Negligence and Fiduciary Duty

The defendant ("D&T"), which was the auditor of the plaintiff (Taiga), recommended that Taiga adopt a plan to minimize provincial taxes, relying on a "loop hole" in the Corporations Tax Act (Ontario), which permitted interest paid to an affiliate incorporaated outside Canada but which was resident in Canada to be received by it free of Ontario corporate tax. Although no written opinion was requested by Taiga, D&T discussed the plan's risks including of a GAAR challenge, which it indicated likely could be withstood. Taiga agreed to implement the plan and pay D&T a fee of $50,000 plus an annual 20% contingent fee based on the amount of taxes saved in excess of $250,000, but with an obligation to refund proportionally the contingency fees in the event that a tax authority "successfully challenged" the tax savings.

Following GAAR reassessments by CRA, Taiga with advice from tax lawyers agreed to settle the reassessments for $8.5 million, and commenced an action against D&T.

Affleck J found that there was no conflict of interest in that D&T was only serving the interests of Taiga, noting (at para. 65) that Taiga's ''real complaint" was that D&T as external auditor should not enter into a contingency fee arrangement as it gave D&T a financial interest in Taiga, thereby compromising its independence. In rejecting this claim, he indicated that the contingent fee arrangement was beneficial to both parties and that a reasonably informed person would not conclude that D&T's independence as auditor was compromised.

In respect of Taiga's alleged negligence in not informing Taiga that D&T's internal documents placed a higher risk on the plan than was orally expressed to Taiga, Affleck J found that the standard of care should not be based on D&T's internal documents but, rather, should be based on the advice provided, which satisfied the requisite standard of care. He stated (at para. 93):

I do not accept the internal reference to the "high" risk of the Finco Plan to mean the defendant knew the Plan posed a high risk that the tax authorities could inflict significant financial losses on the plaintiffs through audits and reassessments. The reference to high risk was intended to alert people within the defendant that the Plan had to be implemented with scrupulous care to avoid criticism by the CRA on the ground it had technical faults, and was also a reference to the high risk the Plan would be rendered ineffective by legislation.

The reassessments did not itself represent a "successful challenge" which triggered an obligation on D&T to repay the contingency fees. There would be a successful challenge only if they were "either unsuccessfully resisted in the courts or, at the least, the plaintiffs were professionally advised there was no reasonable prospect of successful resistance in the courts" (para. 104). As the dispute instead was settled (through what was described at para. 157 as "a prudent settlement agreement preserving at least some of the benefits of the Finco Plan"), Deloitte was not obligated to refund its fees.

The taxpayer was assessed for approximately $600,000 so as to treat sales of logs as on income account and to deny expenses. The tax debt was ultimately settled for $57,000 pursuant to a consent judgment, so that his original capital-account treatment of sales was accepted. Meanwhile, the taxpayer lost his business, as well as his home situated on the business's land. He sued CRA for negligence.

Humphries J found that the taxpayer was unable to show a causal link between CRA's conduct and his damages, as the business was under financial stress for a host of other reasons. However, she did find that the auditors owed him a duty of care, and that they had breached the standard of care.

Humphries J applied Anns, [1978] AC 728, and Hill, 2007 SCC 41, to find that, analogously to police officers, auditors will owe the taxpayer a duty of care where, for example, the auditor's discretion will have "foreseeably huge and devastating effects" on a taxpayer (para. 301). She noted that, although prior cases had declined to find or create a duty in similar circumstances, none of them dealt with penalties of this magnitude (para. 300). The public policy reasons for vitiating such a duty of care were not compelling (paras. 306-307).

Most of alleged breaches in the standard of care were ultimately linked to the taxpayer's poor records and failing to clearly articulate his positions. However, regarding the imposition of penalties in relation to the capital gains issue, which were approximately nine times the income tax actually owing, Humphries J stated (at para. 347):

Since CRA now takes the position that [the audit issues were] complex [and therefore CRA's characterization of the income was not negligent], it cannot be said that the assumption of contrary positions by Mr. Leroux, positions that were eventually accepted as correct, was grossly negligent. To call them so, and to assess huge penalties as a result, ... is unacceptable and well outside the standard of care expected of honourable public servants or of reasonably competent tax auditors.

It was also a breach for one of the auditors, in communicating with the taxpayer, to conflate the "negligence" standard in s. 152 to open a statute-barred year with the "gross negligence" standard in s. 163 to assess penalties (para. 350), and it was especially inappropriate to use such spurious gross negligence penalties as a threat to make the taxpayer sign a waiver to open a statute-barred year (para. 349). Nevertheless, with no proof of causation, the taxpayer's action was dismissed.

