that no principal residence designation on another property has been made in respect of these years, neither by the deceased person or his or her family unit, nor by a specified beneficiary or his or her family unit.MAINTENANCE OF TESTAMENTARY TRUST STATUSIn the context of a transaction for the sale and purchase of residences involving a testamentary trust, one must be careful not to jeopardize the testamentary trust status of this trust, which benefits from taxation at progressive rates.Therefore, in order to retain its testamentary trust status, no item of property must be contributed to the trust otherwise than by an individual on or after his or her death and as a consequence thereof. The trust could then lose its testamentary trust status and related tax benefits if, for example, it does not deal at the fair market value when acquiring the new residence: the seller may be considered as having made a contribution equal to the excess of the fair market value of the property over the fair market value of the consideration paid by the trust.Subject to certain exceptions, the testamentary trust status of the trust may also be lost if the trust incurs a debt or any other obligation owed to, or guaranteed by, a beneficiary of the trust (for example, the spouse of the deceased person) or another person with whom a beneficiary of the trust does not deal at arm’s length.CONCLUSIONThe tax consequences of transactions involving real property transferred by or to a spousal testamentary trust should always be carefully reviewed beforehand in order to avoid unpleasant surprises.________________________________  1 Income Tax Act.

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