Negligence, breach of trust and fiduciary duties
Ensuring clients are comfortable and understand the risks associated with various types of tax planning is key to avoiding a claim of negligence or breach of trust, and meeting your fiduciary duty to a client. This is not a new concept but sometimes it’s lost in the planning process. And it’s what happened in the case of Lindsay v. Aird & Berlis LLP, 2018 ONSC 7524, where the tax lawyer failed in his fiduciary duties and is subject to a damage claim by his former client.
Olympian Catherine Pace Lindsay was one of Canada’s most accomplished Alpine skiers. During her 16-year athletic career, funds and endorsement contracts flowed into an amateur athletic trust used to preserve her amateur status and defer tax. She faced a mandatory wind up of the trust in accordance with income tax rules.
The value of Lindsay’s assets in the trust were approximately $1,000,000 comprised mainly of publicly traded securities and shares of two private companies. Lindsay did not want to liquidate those shares, if possible.
She and her husband sought tax advice from Stuart Bollefer at the law firm of Aird Berlis. Mr. Bollefer’s practice was restricted to tax planning and he held himself out as an expert on tax planning vehicles such as athletic trusts.
Bollefer presented a memorandum with two charts to Lindsay as an explanation of the tax plan structure he was proposing. The tax plan was made up of two parts.
First Lindsay would make a charitable donation of $750,000 from funds distributed from the trust to an offshore Canadian charity. Bollefer indicated Lindsay would avoid paying tax on the pre-tax income held in the trust and be able direct the investment of the donated funds through an offshore entity. Mr. Bollefer was closely connected to the offshore charitable foundation having been involved in its foundation and acting as its legal counsel.
Then Lindsay would use the balance of the trust’s funds to purchase a disability and life insurance policy through an offshore entity. Mr. Bollefer indicated the disability and life insurance policy would let Lindsay avoid or minimize tax and retain the trust’s private company shares.
Bollefer’s proposed plan involved a series of transactions. Lindsay would use the receipt from the charitable donation to claim a deduction against her income from the trust. The funds paid to the charity, less a 15% fee, would eventually be transferred to an offshore insurance company and be used to purchase a life insurance policy. When the people insured under the life insurance policy died, the money Lindsay had donated to the charity would be returned to her.
Relying on Mr. Bollefer’s expertise, Lindsay pursued his proposed plan and wound up the trust following Bollefer’s well documented instructions. But Bollefer’s tax plan failed from the start. The CRA reassessed Lindsay’s tax returns relating to the tax planning and concluded that the steps taken toward making the charitable donation were fraudulent. They threatened criminal prosecution, though criminal charges were never brought against Lindsay.
Instead Lindsay sued Aird Berlis. The issue before the court was whether they had breached their duty of care to her in failing to warn her of the risks in pursuing the plan.
The memorandum that Bollefer gave to Lindsay did not disclose any risk associated with pursuing the proposed structure and plan. When the matter was ultimately litigated, Lindsay indicated that she did not fully understand how the disability/life insurance policy portion of the tax plan worked, only that it allowed her to keep her private company shares that were held in the trust.
It turned out that at the time Lindsay made her donation to the charity, its registration had been revoked and it was not a registered charity as defined under the Income Tax Act. Mr. Bollefer acknowledged at trial that he breached his duty of care to Lindsay in failing to ensure the charity was still registered.
The court found that there was a clear duty to warn Lindsay of the risks of the proposed tax plan and what might happen and that Mr. Bollefer failed to warn Lindsay of the risks associated with the plan. The court commented that the memorandum regarding the structure should have had a warning as to the risks associated with making the donation.
Lindsay was never warned that she could be audited, her income tax reassessed, or that she could be charged with tax evasion. The first she knew that there were issues with the tax plan was when she heard from the CRA.
The court also found that the law firm breached their duty to provide competent legal and tax advice. It found Mr. Bollefer breached his duty to apply reasonable care, skill and knowledge in rendering his professional services in accordance with the standards of a reasonably competent solicitor with expertise in income tax planning.
Lawyers and accountants are held to a professional standard set by their governing bodies. Like lawyers and accountants, advisors must also follow a standard of care in providing information and advice that clients will rely on. When you’re acting in a position of trust, you must give special attention to disclosing risk to the client and assessing whether the planning and structure fit the client’s risk tolerance profile. Certain structures in the current marketplace - such as immediate financing arrangements (IFAs), shareholder borrowing and other leveraged and offshore structures - certainly warrant warning clients of the risks. This case is a good illustration of why clients need to be made aware of potential risks.