A Revenu Québec auditor (who was under a quota for producing $1,000 per hour of recoveries) generated false and fictitious entires in the taxpayer`s records in order to make it appear that the taxpayer had claimed false expenses, with the result that the taxpayer was reasessed for additional tax, interest and penalties of over $450,000. Revenu Québec's collection department then made a seizure under the taxpayer's line of credit even though it was known that the excesssive reassessments would be reversed. The taxpayer ceased activities.

The court awarded $1.1 million in damages to the taxpayer's shareholder (including $1 million in punitive damages) and $2.75 million to the taxpayer (including $1 million in punitive damages and $350,000 in legal costs). The punitve damages awards were grounded on there being "unlawful and intentional interference" under the Quebec Charter of Human Rights and Freedoms.

The plaintiff, along with about 900 other taxpayers, indirectly acquired rights to timeshare weeks at a Carribean resort, and donated the rights to a Canadian athletic association along with enough cash to discharge encumbrances on the timeshare weeks. The athletic association issued tax receipts for the cash contributions and for the fair market value of the timeshare weeks minus the encumbrances, thereby resulting in tax credits claimed by the taxpayers in excess of their cash outlays. The defendant law firm had provided tax opinions to the taxpayers stating that "it is unlikely that the CCRA could successfully deny ... the [anticipated] tax credit[s]."

CRA proposed to disallow the tax credits in 2004. Two of the other donors launched test cases in 2006 challenging the denial, but settled with CRA in 2008 on the basis that credits would be granted for the taxpayers' cash contributions but not their timeshare contributions.

In 2009, the plaintiff moved to certify a class action against the defendant for claims of negligence and negligent misrepresentation. This was denied by the motions judge on the basis that the applicable two-year limitations period had commenced in 2004 when CRA notified the taxpayer that there was a "potential problem with the tax credits."

The Court of Appeal certified the class action. The limitations period could not commence until the claim was discoverable, and a mere "potential problem" does not make a claim discoverable. Goudge and Simmons JJA stated (at paras. 82 and 90):

[T]he fact of a CCRA challenge to the tax credits did not, in itself, mean the challenge would likely be successful or make the Cassels Brock opinion invalid. Further, even accepting that receipt of the notices of disallowance prompted class members to obtain professional advice and to launch test case litigation to challenge the denial of the tax credits, that conduct does not demonstrate when class members knew, or ought reasonably to have known, that the test case litigation would not likely be entirely successful.

...

[The defendant's] opinion did not promise that the CCRA would not challenge the anticipated tax credits under the Timeshare Tax Reduction Program. Rather, it stated that it was unlikely that the CCRA could successfully challenge tax credits claimed under the Program. Mr. Lipson is not entitled to, and did not, sue Cassels Brock for an opinion they did not give.

The motion judge referenced Robinson v. Rochester Financial Ltd., 2010 ONSC 1899, suggesting that the preparation of a tax opinion that it ought to be known is likely to be used to market a tax avoidance scheme may entail a duty of care to the scheme's potential participants.

The plaintiff participated in a tax avoidance scheme, in which he and other Canadian taxpayers would make leveraged charitable donations, for the purpose of obtaining tax credits greater than their cash outlays. CRA ultimately disallowed these tax credits (on 19 June 2006) and the adverse decision in Maréchaux, respecting another leveraged donation scheme, was released on 12 November 2009 . The plaintiff commenced a putative (i.e. not yet certified) class action on 11 March 2011 against the firm that coordinated the avoidance scheme ("Trinity"), and against the law firm that Trinity had retained to prepare an opinion on the scheme's tax consequences ("FMC"). The defendants moved for summary judgment on the basis that the Ontario two-year limitations period had expired, running from the time that CRA first indicated to the plaintiff that it was considering reassessment.

Strathy J. denied the motion. The starting time of the limitations period was a genuine issue requiring a trial. A limitations period in Ontario only commences when the plaintiff knows or ought to know that he has a claim against the defendants. Shortly after the plaintiff received CRA's first correspondence on the matter, FMC sent him a retainer letter, which he signed, offering to advise him in connection with the proposed reassessment. This created a conflict of interest, as the plaintiff had a potential claim against Trinity, whom FMC also represented (and potentially against FMC as well - see Lipson). FMC neither disclosed the conflict of interest, nor brought the potential claims to the plaintiff's attention.

