I WRONG): A TAX PROFESSIONAL’S DUTY TO WARN A CLIENT ABOUT WEAKNESSES IN A TAX OPINION

Part Ii

By Joel Nitikman, K.C.

This is Part II of an article1 discussing two related issues: If a tax professional 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?

In Part I, I set out U.S. influence on the language of Canadian tax opinions, as well as certain other background considerations, and made a start on analyzing the applicable case law. In Part II, I examine in detail some of the additional case law underpinning my ultimate conclusion, which is that there is no “one-size-fits-all” answer to the question of whether a tax professional has a legal duty to warn a client that an opinion may be wrong and may be challenged by the revenue authorities. As a general rule, the tax professional does not have such a duty. However, such a duty will exist in certain circumstances summarized in Part I of this article and again below.

THE SCOPE OF THE TAX PROFESSIONAL’S RETAINER (CONTINUED)

Among the considerations that inform whether a legal duty arises to warn a client that an opinion may be wrong and may be challenged by the revenue authorities is the scope of the professional’s retainer. As noted in Part I of this article, 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 if that duty is set out expressly or by implication in the professional’s retainer. In evaluating the scope of a retainer, it is important to remember that it may stretch beyond (perhaps well beyond) its express terms.

Ormindale Holdings Ltd. v. Ray, Wolfe, Connell, Lightbody & Reynolds2 is a leading Canadian and Commonwealth decision on the duty to warn. Below, I consider whether it applies to tax advice and discuss how that decision and the concepts in it have been addressed in later case law.

Ormindale Holdings3

As a leading decision on the duty to warn, Ormindale Holdings is worth reviewing in detail. The plaintiff, Ormindale, was a real estate developer. The defendant (“Ray”) was a law firm that had not acted previously for Ormindale. One of Ray’s partners, Mr. Wolfe, was on Ormindale’s board of directors.

During one particular Ormindale board meeting, Mr. Wolfe said that his law firm was of the opinion that Ormindale could carry out a particular real estate development by relying on a “loophole” in a certain provincial statute. The statute was designed to ensure that all term commitments of previously rented residential accommodation would be subject to prior local government approval before being converted to condominiums and sold.

After the meeting, Ormindale retained Ray to give it the required opinion. Ormindale then carried out the development in the manner set out in the opinion. Had the loophole existed, Ormindale would have been able, effectively, to circumvent the declared provincial government policy that conversion of rental accommodation to long-term tenure be permitted only with the consent of the local authorities. Ormindale stood to gain several millions of dollars by avoiding the requirement to win local approval.

Eventually, the B.C. government challenged the plan, which had been carried out by a different developer. The B.C. Court of Appeal, in a 2:1 majority, held that the loophole did not exist.4

Ormindale had stood to gain about $5.5 million if the plan had worked. As a result of the ruling, it lost millions of dollars of construction costs, legal fees and other costs. Ormindale sued Ray.

Ormindale argued three points:

(a)Ray was negligent in giving an opinion that turned out to be wrong;

(b)in the alternative, the opinion was equivalent to a guarantee or a warranty that the plan would work;

(c)in the further alternative, Ray was negligent for not warning Ormindale that the opinion might be wrong.

The B.C. Supreme Court, upheld by the Court of Appeal, ruled against Ormindale on each point.

On the first point, whether Ray was negligent in giving an incorrect opinion, the trial judge, Justice Taylor,5 held that this argument was “plainly untenable”.6 He held that the fact that at least one justice of the Court of

Appeal had dissented and found that the loophole existed was “powerful evidence” that Ray did not give the opinion negligently.7

On the second issue, whether the opinion was a warranty or guarantee, Justice Taylor held it was not. He referred to the idea that Ray had guaranteed the correctness of the opinion as a “novel proposition”.8 Ormindale had argued that Mr. Wolfe, the Ray partner who first suggested the plan at the directors’ meeting, had done so to entice Ormindale to retain Ray and that, therefore, the opinion was a warranty. But Justice Taylor held that Mr. Wolfe had done exactly what he as a director was expected to do: tell the board how Ormindale could achieve its desired real estate project. While that might lead to Ray being retained, that was not the purpose of his advice. Justice Taylor held that no warranty was created and implied that it would take very unusual facts before a lawyer could be held to have guaranteed that an opinion would be correct.9

