I Am Sure I Am Right (But I Might Be Wrong): A Tax Professional’s Duty to Warn a Client About Weaknesses in a Tax Opinion: Part I By Joel Nitikman, K.C How to Use Presentations to Stand Out and Get More Clients

I AM SURE I AM RIGHT (BUT I MIGHT BE WRONG): A TAX PROFESSIONAL’S DUTY TO WARN A CLIENT ABOUT WEAKNESSES IN A TAX OPINION

PART I

By Joel Nitikman, K.C.

“Practising tax law must sometimes feel like walking a tightrope without a net. One small misstep can have drastic consequences.”

—Lawyers Insurance Fund, “Income Tax: It’s a Risky Business”, Insurance Issues: Risk Management (2010), Issue No. 3, Winter

“Clients, I know, want two inconsistent things. They want confident advice on which they can act, and they want cautionary advice about the risks of doing so. It is a solicitor’s unhappy lot to have to try to satisfy both requirements simultaneously.”

—Queen Elizabeth’s School Blackburn Ltd v. Banks Wilson Solicitors (A Firm), [2001] EWCA Civ 1360 at para. 51, per Lord Justice Sedley

This two-part article discusses two related issues:1 If a tax pro- fessional2 gives a tax opinion to a client, does the professional have a legal duty to warn the client that the opinion might be wrong, or that a revenue authority might challenge the opinion in court?3

Part I of this article sets out U.S. influence on the language of Canadian tax opinions, as well as certain other background considerations, and begins the analysis of the applicable case law. Part II, to be published in a later

issue of the Advocate, examines in detail some of the additional case law underpinning my ultimate conclusion: whether a duty arises depends on the circumstances. As a general rule, a tax professional does not have a duty to warn their client that the professional’s opinion may be wrong and may be challenged by the tax authorities. However, for the reasons I develop in Parts I and II, a tax professional will have a legal duty to do so where: (a) there is an express or implied term in the professional’s retainer agreement imposing such a duty on the professional; (b) a failure to so warn the client will mislead the client into believing that there is no risk that the opinion is wrong or may be challenged (this may arise particularly where the client is unsophisticated in tax matters or for some other reason is unable to appreciate that an opinion by its very nature is not a guarantee and may be wrong or be challenged); or (c) the facts taken as a whole indicate that the client had a reasonable expectation that the tax professional would warn the client of the risk of being wrong or challenged. There is no fixed or closed list of facts that might lead to this result. Some facts that would normally be relevant to such a determination include, in no particular order and with no particular weight being assigned to any one factor: ii (i) whether the law is uncertain and to what degree; i (ii) the consequences to the client of being wrong; (iii) the client’s degree of sophistication in tax matters; (iv) whether the opinion is for the client’s own use or for the use of a third party or to induce a third party to take or avoid taking a particular action; i (v) the amount the professional charged for giving the opinion; (vi) the lawyer’s level of confidence in the opinion; (vii) what actions the client took independently of the lawyer;4 and

(viii) the aggressiveness of the tax plan.

THE LANGUAGE OF TAX OPINIONS—BRINGING U.S. PRACTICE TO CANADA Before 2003, Canadian tax professionals did not generally couch their opinions in any specific form of words such as “more likely than not” or “should”, etc.

The U.S. Internal Revenue Code5 (the “Code”) imposes penalties on taxpayers in various situations. Taxpayers may avoid those penalties if they file their tax returns in a manner consistent with a tax opinion provided by a qualified tax professional. Different levels of what may be called “confidence” in the opinion are required to avoid different penalties. That is, to avoid some penalties, the opinion need state only that the professional is confident that there is a “reasonable basis” for the opinion, while avoiding others requires the professional to opine that there is “substantial authority” for the conclusion reached in the opinion.

The Code does not provide numerical guidelines for how these various terms—“reasonable basis”, “substantial authority”, etc.—are to be interpreted. Numerous articles have been written that ascribe percentages to these terms, but these are merely the writers’ opinions, do not reflect any statutory language and perhaps do not reflect even a large consensus. One writer suggested the following percentages: • Will: 95%+

• Should: 70-75%

• More likely than not: >50% • Substantial authority: 35-40% • Reasonable basis: 20-25%

• Not frivolous: 5-10%6

A 2003 article introduced the U.S. practice of expressing one’s level of confidence in an opinion into Canada.7 Even though the language of Canadian tax legislation is very different than that of the Code, Canadian tax professionals began to follow the U.S. practice, with the result that, at present, almost all Canadian tax opinions use some form of the U.S. wording to express the professional’s level of confidence in the opinion being delivered.

