A judge has found a well-known firm liable for negligence after one of its tax lawyers failed to advise a client on tax consequences concerning their family trust.
“…I conclude that none of the experts has persuaded me that the Defendants did not, at least in part, cause the Plaintffs’ tax consequences resulting from the deemed disposition rule,” Labrosse said in the decision.
Grimes and Ozerdinc retained lawyer Mark Siegel in 1990 to create a family trust for their four children, which would be distributed among them when the youngest sibling turned 22.
In 2007, Grimes decided her children would acquire property in the trust too early. So Siegel dissolved the first trust and created a second one that would distribute the assets to them when the youngest child turned 30 years old.
Rosanne Dawson, a former Gowlings lawyer who is also named as a defendant in the lawsuit, wrote a legal opinion for Grimes and Ozerdinc in 2007, which stated there were no immediate tax consequences related to creating the second trust.
There was also no mention of the deemed disposition date of 2011 of the first trust, according to the decision.
Deemed disposition rules require that every 21 years there is an automatic disposition of assets in trusts.
The rules were created in the intention of stopping the handing down of property through generations without taxation.
Ronald Caza, the lawyer representing the plaintiffs, says that while Siegel created a new trust, the 21-year rule still applied.
The plaintiffs claimed that Siegel never told them about this issue.
“The law is clear that even though that new trust was created, the 21-year clock keeps ticking,” says Caza, a partner with CazaSaikaley LLP.
“That issue was never taken into issue or raised with the client.”
In 2011, Grimes received a phone call from the Canadian Revenue Agency looking for significant taxes that were owed, Caza says.
Labrosse granted the plaintiffs partial summary judgment, finding that Ozerdinc and Grimes experienced the tax consequences they did because Siegel had failed to advise them of the impending deemed disposition.
The judge also found that Siegel failed to provide tax-planning measures that could have avoided taxes from the deemed disposition of the trust.
Lawyers say the decision shows that summary judgment can be granted even in matters that are particularly complex, such as tax issues.
Hilary Book, a partner with Lax O’Sullivan Lisus Gottlieb LLP, says the decision reinforces that litigators need to be aware of whether summary judgment is available.
“It’s available in a lot more places then we might have traditionally thought five years ago before the rule change or before the Hryniak decision,” says Book, who did not act in the case.
“That’s just something that every civil litigator needs to have in their strategic arsenal.”
Gowlings challenged whether it had caused the client’s damages and said a third-party accounting firm — Raymond Chabot Grant Thornton LLP — was responsible for advising the clients of potential tax mitigation strategies and for tracking the 21-year deemed disposition date.
Gowlings admitted that it was liable for Siegel’s actions and that he had fallen below “the standard of care of a reasonably prudent tax lawyer,” according to the decision.
However, the firm claimed it was not responsible for the causation of damages.
The firm filed a cross-motion that would have effectively consolidated the Ozerdinc action with one the firm had launched against the third party, arguing the matter addressed in the partial summary judgment motion should go to trial as there were common issues between the two actions.
Sally Gomery, who represented the accounting firm, says the law firm was responsible for advising the plaintiffs about potential tax consequences as it had set up the two family trusts.
“Raymond Chabot was not involved at all in setting up those trusts, never gave advice on those trusts [and] in fact wasn’t even aware that the second trust had been set up until after the fact,” she says.
Labrosse found that as the accounting firm was not a party in the action, he could not consider the third party’s role and could only assess causation with respect to Gowlings. The judge also dismissed Gowlings’ cross-motion.
Book says it is common for a main action and third party to be heard together, but in this instance the judge kept them separate.
“This case is also an important example for the parties to think about whether a third-party action really should be tried with the main action and that it doesn’t necessarily always have to be,” she says.
“And for that reason there are strategic considerations for counsel.”
The issue of damages was not dealt with through the partial summary judgment motion and will be addressed at trial.
A spokesman for Gowlings declined to comment on the decision “as the matter is still before the court.”
Siegel has retired from the firm. Allan O’Brien, who represented Gowlings in the matter, did not respond to requests for comment.
Caza says while its common for plaintiffs to file liable lawsuits against as many defendants as possible, his clients only commenced litigation against Gowlings, as the law firm was who they depended on.
He says the whole summary judgment turned mainly around this issue, as Gowlings’ argument against partial summary judgment was that the accountants were also liable.
“Often what people will do is they’ll cast in a wide net in order to get in as many defendants as they can, because arguably somebody could say you have accountants that are working with you. Maybe the accountants are liable,” he says.
“Instead of using a wide net, they basically used a spear.”