Law Times

Law Times • December 12, 2011 NEWS PAGE 3 Tax class actions against 2 firms raise key questions Cassels Brock matter dismissed, FMC part of $11M settlement with plaintiffs BY KENDYL SEBESTA Law Times settlement, both involving Bay Street law fi rms, have raised questions about lawyers' liabil- ity in matters involving charity- based tax opinions that several experts say could open a Pan- dora's box of legal issues. Th e settlement last month A involved Fraser Milner Casgrain LLP in a matter that fi rst 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. Th is 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. Th e settle- ment agreement states that the defendants make no admission of liability or wrongful conduct. Th e settlement is pending court approval next month. "Th e defendants agreed to this settlement in order to end the ongoing distraction and cost of a complex litigation pro- cess," FMC said in a statement last week. "Fraser Milner Cas- grain has a well-earned reputa- tion for consistently delivering the highest-quality legal services to our clients, and we fi rmly 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. "Th ere are more factors to consider now. If the CRA de- cides to pursue third-party civil litigation penalties, LawPRO may not cover these penalties. Th ey then become the law fi rms' 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." Th e 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. "Th e question then recent ruling from the Ontario Superior Court and a new class action becomes what can the implica- tions 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 profes- sor at the University of Western Ontario who focuses on char- ity law, says many law fi rms avoid that kind of work anyway. "While many law fi rms do not provide opinions on tax shelter- style donation arrangements, this is generally not due to concerns over negligence claims from do- nors relying to their detriment on the opinions," says Parachin. "Tax lawyers routinely pro- vide 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 re- quired to live up to an exacting standard of professional compe- tence, it has not tended to be a key consideration over whether a fi rm should accept a retainer in this area. In any event, many opinions provided in this area are heavily qualifi ed to mini- mize a fi rm's exposure." Parachin notes law fi rms may refuse to do opinion work in the area of charity tax law for reasons apart from avoid- ing lawsuits. "Th e primary rea- son is that fi rms are concerned over not squandering reputa- tional capital. Th e economics of many mass-marketed donation schemes would appear to work only if donors receive infl ated donation receipts and/or sub- stantial portions of the receipt- ed donations are somehow cir- culated 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 an- other. Firms are often keen to avoid the stigma of being asso- ciated with these schemes as it can undermine a fi rm's brand." Parachin adds that many law fi rms also provide negative opinions on tax shelter-style donation arrangements. How- ever, the programs' promoters rarely feature those opinions, he points out. Last month, the Ontario Su- perior Court touched on some of the liability issues in Lipson v. Cassels Brock & Blackwell LLP. Superior Court Justice Paul Perell, addressing the issue of li- ability, referred to his colleague Justice Joan Lax' ruling in Rob- inson v. Rochester last year, the matter that named FMC as a defendant. "Th e 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 fi rm had a duty of care and that the other constituent elements of negligence claim might be established; i.e. it is not plain www.lawtimesnews.com 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 misrep- resentation," Perell, who ruled the plaintiff s' claim was statute- barred, wrote in Lipson. According to Perell, the key diff erence between Lipson and Robinson was that Cassels Brock "wrote its opinions so that they down the road," says Adam Dewar, a partner at Roy Elliott O'Connor LLP who represent- ed representative plaintiff Jef- frey Lipson. "People should also be aware that what they write at one stage may be used in an- other in the future." Dewar calls the Lipson judg- ment disappointing in terms of the fi nding that class members' claims were statute-barred and Ultimately, the practice should be aware that their opinions are subject to scrutiny down the road. might be relied on by potential donors, their agents, and profes- sional advisers for the purpose of the transactions contem- plated 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 pro- gram to potential donors." But questions around liabili- ty remain, according to a lawyer involved in Lipson. "Ultimately, the practice should be aware that their opinions are subject to scrutiny its imposition of a heavy burden on Lipson to prove that the law fi rm 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 disal- lowed all of these anticipated tax credits, causing Lipson and several other donors to begin litigation against the govern- ment 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 misrepresenta- tion. He claimed he wouldn't have participated in the pro- gram if it weren't for the law fi rm's opinions. Perell, determining that the case had exceeded the limita- tion 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, indepen- dent legal advice in these mat- ters in the future. Ultimately, I think it could make people much more careful of their opinions in the future." RELY ON THE OFFICIAL REFERENCE OF THE ONTARIO MINISTRY OF LABOUR EMPLOYMENT STANDARDS ACT 2000 – POLICY AND INTERPRETATION MANUAL PREPARED BY THE ONTARIO MINISTRY OF LABOUR, EMPLOYMENT PRACTICES BRANCH Written and used by the Ontario Ministry of Labour, this manual shows you word-for- word how the Ministry is interpreting and implementing every provision of the Act. This practical looseleaf is updated twice annually so you get the Ministry's view on new changes and developments as they happen. You get convenient access to the current legislation and the expert interpretation that will help you provide effective solutions for your clients. 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