IF I AM NOT 100% CONFIDENT, THEN I MAY BE WRONG By definition, a legal opinion may be wrong. The very fact that all of the above percentages are less than 100 means that every opinion may be wrong. In fact, even if a professional were to say that they are 100% confident that the opinion is correct, they may be wrong. The issue, therefore, is whether they have a legal duty to tell the client that the professional may be wrong or that the relevant tax authority may challenge the opinion in court, with the concomitant expenditure of time and money required to defend such a challenge being for the client’s account.8

DUTY, NOT PRACTICE It bears emphasizing that I have expressed the issue as a legal duty to warn the client. Whether it is good practice to warn the client is a different matter. I venture to guess that many if not most Canadian tax professionals would say that it is so obviously good practice to warn the client that the opinion may be wrong and that a revenue authority may challenge it in court as to not even warrant discussion. I disagree. In my view, most clients want opinions that do not contain what are colloquially called “weasel words”. In one decision, discussed in detail in Part II of this article, the trial judge referred to lawyers “indulging in ‘on the other hand’ advising which most clients find confusing and annoying”.9 He suggested that clients and “particularly business clients” want “straight answers”, with “no waffling” and “no ‘in my opinion’ answers”.

Accordingly, my view is that an opinion need not say invariably as a matter of practice that it may be wrong or be challenged in court. That may be the right manner of drafting an opinion in some cases, but not in others. Of course, if there is a legal duty to say that, then failure to do will be a breach of contract or the commission of a tort, so any discussion of good practice would be beside the point. This is discussed further below.

I feel reinforced in my view by the fact that one of the leading authorities on professional negligence10 suggests that where the law on which an opinion is given is “difficult”, then it would be “prudent” for the lawyer to qualify the opinion by stating some doubt as to the conclusion. But the authors go on to cite the House of Lords’ decision in Blair v. Asset Co Ltd. 11 That case concerned whether Scottish lawyers, advising on the basis of a then-current decision of the Court of Session, should have told the client that there was a possibility that that decision would be reversed by the House of Lords, given the existence of a critical comment by one Lord of Appeal in a different case. Several of the justices in Blair cited with approval the decision of Lord Kincairney at first instance,12 who held that it was not the lawyers’ duty to “reason out the matter with the liquidators, to say whether their opinion was given with confidence or hesitation, or to quote their authorities”.

THE STANDARD OF CARE Tax professionals may be liable for both breach of contract and negligence if they fail to render a tax opinion with the appropriate standard of care.13 The Supreme Court of Canada in Central & Eastern Trust Co. v. Rafuse said: “The requisite standard of care has been variously referred to as that of the reasonably competent solicitor, the ordinary competent solicitor and the ordinary prudent solicitor”.14

It has been said that the standard will be “higher” if the professional is a “tax specialist” or is being retained because of their high standing in the tax community.15 While the Supreme Court of Canada in Rafuse cited with apparent approval16 the distinction drawn by Justice Hallett at first instance between the standards of care applicable to an ordinary solicitor and a specialist,17 I do not believe that “higher” is the correct adjective. A tax professional holding themselves out as such must exhibit the level of knowledge and skill of a reasonably competent advisor specializing in tax matters. That level will naturally be higher than that expected of a non-specialist, but the standard is still that of a “reasonably competent” specialist.18 That is, the standard of care is that of an “average” or “ordinary” specialist.19 I believe that an Australian decision articulated this point correctly when the Victorian Supreme Court said that where a person holds themself out as a specialist, the standard of care “is that which is reasonably to be expected of an ordinary practitioner having that special skill or competence”.20 More importantly, the court held that that “does not involve the application of a different or higher standard of care but one which reflects what is reasonably to be expected of an ordinary practitioner having or professing to have the special skill or competence concerned”.21

This more particular standard applies to lawyers,22 and especially to tax professionals.23

WHY GIVE THE OPINION? Tax professionals give opinions for various reasons.24 Without exhausting all possibilities, opinions are given to provide clients with a plan as to how to effect a particular transaction while paying the least amount of tax; to provide those who may be considering investing in a client’s corporation, partnership or trust with some certainty as to the tax consequences of doing so; to advise a client on the risks and rewards of litigating an assessment; to prevent the application of gross negligence penalties potentially applicable to a position taken in a tax return; or to satisfy a contractual obligation not to take certain action without the support of a tax opinion.

I have concluded that the issue of whether a tax professional has a duty to warn a client that the professional’s opinion may be wrong is very dependent on the facts. I believe that one such fact is the reason for giving the opinion. I will return to this point in Part II of this article.

