An Ontario judge has found a Toronto lawyer and his law firm were negligent in tax advice they gave to a former Canadian Olympic skier.
Ontario Superior Court Justice Bernadette Dietrich determined that lawyer Stuart Bollefer and Aird & Berlis LLP failed to warn retired skier Katherine Pace-Lindsay about the risks of a plan they provided to limit the amount of income tax paid on assets she held in a trust.
“The defendants breached their duty to provide competent legal and tax advice,” Dietrich wrote in Lindsay v. Aird & Berlis LLP.
“Mr. Bollefer breached his duty to apply reasonable care, skill and knowledge in the provision of his professional services to the plaintiff in accordance with the standards of a reasonably competent solicitor with particular expertise in income tax planning matters.”
Pace-Lindsay retained Bollefer and his firm in 2006 to get advice on the winding up of a trust, which had been set up to preserve her amateur status as an athlete and to defer income tax, according to the decision.
By the time Pace-Lindsay was 16 years old, she was travelling most of the year for skiing competitions. Pace-Lindsay was named Canadian Female Athlete of the Year in 1993 and competed in the 1994 Olympic Games in Lillehammer, Norway.
The money she received from prizes and endorsements went into the trust, which amassed around $1 million worth of assets including publicly traded securities and shares from private companies. The trust was set to wind up in 2006, eight years after she retied from competitive skiing.
Part of Bollefer’s proposal was to have Pace-Lindsay make a donation of $750,000 from the trust to an offshore Canadian charity and spend the remaining $250,000 on a life insurance policy, according to the decision. This plan was meant to let her to keep the private company shares and limit the amount of income tax she would pay on the investments.
Pace-Lindsay would then use the receipt from the donation to claim a deduction against her income from the trust. The amount she paid to the charity — minus a 15-per-cent fee — would be transferred to an offshore insurance company, which would buy a life insurance policy, according to the decision.
Bollefer and the firm told Pace-Lindsay that she would avoid tax on the pre-tax income held in the trust. They also advised her that she would be able to direct the investment of the donated funds through an offshore entity and that, upon the death of the insured parties, the money would be returned to her.
The plan failed, as the offshore charity was not a registered charity at the time the donation was made. Bollefer was involved in the charity foundation’s formation and acted as its legal counsel at the time its registration was revoked.
Pace-Lindsay later testified that she did not fully understand the plan and depended on the advice of the lawyer and his firm. Pace-Lindsay also contended that she never would have committed her funds to the plan if it weren’t for Bollefer’s advice.
Pace-Lindsay brought the lawsuit after the Canada Revenue Agency audited her tax returns and found that “the steps taken pursuant to the defendants’ advice relating to the donation amounted to a sham,” the decision said. The CRA then threatened Pace-Lindsay with criminal prosecution, but after a ninth-month appeal process, she was told criminal charges would not be brought against her.
Bollefer admitted that his conduct fell below a reasonable standard and that he breached his duty of care to ensure the charity was registered at the time, according to the decision.
James Gibson, one of the lawyers representing the defendants, did not respond to requests for comment.
Dietrich found the lawyer and firm failed to warn Pace-Lindsay of the serious risks inherent in the plan either in writing or orally and that they had a duty to do so.
The defendants provided a written opinion to Pace-Lindsay warning about the part of the plan concerning the insurance policy — but not until two years after she already accepted the advice, the decision said.
Pace-Lindsay claimed that Bollefer had said the plan was routine and similar to that employed by other athletes with trusts and failed to warn her about the risks if CRA became aware of the plan.
Bollefer contended it was his practice to warn a client about such an “aggressive plan,” but on cross-examination, he had no specific recollection of an oral warning.
Dietrich found that as Bollefer was the solicitor and “architect” of the plan, he was informed of the importance of warning his client of the significant risks.
“He bears a heavy onus to satisfy the court that his version of the warning ought to be preferred,” Dietrich wrote.
Ronald Caza, of CazaSaikaley LLP, says the decision serves as a reminder for lawyers to make sure they give advice in writing.
“It’s so essential for all lawyers whenever they’re giving advice, especially on issues such as tax or anything that can be complicated, to put it in writing,” says Caza, who was not involved in the case.
Dietrich also made the findings on summary judgment without the use of expert evidence. The defendants had argued that there could not be a finding of negligence without expert evidence. The judge disagreed.
“The defendants’ failure to advise the plaintiff of the significant legal risk in pursuing the plan falls squarely within the exception of a failure to warn where the duty to warn was clear,” Dietrich wrote. “In such cases, expert evidence of solicitor’s negligence is not required.”
Lawyers say that for a while there was case law that stated it was almost impossible to get a finding of professional negligence on summary judgment if there was not an expert report.
Gavin Tighe, a senior partner with Gardiner Roberts LLP, who was not involved in the case, says recent decisions show that is no longer the case.
“You don’t need a weatherman to know which way the wind blows sometimes,” he says, quoting a Bob Dylan song.
Eric Fournie, the lawyer who represented Pace-Lindsay in the case, declined to comment on the decision.
While Dietrich made her ruling on whether the defendants were liable through summary judgment, both parties agreed that determining the quantum of damages would require a trial.
Lawyers say the fact that the court allowed for partial summary judgment is surprising as the Court of Appeal ruled in a 2017 decision — Butera v. Chown, Cairns LLP — that motions for partial summary judgments should only be brought in the clearest of cases.
Tighe says he would not be surprised if this point was a ground of appeal if the defendants decide to seek leave to appeal the decision.
The damages that Pace-Lindsay is seeking include legal fees she incurred to resolve the issues coming out of the CRA audit, as well as the difference between the interest on her assessed tax liability and the market rate of interest.
She is also seeking damages for the balance of the funds provided for the plan, which she said she has not received yet. Since the CRA audit, Pace-Lindsay has been repaid some of the funds.