Law Times

PAGE 6 COMMENT Law Times Group Publisher ....... Karen Lorimer Editorial Director ....... Gail J. Cohen Editor .................. Glenn Kauth Staff Writer ............. Robert Todd Staff Writer ....... Michael McKiernan Copy Editor ......... Heather Gardiner CaseLaw Editor ...... Jennifer Wright Art Director .......... Alicia Adamson Account Co-ordinator ...... Ryan Rogers Electronic Production Specialist ............. Derek Welford Advertising Sales .... Kimberlee Pascoe . . . . . . . . . . . . . . . . . . . . . . . . . . Kathy Liotta Sales Co-ordinator ......... Sandy Shutt ©Law Times Inc. 2010 All rights reserved. No part of this publication may be reprinted or stored in a retrieval system without written permission. The opinions expressed in articles are not necessarily those of the publisher. Information presented is compiled from sources believed to be accurate, however, the publisher assumes no responsibility for errors or omissions. Law Times Inc. disclaims any warranty as to the accuracy, completeness or currency of the contents of this publication and disclaims all liability in respect of the results of any action taken or not taken in reliance upon information in this publication. May 3, 2010 • Law TiMes Law Times Inc. 240 Edward Street, Aurora, ON • L4G 3S9 Tel: 905-841-6481 • Fax: 905-727-0017 www.lawtimesnews.com President: Stuart J. Morrison Publications Mail Agreement Number 40762529 • ISSN 0847-5083 Law Times is published 40 times a year by Law Times Inc. 240 Edward St., Aurora, Ont. L4G 3S9 • 905-841-6481. lawtimes@clbmedia.ca CIRCULATIONS & SUBSCRIPTIONS $141.75 per year in Canada (GST incl., GST Reg. #R121351134) and US$266.25 for foreign addresses. Single copies are $3.55 Circulation inquiries, postal returns and address changes should include a copy of the mailing label(s) and should be sent to Law Times Inc. 240 Edward St., Aurora, Ont. L4G 3S9. Return postage guaranteed. Contact Kristen Schulz-Lacey at: kschulz-lacey@clbmedia.ca or Tel: 905-713-4355 • Toll free: 1-888-743-3551 or Fax: 905-841-4357. ADVERTISING Advertising inquiries and materials should be directed to Sales, Law Times, 240 Edward St., Aurora, Ont. L4G 3S9 or call Karen Lorimer at 905-713-4339 klorimer@clbmedia.ca, Kimberlee Pascoe at 905-713-4342 kpascoe@clbmedia. ca, or Kathy Liotta at 905-713-4340 kliotta@ clbmedia.ca or Sandy Shutt at 905-713-4337 sshutt@clbmedia.ca Law Times is printed on newsprint containing 25-30 per cent post-consumer recycled materials. Please recycle this newspaper. Editorial Obiter The Torys fiasco: who was double-checking? I t's the tale of endless boxes. First, it was Conrad Black, who inflamed his own legal troubles when he removed a dozen boxes from his Hollinger empire's downtown To- ronto offices despite a court order tell- ing him not to. Now, Torys LLP has added to its le- gal headaches by inadvertently forget- ting to turn over 168 boxes of materi- als related to the Hollinger saga now at the centre of a Law Society of Upper Canada disciplinary hearing against two of its lawyers. By now, most people will have heard about the "fiasco" last Monday that led to an adjournment of conflict of inter- est proceedings stemming from the sale of Hollinger assets against the two To- rys lawyers, Darren Sukonick and Beth DeMerchant. Ron Foerster, the Borden Ladner Gervais LLP partner represent- ing Torys, took the blame for not pass- ing on the materials to the law society in advance of the hearing. In the week between the April 19 notice of the problem and the April 26 start date for the hearings, the law society was able to get through just 10 of the boxes, LSUC counsel Paul Stern said. But a meeting on Thursday re- vealed that progress in reviewing 149 of them by last week would hopefully allow for a resumption of the proceed- ings tomorrow. It's hard to believe a prestigious Bay Street law firm could mess things up so badly, especially when its own affairs are at stake rather than those of its cli- ents. Foerster explained the mix-up by noting it dated back to 2007, when Torys had been sending materials to an outside company for scanning onto CDs. In instructing a clerk who was sending the materials off, Foerster mis- takenly included the 168 boxes on a list of matters he believed the law soci- ety had already received. It was Philip Campbell, DeMerchant's lawyer, who thought to double-check that the LSUC did in fact have them, a move that sparked last week's adjournment. The incident raises many questions. Key among them is whether the law society needs to have better processes in place to ensure it receives proper document production. From last week's events, it appears it was relying on To- rys to provide it. That makes sense, es- pecially given that it doesn't have the investigative capacity that police have, but it seems logical to have more checks and balances to ensure it gets the infor- mation it needs without proceedings degenerating into the embarrassing and costly episode we saw last week. Torys, too, has questions to answer given the public interest in timely and efficient regulation by the LSUC. Why, after years of dealing with the issue, was