WHAT IF YOU HAVE SPECIFIC KNOWLEDGE? The issues discussed in the balance of this article (both Parts I and II) should be distinguished from a different situation. In two related decisions,

the Manitoba Court of Appeal refused two accounting firms’ applications to dismiss summarily a negligence action brought against them.25 Perth Services (“Perth”) sued a law firm and the two accounting firms because of Perth’s failed investment in a tax-shelter program to support scientific research. In the first case, in an unreported decision, a master had granted Deloitte’s application to dismiss, but Perth appealed to the Manitoba Court of Queen’s Bench.26 Deloitte was the auditor and accountant of a corporation, Anaquan Scientific Research Ltd. (“Anaquan”), that had been created to raise money through the provision of tax shelters. Perth became a limited partner in Anwin Research Partnership (“Anwin”), of which Anaquan was the general partner. Deloitte provided a tax opinion to Anwin on the tax shelter. Perth did not allege that the opinion was wrong. But Perth alleged that Deloitte knew that Anaquan did not have the financial ability to support Anwin or the tax shelters and had failed to disclose Anaquan’s financial weakness to Perth and the other limited partners, even though Deloitte had noted this weakness in its audit of Anaquan’s financial statements. The Court of Queen’s Bench, as affirmed by the Court of Appeal, held that there was some evidence that Deloitte was in a relationship of sufficient proximity to Perth such that Deloitte owed Perth a duty to disclose to Perth all relevant information in Deloitte’s possession as it related to Perth’s potential investment in Anwin and that it breached its duty by failing to disclose Anaquan’s need for capital. Justice Sinclair held that Deloitte, “on all the information available to it”, had a duty to take into account (without necessarily revealing) Anaquan’s financial position, so long as the plaintiff could show that there was “even partial reliance on Deloitte’s advice”.

In the companion case, Thorne Riddell, Thorne Ernst & Whinney and Peat Marwick Thorne also moved for summary dismissal of the action against them.27 Again a master had allowed the application and again Perth appealed to the Manitoba Court of Queen’s Bench, which reversed the master. Justice Jewers, affirmed by the Court of Appeal, held that there were arguable issues about the scope of the accountants’ retainers and their obligations to disclose to Perth Anaquan’s precarious financial position and so held the matter over for trial.

THE SCOPE OF THE TAX PROFESSIONAL’S RETAINER Regardless of whether the law of negligence requires a tax professional to warn their client of a risk that the opinion is wrong or may be challenged, the professional may have a contractual duty to do so if that duty is set out expressly or by implication in the professional’s retainer. Through the remainder of Part I of this article, I set out certain of the framework con-

cepts related to the scope of the retainer. I will turn in Part II to further examination of retainer-related considerations and other concepts affecting whether there is a legal duty to warn the client that the tax professional’s opinion might be wrong or that a revenue authority might challenge the opinion in court.

In evaluating the scope of a retainer, it is important to remember that it may stretch beyond (perhaps well beyond) its express terms. This point has been made in many cases. In a leading decision,28 Credit Lyonnais (“CL”) had entered into a long-term lease over certain premises. The lease contained a clause allowing CL to terminate the lease early, but only if it paid a termination fee on or before a particular date. CL was not, apparently, aware that for such types of provisions in a lease, time is of the essence. CL was late paying the termination fee, the landlord refused to terminate early and CL had to buy its way out of the lease at a price that exceeded significantly the amount of the termination fee. CL sued its solicitors for failing to advise CL that there was a condition precedent to exercising the termination clause and that time was of the essence in paying the termination fee.

The law firm’s defence was that providing such a warning was not within the scope of its retainer. Both sides cited previous decisions relating to the interpretation of a solicitor’s retainer. The law firm relied on decisions that appear to say that a lawyer has no duty to go beyond the express wording of a limited retainer. CL relied on decisions that appear to say that it is inherent in every retainer that a lawyer will pass on to the client facts or risks that come to the lawyer’s attention.

The High Court declined to find that these authorities were in conflict with each other and indeed found that they were consistent with each other. Justice Laddie held that, while a lawyer need only follow the scope of the retainer as set out expressly, the lawyer is required to bring to the client’s attention any significant risks of which the lawyer learns while carrying out the client’s express instructions.

