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Tax class actions against 2 firms raise key questions

|Written By Kendyl Sebesta

A recent ruling from the Ontario Superior Court and a new class action settlement, both involving Bay Street law firms, have raised questions about lawyers’ liability in matters involving charity-based tax opinions that several experts say could open a Pandora’s box of legal issues.

The settlement last month involved Fraser Milner Casgrain LLP in a matter that first arose more than three years ago after nearly 3,000 people took part in the Banyan Tree Foundation gift program from 2003 to 2007.

A negative pronouncement by the Canada Revenue Agency about the program eventually led to a class action lawsuit in which the donors went after FMC, which had provided opinions on the charity’s compliance with tax rules.

This month, FMC, the Banyan Tree Foundation, and three related companies agreed to contribute $11 million to settle the lawsuit with donors who are part of the class action receiving pro-rated shares of the settlement fund.

The settlement agreement states that the defendants make no admission of liability or wrongful conduct. The settlement is pending court approval next month.

“The defendants agreed to this settlement in order to end the ongoing distraction and cost of a complex litigation process,” FMC said in a statement last week.

“Fraser Milner Casgrain has a well-earned reputation for consistently delivering the highest-quality legal services to our clients, and we firmly stand behind our lawyers and the quality of their counsel.”

In light of the settlement and a recent court ruling dismissing a similar class action against Cassels Brock & Blackwell LLP as statute-barred, tax lawyers say indirect answers from the courts and a lack of concrete case law on the issue are leading to a more cautious approach.

“It appears that tax lawyers who provide opinions on these types of issues will have to be much more careful about what they write in the future,” says Adam Aptowitzer, a charity and tax lawyer at Drache Aptowitzer LLP.

“There are more factors to consider now. If the CRA decides to pursue third-party civil litigation penalties, LawPRO may not cover these penalties. They then become the law firms’ or partners’ responsibilities.

It’ll also open up the issue of having to carry enough insurance to cover the cost if those opinions go south.”

The issue may open up other questions as well. “If you are a lawyer and you write an opinion and later it turns out that the opinion is wrong, you would essentially be stuck,” says Aptowitzer.

“The question then becomes what can the implications be and what will it mean to other lawyers who provide opinions down the road and that is where we reach much more uncharted territory.”

But Adam Parachin, a professor at the University of Western Ontario who focuses on charity law, says many law firms avoid that kind of work anyway.

“While many law firms do not provide opinions on tax shelter-style donation arrangements, this is generally not due to concerns over negligence claims from donors relying to their detriment on the opinions,” says Parachin.

“Tax lawyers routinely provide advice on highly complex structured transactions where there is a real risk of getting it wrong.

Since the presence of a charitable dimension to a planned transaction does not alter the fact that lawyers are required to live up to an exacting standard of professional competence, it has not tended to be a key consideration over whether a firm should accept a retainer in this area.

In any event, many opinions provided in this area are heavily qualified to minimize a firm’s exposure.”

Parachin notes law firms may refuse to do opinion work in the area of charity tax law for reasons apart from avoiding lawsuits. “The primary reason is that firms are concerned over not squandering reputational capital.

The economics of many mass-marketed donation schemes would appear to work only if donors receive inflated donation receipts and/or substantial portions of the receipted donations are somehow circulated back to private hands.

Advising clients of tax loopholes is one thing . . . but facilitating or being seen as facilitating such seemingly abusive charitable gift arrangements is quite another. Firms are often keen to avoid the stigma of being associated with these schemes as it can undermine a firm’s brand.”

Parachin adds that many law firms also provide negative opinions on tax shelter-style donation arrangements. However, the programs’ promoters rarely feature those opinions, he points out.

Last month, the Ontario Superior Court touched on some of the liability issues in Lipson v. Cassels Brock & Blackwell LLP.

Superior Court Justice Paul Perell, addressing the issue of liability, referred to his colleague Justice Joan Lax’ ruling in Robinson v. Rochester last year, the matter that named FMC as a defendant.

“The Robinson case is not distinguishable from the case at bar, and, indeed, the case at bar is a stronger case for her [Lax’] analysis, which posits that it is arguable that the law firm had a duty of care and that the other constituent elements of negligence claim might be established; i.e. it is not plain and obvious that Mr. Lipson and the class members do not have a free-standing claim for negligence that is discrete from a claim for negligent misrepresentation,” Perell, who ruled the plaintiffs’ claim was statute-barred, wrote in Lipson.

According to Perell, the key difference between Lipson and Robinson was that Cassels Brock “wrote its opinions so that they might be relied on by potential donors, their agents, and professional advisers for the purpose of the transactions contemplated by this opinion . . . while in Robinson the opinion was for the promoters, although it was foreseeable that they would use it to market the donation program to potential donors.”

But questions around liability remain, according to a lawyer involved in Lipson.

“Ultimately, the practice should be aware that their opinions are subject to scrutiny

down the road,” says Adam Dewar, a partner at Roy Elliott O’Connor LLP who represented representative plaintiff Jeffrey Lipson.

“People should also be aware that what they write at one stage may be used in another in the future.”

Dewar calls the Lipson judgment disappointing in terms of the finding that class members’ claims were statute-barred and its imposition of a heavy burden on Lipson to prove that the law firm was negligent. He notes there will be an appeal.

Lipson involved roughly 900 taxpayers who participated in a charitable timeshare program between 2000 and 2003.

Participants donated both cash and resort timeshares to Canadian athletic associations in anticipation of tax credits.

In 2004, the CRA disallowed all of these anticipated tax credits, causing Lipson and several other donors to begin litigation against the government in 2006 as a litmus test for what it would permit.

In 2008, the case settled, and the CRA allowed tax credits for the cash donations but not the timeshares.

To recover the remaining losses, Lipson launched a class action against Cassels Brock in 2009 for alleged negligence and negligent misrepresentation. He claimed he wouldn’t have participated in the program if it weren’t for the law firm’s opinions.

Perell, determining that the case had exceeded the limitation period, dismissed Lipson’s case last month. Dewar says he plans to appeal.

“How do you tell people they can’t rely on tax opinions from legal professionals?” says Aptowitzer. “I don’t think that’s a fair statement. Maybe a better statement would be that they should get additional, independent legal advice in these matters in the future.

Ultimately, I think it could make people much more careful of their opinions in the future.”

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