Forgiven loan leaves retired advisor with taxes owing

According to the decision, Dick received a transition loan of almost $180,000 from the firm in 2001. In 2004, he went on disability, and in 2005, he retired from the firm. The repayment of the loan was suspended while he was on disability, and the firm began deducting loan payments from his retirement transition plan once he retired. In 2007, Dick objected to those repayments, arguing that he was still disabled, and the firm agreed to refund the amounts deducted.

The court notes that there was no further communication between them for over four years. But, in early 2012, a T4 was issued to for almost $125,000, which identified the outstanding amount owing on the loan as employment income. It says that Dick then objected to the issuance of a T4, but the firm maintained that the retirement of the loan properly created a taxable benefit. He was later reassessed by tax authorities, which increased his income tax liability for 2011 by over $59,000 plus arrears interest of $2,000.

Dick then turned to the court arguing that the retired loan shouldn’t have been treated as a taxable benefit. And, that a Q&A accompanying the loan documents suggested that outstanding loans would be retired through insurance, or some other mechanism, that wouldn’t create a taxable benefit.

The decision indicates that the firm argued that it lived up to its obligations under the loan documents, and that the retirement of the loan resulted in “an inevitable taxable benefit for the [advisor] and it was not caused by the [firm].”

The court says that the firm acknowledges that the loan documents don’t contemplate that the retirement of the loan will result in a financial consequence to the advisor. “The loan documents are silent on this issue,” the decision notes. “The [firms] deny that they had any obligation to forewarn the [advisor] that the retirement of the loan would create a taxable benefit.”

The decision also says that it was “entirely reasonable” for the advisor to have assumed, after over four years of silence, that the retirement of the loan “had been dealt with internally without further consequence to him.” And, it notes that at a minimum, the firm should have advised the advisor of “the eventual taxable benefit as a result of retiring the loan”, which would have given him time to arrange his financial affairs accordingly.

“It is apparent that the [advisor] did not turn his mind to this question at the time of signing the loan documents. The [firm] seemed to have been aware of the tax consequences as standard practice, but it chose not to advise the [advisor] in December 2001 or in October 2007,” the court says.

Nevertheless, the court ultimately agreed with the firm. It says that while there was the suggestion that the loan would be retired through insurance, it is not a requirement of the loan. The choice of how to retire the loan was up to the firm.

“In the end, the court cannot re-write the loan documents for the parties,” the decision says. “While the [firm] may have had obligations to the [advisor] to act in a timely fashion, to warn the [advisor] of the “standard practice” of issuing a T4 upon retiring the loan or even to take certain steps to minimize the financial impact of the retirement of the loan, these questions may be left to future proceedings between the parties. There is no interpretation of the loan documents which would allow me to conclude that the [firms] were obligated to retire the loan in a manner which resulted in no financial consequence to the [advisor].” Therefore, the court dismissed the application.