That decision has been cited in numerous other decisions. In one such decision, the High Court held that it applies particularly to tax professionals.29 In another, the U.K. Court of Appeal held that the general principle is that “the scope of the retainer, and the nature and extent of the duty arising, depend on the particular documentation and the particular facts of the particular case”.30 In a third decision, the U.K. Court of Appeal summarized the relevant principles as to the scope of a professional’s retainer as follows:

iii)a solicitor’s contractual duty is to carry out the tasks which the client has instructed and the solicitor has agreed to undertake;

iii)it is implicit in the solicitor’s retainer that he/she will proffer advice which is reasonably incidental to the work that he/she is carrying out; iii)in determining what advice is reasonably incidental, it is necessary to have regard to all the circumstances of the case, including the character and experience of the client; iv) in relation to (iii), it is not possible to give definitive guidance, but one can give fairly bland illustrations. An experienced businessman will not wish to pay for being told that which he/she already knows. An impoverished client will not wish to pay for advice which he/she cannot afford. An inexperienced client will expect to be warned of risks which are (or should be) apparent to the solicitor but not to the client; iv)the solicitor and client may, by agreement, limit the duties which would otherwise form part of the solicitor’s retainer. As a matter of good practice the solicitor should confirm such agreement in writing.

If the solicitor does not do so, the court may not accept that any such restriction was agreed.31

In Perth Services, in respect of their retainers, the defending accounting firms argued that they were “limited retainers”, limited to mechanical tax calculations and did not encompass advising Perth on all aspects of its investment in Anwin. Justice Jewers accepted that in principle a lawyer’s or accountant’s retainer may be limited to carrying out certain functions or advising on certain matters, but also accepted, based on a New Zealand decision,32 that it would be “unreasonable and artificial” to limit a retainer to the client’s express instructions. Rather, anything that “fairly and reasonably” arises while carrying out those instructions is within the scope of the retainer.

The lessons to be learned from these decisions are:

(a) a tax professional’s duty may extend beyond the technical aspects of an opinion and may include disclosing specific facts within their knowledge that may affect the client’s decision to follow the opinion; (b) the scope of the professional’s retainer may extend beyond its express wording and may implicitly include a duty to advise a client on all aspects of its proposed course of action, including the advisability of entering into the transaction in the first place33 or of warning that a risk exists that the opinion may be wrong or may be challenged; and (c) the mere fact that the opinion warns the client to seek its own independent advice from other tax professionals will not absolve the tax professional who renders the opinion from liability if the client relies even partially on the opinion.

In Part II of this article, I will turn to Ormindale Holdings Ltd. v. Ray, Wolfe, Connell, Lightbody & Reynolds, 34 which is a leading Canadian and Commonwealth decision on the duty to warn, consider whether it applies to tax advice and discuss how that decision and the concepts in it have been addressed in later case law. I will also raise a few additional points informing my conclusion that a legal duty to warn the client that (a) the opinion might be wrong or (b) a revenue authority might challenge the opinion in court does not arise in all cases.

ENDNOTES

1. Below, I have referred to a tax professional’s potential duty to advise a client not to enter into a risky transaction. That is a different duty than that which is the main subject of this article. 2. I have referred to “tax professionals” to include both lawyers and accountants. Technically, accountants are not allowed to practise law, and there remains some debate as to whether issuing a tax opinion is the practice of law. In practice, however, accountants do this every day, so I have included them in this discussion. See Ronald Foerster, Accountants’ Liability in Canada (Toronto: Carswell) (loose-leaf), s 7.7 (“[a]ccountants have a significant history of providing tax advice to clients. It is an area where legal and financial advice overlap and where the dividing line between the two can be murky”). For a comment on whether accountants rendering tax opinions are practising law, see Robert C Strother, “Defensive Tax

Practice: Professional Negligence”, 1989 BC Tax

Conference, Tab 4, at 57–60. 3. In this article, I have assumed that the tax professional has issued the opinion in a manner that is not negligent as to the actual opinion given—that is, that the facts have been reviewed carefully, adequate legal research has been done, important issues have not been assumed away, etc. 4. See Austrust Ltd v Astley (1993), 60 SASR 354 at 372 (SC), citing Ormindale Holdings Ltd v Ray,

Wolfe, Connell, Lightbody & Reynolds, 1980 CarswellBC 635 (SC) [Ormindale (SC)], aff’d 1982 CarswellBC 748 (CA). 5. USC Title 26, as amended [Code]. 6. Heather M Field, “Aggressive Tax Planning & the Ethical Tax Lawyer” (2017) 36:2 Va Tax Rev 261 at 271. See also a seminal article on the topic: Jasper L

Cummings, Jr, “The Range of Legal Tax Opinions, with Emphasis on the ‘Should’ Opinion” (2003) 98

Tax Notes 1125. 7. See Jack Bernstein, “Understanding U.S. Tax Opinions”, Tax Profile, Issue No 9, September 2003 at 9.