there apparently no one doing a proper check on what it had and hadn't produced? We'll be looking for more on this as the matter progresses. — Glenn Kauth Y ou've just filed your 2009 tax return and tucked away the shoebox with Note to family lawyers: beware hidden tax traps Financial your legal documents and are now breathing a sigh of relief as you get ready to enjoy the Stan- ley Cup playoffs without wor- rying that the government will seize your television set. Alterna- tively, you may be one of the un- lucky people who just received a reassessment of their ex-spouse's tax bills. It was bad enough when your spouse eloped with the TV, but it's really too much when the government comes to you for taxes 10 years after your divorce. Unlike the United States, Can- ada doesn't have joint tax returns for spouses and common law partners. However, even though individuals are responsible for their own income, they may be liable for their spouse's taxes. Tax law is a potential minefield for family lawyers, particularly those who studiously avoided tax in law school. The law reports are replete with cases of matrimonial settle- ments and hidden boomerangs for divorced spouses — often women — who settled with- out considering the tax impli- cations of their property trans- actions. Such settlements can trigger liability claims against lawyers and accountants. When individuals transfer property to their spouse or common law partner, wheth- er by sale for inadequate consid- eration, gift or settlement, both the transferor and the recipient are jointly and severally liable for any income tax payable in the year of the transfer. The liability attaches as of the beginning of the year in which the transac- tion occurs. Hence, the recipient spouse can be liable even before the transfer of property. The rule is one of absolute li- ability. Due diligence is not a de- fence. The parties don't have to have any intention to defeat the Canada Revenue Agency's claim. Indeed, the parties don't even have to know that a tax liability exists. There is no time limit on the CRA's claim. There is some good news. The recipient spouse's liability is lim- ited to the lesser of the transferor's tax liabilities outstanding on the Matters By Vern Krishna date of the transfer and the differ- ence between the fair market value of the property and the amount paid for it. For example, assume that upon divorce, a man with in- come tax debts of $400,000 gives up his half-interest in the family home — which has a fair mar- ket value of $1 million — to his spouse as part of the property set- tlement. The spouse is potentially liable for the former husband's tax bill of $400,000 if he defaults on his taxes by, for example, going bankrupt or skipping town. The spouse also becomes liable for any additional taxes owed by the husband to the end of the year in which he transfers the property. The spouse cannot, however, be liable for more than $500,000. The rule also applies to chil- dren who receive payments from parents, such as school or sum- mer camp fees and amounts www.lawtimesnews.com paid for a child's wedding. If the transfer occurs through a series of family members, all of them become liable even if they were mere transients along the way. All property transfers have tax implications. Two cases il- lustrate the difficulties that can arise. In the first, an individual transferred the family residence to his spouse when they separat- ed. Even though the family resi- dence had never been an income- producing property, the spouse was held liable for the husband's unpaid income tax as of the date of the transfer of the home. In the second case, an indi- vidual helped pay for a home purchased by his spouse by con- tributing to the down payment and making mortgage payments thereafter. He also paid off his spouse's bank loans. At the time the taxpayer made these pay- ments, he had a tax liability of nearly $65,000. The parties separated many years later. The spouse was held liable with her husband for payment of his ear- lier taxes because he had repaid her loans at the bank. The statutory language is so broad that a stay-at-home spouse who receives housekeeping mon- ey becomes liable for the hus- band's unpaid taxes to the extent of any shortfall in consideration flowing to him. Contribution to the expenses of marriage is not consideration. Not only is the spouse liable for his unpaid taxes as of the date of receiving the money, the spouse also becomes liable for taxes on income he'll earn later in the same year. Thus, although Canada doesn't have joint returns, we do have joint liability for property transfers between spouses. Un- less properly advised, an indi- vidual faced with an unexpected CRA bill may try to seek recourse against counsel through LawPRO or the accountant's insurers. Pay- ing tax is painful, but it's even more so when the law's path is beset with hidden traps. LT Vern Krishna is tax counsel, me- diator, and arbitrator at Borden Ladner Gervais LLP and execu- tive director of the CGA Tax Re- search Centre. He can be reached at vkrishna@blgcanada.com.

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