On the third point, whether there was a duty to warn that the opinion might be wrong, Justice Taylor held that, at least on the facts of this case, there was no such duty. He found as a fact that “the lawyers expressed complete confidence in the scheme and mentioned no risks of failure”10 and that “the defendants, in confidently advocating the scheme, were expressing their honest belief that it was sound in law”.11

Given that he had found already that the opinion itself was not given negligently, Justice Taylor said that the issue boiled down to this: “were the defendants negligent in failing to advise their clients that an argument could be made against the legality of the scheme, even though they were confident that argument would not succeed?”12 Phrased another way, he put the issue as follows: “But when is a solicitor obliged … to advise his client that an opinion which he has confidently formed with reasonable skill and care may still be wrong, so that the client may weigh the risks involved and, if he wishes, seek a second opinion before deciding whether to accept it?”13

Justice Taylor quoted from an earlier B.C. Supreme Court decision (affirmed by the B.C. Court of Appeal) that had held that, while it may be a general rule that “a solicitor should warn his client of the risks involved in the course of action recommended”, that will not always be the case.14 He observed that clients do not appreciate what he called “on the other hand” advice, because they find it confusing and annoying.15 Accordingly, he held that Ray’s duty to warn that its advice might be wrong arose only if Ormindale had been misled into thinking that there was no risk in carrying out the plan.16

On the evidence presented, he held against Ormindale on that point and indeed was very sarcastic of Ormindale in raising the issue: “I cannot accept that the plaintiffs really believed that their lawyers had found a means by which, with timely action, a gain of $5,500,000 was certain”.17

In the end, Justice Taylor held that Ormindale was a sophisticated client who must have known that a lawyer’s view on a matter of statutory interpretation is an opinion only and that it could be wrong. The lawyer does not need to spell that out in detail. An opinion is just that. A lawyer is not required to give a “formalistic warning to experienced business clients”.18

Most importantly, Justice Taylor held that, on the evidence, the plaintiffs were not “misled into believing the advice they received was other than a legal opinion”. Given that the plaintiffs were “experienced business clients”, Ray was not required to advise them “of the possibility that the opinion, although firmly held, may not, in fact, prevail”.19

The Court of Appeal upheld Justice Taylor’s reasoning in its entirety.20

Applying Ormindale: Arkelian v. Daley, Black & Moriera21

This decision, rendered after Ormindale, involved a claim in negligence by numerous plaintiffs against a tax lawyer and his law firm. The plaintiffs purchased Scientific Research Tax Credits (“SRTCs”) in December 1985 for $5.6 million. In January 1986, the lawyer issued an opinion22 to the plaintiffs confirming that the SRTCs were grandfathered under the transitional rule in subparagraph 194(4.2)(b)(ii) of the Income Tax Act 23 In or about April 1986, the plaintiffs filed their income tax returns for their 1985 taxation years and claimed the SRTCs against income tax otherwise payable for 1985. n 1987, the Canada Revenue Agency (“CRA”) notified the plaintiffs that the SRTCs were not grandfathered, so that they were not entitled to the SRTCs that they had claimed for the 1985 taxation year. The plaintiffs made numerous submissions to the CRA24 and started an appeal in the Tax Court of Canada but did not proceed with it. Rather, the plaintiffs sued the law firm, claiming that the opinion was not only wrong but was given negligently and that the lawyers had failed to warn the plaintiffs that the CRA might reject the SRTC claims.

The B.C. Supreme Court dismissed the plaintiffs’ action. Justice Catliff was placed in the unusual position of a provincial Superior Court justice having to determine a substantive federal income tax matter without any argument from the Crown but, as he observed at paragraph 18, he had no choice, because the plaintiffs alleged that the grandfathering opinion was wrong. If in fact it was correct, then that claim fell away.