Although further substantive determinations were beyond the motion's scope, Strathy J. offered some favourable remarks about the plaintiff's case. He stated that a trial judge "could reasonably conclude" that the alleged conflicts of interest did exist (paras. 105-06), and stated (at paras. 110-111):

In the circumstances, [the plaintiff] was entitled to expect candour and undivided loyalty from his law firm. If they were conflicted, they should have declined to act and should have ensured that he obtained independent legal advice.

Instead, the evidence suggests that FMC continued to act for Charette and re-assured him ... that FMC's opinion was right, CRA's position was wrong and that he had no legal obligation to pay the taxes CRA claimed were owing.

Strathy J. also suggested that, given the "confusing and intimidating nature of the CRA assessment and appeal process," it was not clear that the plaintiff ought to have known about his potential claims even though he was relatively sophisticated (para. 112).

Tax advisors owe a fiduciary obligation to their clients, because the clients should be entitled to trust that they are being advised as to their own best tax interests. The defendant breached this duty by failing to disclose that he received a commission on the sale of limited edition prints, which he advised his clients buy in an ineffective tax avoidance scheme.

Gray J. acknowledged that contributory negligence could reduce damages, where the plaintiff fails to take reasonable steps to reduce or eliminate loss. In this case plaintiff's only failing was to rely on the defendant's questionable advice, so there was no contributory negligence.

Finally, the plaintiffs were not entitled to the interest owed to the CRA and the interest on loans taken to pay the CRA: "The [plaintiffs] had the use of the money until they were required to repay it... . Furthermore, I have no evidence that the [plaintiffs] could not have paid the amounts required out of their own resources, rather than borrowing the money."

The defendant, who was a chartered accountant, advised the plaintiff to invest in certain MURBs but, contrary to the rules of professional conduct, failed to disclose to the plaintiff that the defendant would receive fees from the MURB developers when his clients invested in these projects.

The majority of the Court found that their relationship required trust, confidence, and independence, that the plaintiff relied on the defendant's advice, and that accordingly, there was a fiduciary relationship between the parties. The damages payable by the defendant for breach of his fiduciary duties were to be calculated on the basis of putting the plaintiff in the same position he would have occupied if the breach had not occurred. Because the disclosure of the fee relationship would have caused the plaintiff not to invest, the defendant was liable for the plaintiff's full loss on his investment.

A partner in a law firm ("Spackman") suggested to two individual clients (Mr. & Mrs. Maplesden) that Mr. Maplesden finance a home purchase through a loan from one of the operating corporations owned by them, that the home be registered in Mrs. Maplesden's name and the that loan be secured by a non-interest bearing demand promissory note signed by Mrs. Maplesden. The Tax Court of Canada later upheld an assessment of Mrs. Maplesden under s. 15(2) of the Act.

Spackman was found to be negligent because he failed to adequately consider or research the requirements of s. 15(2) and because he breached his duty to advise Mrs. Maplesden, who was clearly inexperienced in business matters, that his view that s. 15(2) was not applicable, might be incorrect. Also, there was no evidence that he ever discussed the option of repayment of the loan by the end of the following taxation year in order to avoid potential liability under s. 15(2).

Immediately prior to the completion of the sale by plaintiff of shares of a private company, the company redeemed a portion of its shares held by the plaintiff thereby giving rise to deemed dividend equal to the estimated safe income of the company (determined after adding back the amount of lease cancellation payments which had been capitalized for accounting purposes but deducted for tax purposes). No Revenue Canada ruling was obtained, as s. 55(2) had been enacted only shortly before the time of the closing. In filing its tax return, the plaintiff reported only a capital gain arising on the disposition of the remaining shares of the company, and did not make an s. 55(5)(f) designation.

The defendants met the standard of the advice that a reasonably competent tax specialists might have given at the time, in advising that safe income should be increased by the amount of the lease cancellation payment, advising that the election procedure under s. 55(5)(f) should not be utilized, and in not advising of the risk that Revenue Canada might require that the safe income of the company be pro-rated amongst all its shares rather than being fully allocated to the shares which were redeemed. In addition, the settlement which the plaintiff reached with Revenue Canada (which permitted the total gain on the sale of the shares to be reduced by a pro-rata portion of the safe income of the company) did not result in the plaintiff paying any additional tax given that it was a business necessity that the shares be redeemed, rather than a cash dividend being paid to the plaintiff.