Globalization offers ‘comfortable niche’ for tax law boutiques

Big law firm mergers and a growing number of international transactions have created “a comfortable niche” for tax boutiques, but lawyers in the area say a more aggressive Canada Revenue Agency is keeping them on their toes.

Vitaly Timokhov of Tax Chambers in Toronto says clients are increasingly choosing boutique firm services. “That’s where we see a lot of competitive advantage,” he says. “We got to the market with a message that we’re specialists, we know what we’re doing.”

Clients also see boutique firms as a cost-effective option, says Timokhov, who notes partners do the bulk of the work and they don’t charge for junior associates’ time.

“That creates a lot of opportunities that I haven’t seen before. We don’t look that big, that scary, and we absolutely have the expertise. It works out perfectly.”

At Morris Kepes Winters LLP, a tax boutique of about eight lawyers, founder Ian Morris says he has never been busier since the firm opened in the early 1990s and notes the business driver relates mostly to a growing number of international transactions.

“We do a lot of international work,” says Morris, citing transactions not just between United States and Canada but also with European countries like Switzerland and Luxembourg.

“There’s a fair amount of immigration happening in the country, so we work with a lot of people setting up inbound trusts,” he adds.

Even when tax boutiques are dealing with tax evasion issues, a lot of international components come into play, says Morris, who notes his firm is hiring a few U.S. lawyers.

But while there’s lots of work, doing it is getting more complex, according to Timokhov. “Canada Revenue Agency definitely became way more aggressive in the recent few years. Of course, it’s all related to the deficit and the cross-border efforts by OECD countries to enforce tax rules,” he says.

Despite a growing number of international families in Canada, many people with foreign bank accounts don’t realize how severe the penalties could be for not filing information forms to the CRA, says Morris.

He cites the story of a man who had $4 million in a European bank account and didn’t file an information form disclosing it to the CRA for 10 years. When the government finally found out, Morris says it sought to charge the man five per cent of the highest balance in his bank account for each of those 10 years.

“They want $2 million because it’s 10 years for not filing a form and plus they want interest. It worked out to be $2.7 million for not filing a form. So the $2.7 million with the $800,000 interest in penalty means they’re taking $3.5 million of his $4 million,” he says.

“People don’t understand how onerous the penalty can be for failure to file the information returns. People think: ‘Ah, there’s no tax. What’s the big deal? It’s only an information return.’”

With increased enforcement from the CRA and the complex areas of the law evoked as a result, professionals like accountants who traditionally manage tax issues for clients are simply unable to cope with the work, says Timokhov. “That’s where we’ve actually seen a very comfortable niche.”

But it’s tricky to explain to current tax service providers the role the tax boutiques will play, he notes. “We say: ‘Listen, we’re coming at a totally different level. We’re not competing with you; we want to complement what you do and help your client be a better taxpayer.’ We say: ‘We’re here to help; we’re part of the structure.’”

At times, not having a tax lawyer at the early stage of ligation may present difficulties for clients later on, according to Robert Kreklewetz of Millar Kreklewetz LLP.

With large corporate clients, he’s seeing a rise in crackdowns by the Department of Justice when notices of objections don’t sufficiently identify the issues.
“The client may have accountants working on their tax matters. They generally don’t, at that stage, have a specialized tax expert and that may present a problem for them later when they get into tax court,” he says.

Boutique firms also come in handy when companies gear up for corporate deals, Timokhov says, noting it has become nearly impossible to carry on such transactions without the help of tax lawyers. Tax boutiques are in a good position to create what he calls “a specialty team” with other employment and labour lawyers that gives the company all of the services it needs.

Despite the opportunities created by globalization, breaking into an industry already occupied by other professionals isn’t easy, says Timokhov.

“The tough part is that it’s not the best legal market,” he says. “We’re actually pushing into the market.”

There are also some procedural issues that slow things down. According to Morris, it takes up to nine months to get a tax appeal officer to review documents. “Can you imagine that? Six to nine months? Don’t forget — interest is accruing,” he says.

And of course, there’s what Kreklewetz calls “the Googlization of the tax practice” as callers look for five-minute advice to confirm whether their legal premise based on what they read online is correct.

“As a lawyer, you’d be crazy to provide that advice because the last thing you want to do is provide bad advice and have somebody suing you in court five years later,” he says.

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