It is not necessary to say more about that issue other than that, based on his review of the subparagraph in issue and the expert evidence, Justice Catliff held that the opinion had been correct—the SRTCs were grandfathered.25

Justice Catliff was then left with the issue of whether the lawyers had had a duty to warn the plaintiffs that the opinion might be wrong and be challenged. He held that, on the facts, there was no such duty. If of course the tax lawyer had thought that the CRA might not approve the SRTC transaction, he would have had a duty to say so. Although the tax lawyer had concerns as the transaction was structured initially, he had suggested changes to the plan that in his view would ensure that the SRTCs were grandfathered. The promoters effected those changes. While the tax lawyer knew that the CRA might not agree with his opinion, his view was that they would be wrong in disagreeing and he was not under a duty to advise the investors that the CRA might make an incorrect ruling:

All concerned knew of the possibility of an adverse ruling. (Two of the plaintiffs - Mr. Shaffner and Mr. Sapp - both said they knew there was such a risk). It was discussed among the professionals. There was no failure by Harris or Seifert to disclose the risk. Mr. Harris’ expertise may have put him in a better position to foresee the possibility of an adverse ruling, but having concluded the transaction met the grandfathering and due diligence requirements he cannot be faulted for failing to say that his opinion might be wrong. A lawyer is not required to tell experienced business clients his opinion may be wrong - Ormindale Holdings Ltd. et al v. Ray, Wolfe et al (1982) 36 B.C.L.R. 378. Still less can Mr. Harris be faulted for failing to advise purchasers that Revenue Canada might make a ruling which would be wrong 26

This decision confirms that there is no general duty on a tax professional to say to a client “I may be wrong” or “the tax authorities may think I am wrong”, especially where the client is “sophisticated” or “experienced” in tax matters.

Is Ormindale Still Good Law?

Ormindale is still good law. It was applied by the B.C. Supreme Court to a “sophisticated client” in a non-tax context as recently as January 18, 2018.27

Does Ormindale Apply to Tax Advice?

In addition to Arkelian , Ormindale was applied in a case involving tax advice 28 relating to scientific research and experimental development (“SRED”) tax credits, where the B.C. Supreme Court held that the tax lawyer was not under a duty to warn the client that there was a risk that a certain commission would not be treated as a payment on account of SRED.

The Most Recent Canadian Case: Lindsay v. Aird & Berlis LLP

The most recent decision on point is Lindsay v. Aird & Berlis LLP, 29 in which the plaintiff sued the defendant law firm for “solicitor’s negligence, negligent misstatement, breach of trust and breach of fiduciary duty”.30

The plaintiff was a famous Canadian alpine skier. She had built up an amateur athletic trust fund of about $1 million, including shares of two pri- vate corporations that she wanted to keep. More than eight years had passed since her last skiing event and, therefore, she was required to wind up the trust.31

The plaintiff got tax advice from Stuart Bollefer, a tax lawyer at Aird & Berlis LLP (“Aird”). He suggested that she engage in a very complicated, insurance-related, charitable tax plan that would somehow (I confess to not understanding the plan at all) allow her to receive the trust funds tax-free (despite paragraph 12(1)(z) of the Income Tax Act) and keep the shares of the two companies.

Unfortunately, the plan failed for a number of reasons, the chief one being that the charity was not registered as a charity with the Minister of National Revenue. The proposed charitable donation was, therefore, not eligible for a charitable tax credit.

In respect of the duty to warn that the tax advice might have been wrong, Justice Dietrich held that “the evidence of the defendants’ negligence in failing to warn the plaintiff of the risks associated with the Plan is compelling”.32

Aird had issued to the plaintiff a written opinion containing certain warnings on the risk of the plan, but not until after the plaintiff’s tax returns for the years in issue were already under audit. Justice Dietrich rejected Bollefer’s evidence that he had given the plaintiff an oral warning. Although she did not cite Ormindale, she held that the plaintiff was unsophisticated in tax matters and that Aird’s duty included the requirement to warn her that the plan might not be accepted by the CRA. Justice Dietrich also held that the duty to warn was so clear that expert evidence of a tax lawyer’s duty in the circumstances was not required.33

The Opposite View: Sheerness v. Brachers

In the U.K. decision of Port of Sheerness Ltd. and Medway Ports Ltd v. Brachers, 34 the plaintiff company wanted to replace all of its employees with independent contractors. It proposed to offer them new work as contractors. The defendant was a law firm that (through its partner Mr. Hannah) provided the plaintiff with an opinion that if the fired employees did not accept the new terms then they could sue for redundancy payments only— that is, they would not receive compensation for unjust dismissal. It turns out that there were two lines of authority on that point, but Hannah’s opinion did not refer to any doubt or qualify in any way the conclusion that the workers could sue for redundancy only. In the result, the workers sued for and received a large unjust dismissal award and the plaintiff sued Brachers for negligence.

