Executive Summary: Key Legal and Evidentiary Issues

• Maya Knauth received an overpayment of $1,336 in Employment Insurance sickness benefits due to a Service Canada administrative error, not through any fault of her own.

• Service Canada refused to write off the overpayment, finding that none of the exceptions under s. 56 of the Employment Insurance Regulations applied to her situation.

• The overpayment arose when Service Canada mistakenly paid 28 weeks of sickness benefits instead of the statutory maximum of 26 weeks during a recalculation following a successful Social Security Tribunal appeal.

• Ms. Knauth argued her case fell under s. 56(1)(e) of the Regulations, which permits write-offs for overpayments arising from retrospective decisions, but the Court found the overpayment stemmed from an administrative processing error, not from the SST's retrospective ruling itself.

• Reasonableness review under the Vavilov framework was the applicable standard, requiring the Court to assess whether Service Canada's decision was based on an internally coherent chain of reasoning.

• No basis for undue hardship, bankruptcy, or any other statutory write-off ground was established, leaving Service Canada with no discretion to forgive the debt.

Background and facts of the case

Maya Knauth was employed by Battle River Power Coop (BRPC). She filed a complaint about harassment in the workplace, but an external investigator found her concerns were unsubstantiated. On January 2, 2024, BRPC terminated her employment without cause. She received $3,935.50 in vacation pay and an additional $9,533.33, less statutory deductions, "on a without prejudice and purely gratuitous basis" in exchange for signing a release absolving BRPC of any liability and under which she agreed not to pursue any legal remedies or complaints related to her employment and termination. In total, she was paid $13,468.83 as a result of the termination of her employment.

The Employment Insurance claim and the severance pay dispute

Following her termination, Ms. Knauth applied for Employment Insurance sickness benefits, with a benefit period from January 7, 2024, to March 4, 2024. Service Canada considered the $9,533.33 payment to be severance pay, which required Ms. Knauth to serve a longer waiting period before receiving EI sickness benefits. She received less in total benefits as a result. Ms. Knauth challenged this characterization, and on August 14, 2024, the Social Security Tribunal upheld her appeal. At the appeal, the Canada Employment Insurance Commission conceded that the amount was actually compensation for any potential damages that she could have claimed as a result of her dismissal. The SST confirmed that this amount should have been treated as compensation and not severance pay, and therefore should not have been considered as earnings. Ms. Knauth's EI claim was recalculated and payment was processed for the weeks of February 4, 2024, to February 24, 2024.

The administrative error and overpayment

When Service Canada recalculated and processed payment for the additional weeks following the SST decision, it made an administrative error. Ms. Knauth was paid for 28 weeks of sickness benefits, but the maximum number of weeks of sickness benefits that can be paid under the legislation is 26. She received three weeks of benefits when she was only entitled to one, resulting in an overpayment of $1,336. The payments for the additional weeks were processed on September 5, 2024, when her EI claim was converted from sickness benefits to regular benefits. On September 7, 2024, she received a Notice of Debt from Employment and Social Development Canada. Ms. Knauth applied for reconsideration of the notice of debt on September 18, 2024, and after a series of phone calls, Service Canada refused to reconsider the notice of debt on October 18, 2024.

The write-off request and refusal

On October 24, 2024, Service Canada refused to write off the EI overpayment. The letter of decision explained that the overpayment did not meet the conditions for a write-off set out in subsections 56(1)(e) and 56(2) of the Regulations. Ms. Knauth argued that her situation fell squarely within s. 56(1)(e), which provides that an amount may be written off if "the overpayment does not arise from an error made by the debtor or as a result of a false or misleading declaration or representation made by the debtor" and the overpayment arose from "a retrospective decision or ruling made under … the Act." She maintained that she did not try to mislead anyone and did not make any false declaration, and that the SST's retroactive decision about her earnings was what led to the overpayment.

The applicable regulatory framework

Section 56 of the Employment Insurance Regulations, SOR/96-332, sets out specific circumstances under which the Commission may write off a debt. These include situations where the total of penalties and amounts does not exceed $20, the debtor is deceased, the debtor is a discharged bankrupt, the debtor is an undischarged bankrupt in respect of whom the final dividend has been paid and the trustee has been discharged, the overpayment arose from a retrospective decision under the Act, the amount is uncollectable, or repayment would result in undue hardship to the debtor. Subsection 56(2) provides an additional write-off avenue for the portion of an amount owing in respect of benefits received more than 12 months before the Commission notifies the debtor of the overpayment, where the overpayment does not arise from the debtor's error and results from factors such as a delay or error by the Commission in processing a claim, retrospective control procedures, an error on the record of employment by the employer, or an incorrect calculation by the employer. The Court applied the two-step framework from Bernatchez v Canada (Attorney General), 2013 FC 111, which requires first determining whether the situation falls within s. 56 at all — that is, whether the Commission has any discretion to exercise — and then whether the Commission should exercise its discretion to grant a write-off.

The Court's analysis and reasoning

The Court reviewed Service Canada's decision under the reasonableness standard set out in Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65, and confirmed in Mason v Canada (Citizenship and Immigration), 2023 SCC 21. Justice Pentney acknowledged that while the distinction between the SST's retrospective ruling and the subsequent administrative processing error was not well explained in the written reasons provided to Ms. Knauth — which were formulaic, relatively sparse and devoid of plain language explanation — she had several phone calls with Service Canada after the reasons were issued, during which she had the opportunity to learn more about the decision and why it was made. The notes from those phone calls were part of the record before the Court and brought the decision within the standard of justification and intelligibility set out in Vavilov. The Court found that Ms. Knauth's case did not fall under s. 56(1)(e) because the overpayment did not arise from a retrospective decision or ruling under the EI Act; rather, it arose from an error that was made by a Service Canada employee when implementing the decision regarding her earnings and converting her claim from sickness benefits to regular benefits. Her case did not fall under s. 56(2) because the overpayment was discovered quickly and the action to recover it was started less than 12 months after the overpayment was made. The remaining provisions of s. 56 were equally inapplicable: the debt was more than $100, Ms. Knauth was not deceased or bankrupt, and she did not indicate circumstances of financial hardship. Moreover, she did not raise allegations that called for consideration of undue hardship.

Ruling and outcome

The Federal Court dismissed the application for judicial review, finding that Service Canada's decision to refuse the write-off was reasonable. Justice Pentney expressly acknowledged that Ms. Knauth bore no fault whatsoever and expressed sympathy for the frustrating bureaucratic process she endured, but concluded that the law does not provide Service Canada with the discretion to write off overpayments based on sympathy, or what the law often labels "equitable" considerations. The Respondent did not seek its costs, and no costs were ordered. The style of cause was amended, with immediate effect, to name the Attorney General of Canada as respondent. No monetary amount was awarded in favour of either party; the practical effect of the dismissal is that the $1,336 overpayment debt stands.