Principal Issues: Does a settlement agreement containing an indemnification clause and that was signed in the context of an employment termination meet the definition of contractual protection under s.237.3(1)(a)(i)(A)?
Position: Generally, no.
Reasons: A reportable transaction is an avoidance transaction entered into by or for the benefit of a person and that meets one of three legislated hallmarks. In turn, an avoidance transaction exists if it may reasonably by considered that one of the main purposes of a transaction (or a series of which the transaction is a part of) is to obtain a tax benefit. Where principled settlements are negotiated in good faith without consideration to the tax implications and the damages are properly allocated, then generally “one of the main purposes” of the settlement will not be to obtain a tax benefit. To the same extent, the contractual protection hallmark is unlikely to be triggered in light of the indemnity clause in the case at hand.