Ultimately the suit was dismissed on the basis that the plaintiff had not suffered any loss (because its overall savings were greater than the unjust dismissal award). But Justice Buckley found that Hannah had been negligent in failing to qualify his opinion. Although there were two lines of authority, one of which supported Hannah’s opinion, that merely proved that “no competent solicitor could reasonably have advised in the terms Mr. Hannah did”.35 Given the amounts involved, the opinion as given, with no “mention of any risk that an industrial tribunal might take the view that it would be an unfair dismissal”, was negligent.

In my view, neither this case nor Lindsay stands for the proposition that a tax professional must in all cases point out the risk of their opinion being wrong or challenged. It appears to depend on the circumstances of each case. In Thomas v. Albutt, 36 some landowners had obtained planning consent for a caravan park. The landowners’ neighbours challenged the consent on an application for judicial review. The landowners retained a barrister, whose advice was that there was a high likelihood of the application being successful on the merits but that the neighbours’ delay in bringing the application could defeat it. He failed to advise the landowners to produce evidence of expenses incurred and other financial prejudice suffered during the neighbours’ delay. He had advised (correctly) that no compensation would be payable if the consent were quashed.

In finding that the barrister was not negligent for failing to give advice on proving financial prejudice, Justice Morgan referred at paragraph 354 to Queen Elizabeth’s Grammar School Blackburn Ltd v. Banks Wilson. 37 In that case the defendant solicitors had drafted a restrictive covenant to govern the plaintiffs when they purchased a property. At a later time the lawyers gave an opinion that certain action would not be a breach of the covenant, although the covenantee was arguing that it would. The Court of Appeal held that there was a real doubt as to the meaning of the covenant. It held also that the solicitors were negligent when they advised on the meaning of the covenant, in that, as Justice Morgan said, “they ought to have pointed out the possibility of and the risk of their construction of the covenant being wrong given that they were advising a lay client”.

Justice Morgan in Thomas v. Albutt at paragraph 355 referred also to Hermann v. Withers LLP 38 The plaintiffs wanted to purchase an expensive house. They wanted to know especially if, as owners of the house, they would have a right to use a nearby garden. This involved an obscure point of property law. The defendant law firm advised the plaintiffs that they would have such a right. In a different case involving the plaintiffs, the court held that they did not have that right. The plaintiffs sued the law firm for negligent advice. Justice Newey held that the defendant’s opinion was reasonably possible so they were not negligent in giving the opinion. How- ever, Justice Newey held that the lawyers should have realized that their opinion was open to doubt and should have advised the plaintiffs of that doubt.

The court in Thomas pointed out that Queen Elizabeth’s Grammar School and Hermann both involved advice given by solicitors to “lay” or, one might say, legally unknowledgeable clients on the correct interpretation of a document. According to Justice Morgan, “they contain statements of principle as to what is involved in the duty of a solicitor to give advice in such a case”.39 Where such a client is involved, “it is the duty of the solicitor to state not only his opinion as to the correct construction but he will also normally be expected to point out, where appropriate, that there are arguments to the contrary and what the consequences are of his opinion not being upheld”.40

Justice Morgan in Thomas was similarly unimpressed by a reference to Levicom International Holdings BV v. Linklaters. 41 That case involved a claim against the well-known Linklaters law firm in respect of their opinion on the meaning of a document. Based on their opinion, the client was advised to commence arbitration proceedings. The plaintiff later alleged that the opinion was “too optimistic” and in fact had been wrong. At paragraph 249 of Levicom, Lord Justice Burnton held that Linklaters could not “sensibly have advised” that the meaning of the document was “clear”, and they should have opined that there were potential counter-arguments, especially given that an overly optimistic opinion would lead to expensive arbitration proceedings. But Justice Morgan in Thomas, at paragraph 357, said: “I am far from clear that the judgments of the Court of Appeal lay down a general principle as distinct from assessing the detailed facts of that case”.

