Ruling flags risks for tax advisors

Lipson v. Cassels Brock & Blackwell LLP “follows on a number of other recent decisions that underline the importance of financial professionals, including auditors, underwriters and investment advisory firms, fulfilling their statutory duties,” says Daniel Bach, a class-action lawyer with law firm Siskinds LLP in Toronto. “What the court is saying in this case is: there are certain circumstances [in which] people will be held responsible for statements they give and steps they take in organizing tax products.”

The Lipson case is not the only recent decision in which professionals who give advice regarding taxes, accounting and securities are being held to strict standards. In a recent settlement, Ernst & Young LLP will pay $117 million to investors in Sino-Forest Corp. after a group of investors launched a class action against the troubled forestry company and its former auditors. (Ernst & Young has denied any liability).

These cases, and others, Bach notes, point to a trend — at least, in Ontario, as class-action legislation varies from province to province. These cases, Bach says, “indicate that Ontario’s courts and Ontario’s regulators are serious about controlling the capital markets. Issuers and their advisors who do not abide by their responsibilities under the Securities Act or other legislation may be held to account by inves-tors and others.”

The representative plaintiff in the case, Jeffrey Lipson, was one of approximately 900 taxpayers who donated cash and resort time-share weeks to various registered athletic associations between 2000 and 2003. Donations were made through a time-share tax-reduction program operated by the Canadian Athletic Trust. Participants anticipated that the tax credits would be worth more than the amounts they had contributed. Promotional material supporting the program’s viability included an opinion provided by Cassels Brock indicating it was unlikely that the Canada Customs and Revenue Agency (CCRA) could successfully deny the anticipated tax credits.

Between October 2000 and April 2003, the law firm provided six opinions, which were included in the promotional material. The OCA said there were two key aspects to the opinions: “First, the opinions are directed not just to the promoters of the Athletic Trust, but also to potential donors. In fact, all but the final opinion specifically state that the opinion ‘may be relied upon … by … potential donors’. Second, although the opinions acknowledge the prospect of a challenge by the CCRA to the tax benefits available under the Program, the opinions state that ‘it is unlikely that the CCRA could successfully deny … the [anticipated] tax credit[s]’.”

But the CCRA did deny the tax credits in 2004. And, in 2008, it offered to settle with Lipson, restricting the tax credits to the cash donations. Lipson brought a class action against the law firm for negligence based on the legal opinion, but the motions judge, ruling that the two-year limitation period had passed, refused to certify that class action.

Lipson appealed the lower court’s ruling. According to the OCA’s ruling, Lipson pleaded that “until January 2008 during the test case litigation … it was not known or reasonably discoverable that it was at least likely … that [the CCRA] would be successful in challenging the tax credits claimed by Lipson and the other Class Members.” The OCA overturned the motions judge’s decision and certified the class action.

The OCA’s decision states: “In our view, neither the fact that the CCRA was challenging the claimed tax credits nor the fact that the class members may have been incurring professional fees to challenge the CCRA’s denial of the tax credits is determinative of when the class members reasonably ought to have known they had suffered a loss as a result of a breach of the standard of care on the part of Cassels Brock.”

The OCA also ruled that because the test case did not settle until 2008, the answer to when each class member’s limitation period began could depend on several factors, including: “what position, if any, Cassels Brock took in response to the CCRA challenge; what notice, if any, Cassels Brock gave to class members of their position, if any, on the CCRA challenge; and what each class member was told by his or her professional advisor(s) and when.” The decision adds: “Importantly, this may be an issue that must be determined individually for each class member, depending on what individual class members were told and when.”

The OCA didn’t rule out the possibility of a potential “duty owed by the professional to a group of individuals who may not have signed on to the retainer agreement,” says Min Kim, a lawyer at Heydary Hamilton PC in Toronto.

Indeed, the OCA’s decision is a warning to professionals, adds Kim: “especially those who practice in tax opinion work, to identify their clients better.” He added: “When you’re giving out this type of tax opinion, know who your intended audience is.”

Use caution when being retained by an entity who will use the opinion to generate business, Kim adds. In the Lipson case, the law firm’s client was the tax shelter’s promoter, who used the opinion as a marketing tool.

“As a prudent practice, have your retainer set out exactly the intended audience if you’re asked to provide an opinion,” Kim says. “I think it would be important for you as a professional to know where this opinion would be used.

“Study and try to understand the business of your client so that you’d actually be able to understand exactly where this opinion would end up, what this opinion is for and what you’re asked to do by this client.”

Other ways to limit liability would be to use a second opinion by another professional and include a clause that limits liability, says Kim: “If there is a high number of people who will be relying on this opinion, obviously, your liability goes up.”

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