The article was also published as “US Tax Opinions” (2003) 11:10 Canadian Tax Highlights 8–9. 8. This is a different question from whether the lawyer has a duty to advise of the risks associated with a particular course of action. In Phinny v Macaulay, 2008 CarswellOnt 5477 at para 160 (SC), the court

said: “A solicitor clearly has a duty to warn his or her client of the potential repercussions of a particular course of action”. 9. Ormindale (SC), supra note 4 at para 35. 10. John Powell et al, eds, Jackson & Powell on Professional Liability, 8th ed (London: Sweet & Maxwell, 2017) at 837, s 11-162. 11. [1896] AC 409 at 426 (per Lord Herschell), 431 (per

Lord Shand). 12. (1895), 33 SLR 539 at 542. 13. Central & Eastern Trust Co v Rafuse, [1986] 2 SCR 147 [Rafuse]. 14. Ibid at 208. 15. See Brian G Morgan, “Professional Negligence”, 1989 Ontario Tax Conference, Tab 11 at 5; Baniuk v Filliter, 2010 NBQB 272 at para 114. 16. Rafuse, supra note 13 at 208. 17. 1982 CarswellNS 365 at para 12 (SCTD). 18. In Imbree v McNeilly, [2008] HCA 40 at para 69, the majority referred to the standard of care expected of a specialist as being “more particular than” than of a generalist. 19. See Wilson v Swanson, [1956] SCR 804 at para 43, followed in ter Neuzen v Korn, [1995] 3 SCR 674 at para 46. 20. Goddard Elliott (a Firm) v Fritsch, [2012] VSC 87 at para 417. 21. Ibid. 22. See in Montague Mining Pty Ltd v Gore, [1998] FCA 1334 at 12 (unreported), per Wilcox J (“[w]here a client engages a solicitor who professes special expertise in a particular field of law to do work within that field, the relevant standard of care is that of the ordinary skilled solicitor exercising and professing special expertise in that field”). Wilcox J’s judgment was reversed for other reasons but not in relation to that passage: [2000] FCA 1214 (FCFCA).

Wilcox J’s statement of principle was cited with apparent approval in a per curiam decision, Wakim v McNallyat, [2002] FCAFC 208 at para 43. The same rule applies to accountants: Metzke v Sali, [2010] VSCA 267 at para 32; Leda Pty Ltd v Weerden, [2006] NSWSC 125 at paras 45–46. 23. Re Martinazzo and Federal Commissioner of Taxation, [2009] AATA 61 at para 68; Symond v Gadens

Lawyers Sydney Pty Ltd, [2013] NSWSC 955 at

para 188 (“[t]he standard expected of Gadens was that of an ordinary skilled solicitor exercising and professing to have a special skill in taxation law”). 24. For a comprehensive discussion, see Robert P Rothman, “Tax Opinion Practice” (2011) 64 Tax Law 301. 25. Perth Services Ltd v Deloitte Haskins & Sells et al, 2005 MBCA 14; Perth Services Ltd v Deloitte Haskins & Sells et al. 26. 2004 MBQB 176 at paras 24–25. 27. 2005 MBQB 287. 28. Credit Lyonnais SA v Russell Jones & Walker (A

Firm), [2002] EWHC 1310 (Ch). 29. Altus Group (UK) Limited v Baker Tilly Tax and Advisory Services LLP, Baker Tilly Tax and Accounting

Limited, [2015] EWHC 12 at para 69 (Ch). 30. Mason v Mills & Reeve (A Firm), [2012] EWCA Civ 498 at para 43. 31. Minkin v Lesley Landsberg (Practising as Barnet Family Law), [2015] EWCA Civ 1152 at para 38 [emphasis added]. 32. Gilbert v Shanahan, [1998] 3 NZLR 528 (CA) at 537. 33. See Zakka v Elias, [2013] NSWCA 119 at para 68: In AJH Lawyers Pty Ltd v. Hamo [2010] VSC 225 Beach J held that there was a duty on solicitors to give “holistic” advice in and around the client’s retainer, unless the retainer was specifically limited to avoid the need for such advice. In “Lawyers Professional Responsibility”, 5th Edn, Dal Pont observes (at [5.65]) that lawyers retained to carry out a transaction that is improvident from the client’s point of view should consider “whether the client needs to be warned against pursuing the transaction, or at least advised explicitly of the risks to which he or she may be exposed”. In the present case, I consider that the facts, as found by her Honour, gave rise to a duty on Ms Rahe’s part of that kind and that her Honour erred in not so finding. [emphasis added] 34. Supra note 4.