Justice Morgan concluded his review of these decisions as follows:

I am not persuaded by those decisions, or otherwise, that Mr Albutt was negligent because he failed to warn that there were risks in litigation generally, or in this case in particular. At all times, he was instructed by solicitors. The two solicitors involved, Mr Davies and Mrs O’Connor could be expected to be fully aware that there are risks involved in litigation … I have held that Mr Albutt’s belief in the prospects of success at the time of those conferences was not a negligent belief. He was not asked during those conferences to assess the prospects of success … he expressed the view that it was well worth fighting the judicial review and that it was difficult to predict the course of the litigation. In that context, I do not regard the reference to the risks as to costs being “low” as inappropriate or negligent 42

Accordingly, there is no general rule that a tax professional cannot offer an opinion that reaches a conclusion without pointing out the possibility of an opposite conclusion or of the revenue authorities challenging the opinion offered. That may be the requirement in a particular fact situation, but not in every situation.

IS THE CLIENT SOPHISTICATED IN TAX MATTERS?

As the decisions above confirm, the client’s degree of sophistication is an important factor: on the same facts, a lawyer will not have a duty to warn a sophisticated client and yet will have a duty to warn an unsophisticated one that the opinion given may be wrong. This is borne out by an Alberta decision involving advice given to a husband and his wife, 285614 Alberta Ltd. v. Burnet, Duckworth & Palmer 43 The Alberta Court of Queen’s Bench held that the lawyer was not required to warn the husband of the risk of tax consequences, but was required to warn his wife, who was “clearly inexperienced in business matters”.44

This is reflective of the “nuanced” approach to these issues developed by the U.K. Court of Appeal, discussed below.

It bears emphasizing that for this rule to apply, the client must be sophisticated in tax matters, not merely business matters. Ormindale was distinguished on the facts in a U.K. decision where the High Court found that the client, although an experienced businessman, would not have any basis on which to assume that the tax opinion given by his counsel would be challenged by the revenue authorities and should have been warned about that possibility.45

Perhaps the broadest and most general way of expressing this principle can be found in Carradine Properties Ltd. v. DJ Freeman & Co., 46 where Donaldson L.J. said: “An inexperienced client will need and be entitled to expect a solicitor to take a much broader view of the scope of his retainer and his duties than will be the case with an experienced client”.47

The U.K. Approach

In addition to the U.K. decisions cited above, a relatively recent U.K. decision dealt with a duty to warn in a tax context.48 Mr. Barker started and owned a consulting business in a corporation of which he was the majority shareholder. He wanted to sell the business and naturally wanted to pay as little tax as possible when he did so. To that end, he retained a tax lawyer, Mr. Baxendale, of the law firm of Baxendale Walker Solicitors (“BWS”), to provide him with tax advice. BWS formulated a plan that Mr. Barker followed. Under the plan, Mr. Barker transferred his shares to a non-U.K. trust, known as an employee benefit trust (“EBT”). The EBT’s beneficiaries were members of Mr. Barker’s family, but the trust deed provided that they could not receive income or capital from the EBT while Mr. Barker was alive. BWS opined that this trust avoided the tax imposed by the U.K. Inheritance Tax Act 1984 49

Her Majesty’s Revenue & Customs (“HMRC”) eventually assessed Mr. Barker for inheritance tax. For purposes of this article, it is not necessary to explain the technical reasoning on which HMRC’s challenge was based. The important point is that Mr. Barker, after consulting with other tax professionals, settled the assessment and paid over £11 million in tax and interest.

Not surprisingly, Mr. Barker then sued BWS. He argued that the firm should have warned him that its opinion might be wrong and that HMRC might challenge it in court.

At trial,50 Justice Roth held that BWS had a legal duty to warn Mr. Barker that HMRC might challenge the tax plan. However, he held that no damages flowed from BWS’s breach of its duty because Mr. Barker would have proceeded with the plan anyway even if BWS had warned him of the risk.

Justice Roth addressed specifically Mr. Barker’s argument that BWS should have warned him that its interpretation of the key provision, section 28 of the Inheritance Tax Act, might be wrong or be challenged. Justice Roth held that no such warning was required because (a) BWS’s opinion on the meaning and application of that section to Mr. Barker’s facts was most likely correct and (b) there did not exist “such strong factors favouring an alternative construction that this should have been pointed out by a lawyer presenting a balanced view to their client”.51 In other words, section 28 was so clear that BWS was not required to warn Mr. Barker that there might be an alternative meaning. Justice Roth at paragraph 178 concluded by holding that a lawyer whose opinion is likely correct does not have a duty to warn the client that the opinion might be wrong. On the other hand, where a competent lawyer would understand the arguments to be “finely balanced” on both sides of an issue, “so that any reasonably careful lawyer (of appropriate expertise) should have been alerted to the significant possibility of a contrary view”, then there may be a duty to warn the client of the weaknesses in the opinion.

Barker appealed Justice Roth’s judgment to the U.K. Court of Appeal.

The Court of Appeal began by holding that BWS’s interpretation of section 28 was wrong and HMRC’s was correct. Therefore, although BWS’s opinion was not negligent, it was certainly incorrect and led to the payment of Mr. Barker’s tax.

As to whether BWS had a duty to warn Mr. Barker that its opinion might be wrong and be challenged, the Court of Appeal held that this depended on the view that a reasonable tax lawyer could take of section 28 and was “also dependent upon whether contrary arguments as to construction are of sufficient significance to require specific mention when taken with the degree of risk inherent in the circumstances and the importance in those circumstances of a balanced view of the provision”.

Justice Asplin held the principles could be summarized as follows:

(i) the question of whether a solicitor is in breach of a duty to explain the risk that a court may come to a different interpretation from that which he advises is correct is highly fact sensitive;

(ii) if the construction of the provision is clear, it is very likely that whatever the circumstances, the threshold of “significant risk” will not be met and it will not be necessary to caveat the advice given and explain the risks involved;

(iii) however, depending on the circumstances, it is perfectly possible to be correct about the construction of a provision or, at least, not negligent in that regard, but nevertheless to be under a duty to point out the risks involved and to have been negligent in not having done so;

(iv) it is more likely that there will be a duty to point out the risks, or to put the matter another way, that a reasonably competent solicitor would not fail to point them out when advising, if litigation is already on foot or the point has already been taken, although this need not necessarily be the case; and

(v) the issue is not one of percentages or whether opposing possible constructions are “finely balanced” but is more nuanced. 52

Justice Asplin went on to hold that a lawyer providing tax advice must determine, as part of giving the advice, and not as some separate matter, if he or she should warn the client that the advice may be wrong, depending on “all the circumstances”,53 including “the fact that this was a very aggressive tax avoidance scheme”,54 that “the potential charge to tax was very large”55 and that the lawyer’s “fee was in the region of £2.4m”.56 These are at least some of the factors that make the decision whether to warn “more nuanced” than simply looking at how uncertain is the tax advice being given.

In addition to the main reasons for judgment by Justice Asplin, there were two concurring sets of reasons. From reading these, it seems that the Court of Appeal’s finding that BWS had a duty to warn Mr. Barker that its opinion might be wrong, or at least challenged by HMRC, was influenced heavily by its finding that the firm’s opinion was wrong legally or at the very least very finely balanced as to whether it was correct.

Therefore, while the duty to warn does not arise simply because the law is not clear, the unclearness of the law is a factor, perhaps a significant one, in determining if there is a duty to warn.57

Applying Barker: David McClean and Others v. Andrew Thornhill QC58

Barker was cited in McLean v. Thornhill. The claimants were members of limited liability partnerships (“LLPs”) that were formed for the purpose of participation in the distribution of films. Participation in the LLPs was marketed to potential investors on the basis that they would be entitled to tax relief against their income or capital gains for trading losses that the LLPs were anticipated to make. These were essentially schemes designed to afford tax benefits to high net worth individuals, but the schemes failed. HMRC refused the reliefs and eventually made a settlement offer to the investors, all of whom accepted. The defendant (“T”) was an eminent tax barrister. He had been engaged by the promoter of the schemes to provide advice on their tax consequences. The investors claimed that T owed them a duty of care in respect of the advice he gave to the promoter. The investors had relied on that advice in entering into the schemes, and contended that T breached that duty of care. The court concluded that no duty of care was owed by T to the claimants for the advice in relation to the schemes. T was not engaged to advise any of the claimants, and none of the claimants were his clients. It was objectively reasonable for T to assume that the investors would obtain independent professional advice, as they were advised to do (and indeed were required to warrant that they had done) in the information memorandum published as part of the scheme marketing. Insofar as the claim was based on T’s failure to warn that there was a significant risk that his views might be wrong, the implicit statement that the promoter’s understanding of the tax analysis was consistent with T’s opinion told potential investors nothing about the terms in which T’s opinion had been expressed or the extent to which it was caveated by such risk warnings. Even if T had owed a duty of care to the claimants, he would not have breached it. On a detailed review of the case law as it stood at the time and a thorough review of developments in the judicial approach to that question in the intervening years, the judge rejected the claim that the approach T had adopted to the question of trading was one to which no reasonably competent tax Q.C. could have come. In addition, none of the claimants had established that the loss suffered by them was caused by any breach of duty by T. The claimants were unable to claim on the basis that the schemes would not have been promoted at all if T had advised differently, both as a matter of law and because the claimants had not established this as a matter of fact.

WHERE ARE WE NOW?

Based on Canadian59 and U.K. decisions, one may conclude that there is no “one-size-fits-all” answer to the question of whether a tax professional has a legal duty to warn a client that an opinion may be wrong and may be challenged by the revenue authorities. As a general rule, the answer is that the tax professional does not have such a duty. But, as set out in Part I of this article, such a duty will exist where:

(a) there is an express or implied term in the professional’s retainer agreement that imposes 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:

(i) whether the law is uncertain and to what degree;

(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;

(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;60 and

(vii) how aggressive the tax plan is.

WHAT IF THERE IS A GUARANTEE?

Where, in the unlikely situation that a lawyer has in fact guaranteed that the revenue authorities will accept a client’s tax return as filed, then the rule in Ormindale will not save the lawyer. In Cannon, 61 the plaintiffs sought to bring a class action against a tax lawyer (among others) in respect of a “buy low, donate high” charitable donation tax plan. The lawyer brought a motion to strike out the statement of claim. On such a motion, the facts alleged in the statement of claim are deemed to be true. One such alleged fact was that the lawyer had guaranteed that the CRA would accept the plaintiff’s tax returns as filed. Taking that alleged fact as being true, the Ontario Divisional Court held that it was irrelevant that some of the plaintiffs might be sophisticated and hence not entitled at common law to a warning that the tax opinion might be wrong.62

Conclusion

In today’s “sue now, ask questions later” environment, tax professionals are understandably reticent to issue an opinion without qualifying it six ways from Sunday as to the potential weaknesses in the opinion, the fact that it is not a guarantee and that the relevant tax authority may challenge it in court. That practice is, perhaps, too well entrenched at this point to be stopped. But, in my opinion, such qualifications are not necessarily a best practice nor, more importantly, required legally. It behooves all tax professionals, for each opinion, to consider what qualifications and assertions of risk it should contain, rather than using boilerplate language in every opinion to cover off such risks.

Endnotes

1. Part I was published in (2023) 81 Advocate 43. See endnotes 1–3 of Part I for further discussion of the scope of the article and of the term “tax professional”.

2. Ormindale Holdings Ltd v Ray, Wolfe, Connell, Lightbody & Reynolds, 1980 CarswellBC 635 (SC) [Ormindale (SC)], aff’d 1982 CarswellBC 748 (CA) [together, Ormindale].

3. Ormindale is famous enough to have been cited in Australian and UK decisions. See e.g. Trust Co of Australia v Perpetual Trustees WA Limited, [1997] 42 NSWLR 237 at 247D; Titan Corporation v Kirby, unreported, Supreme Court of Victoria, BC 9703881 (25 August 1997), where Ormindale is cited for the principle that “where an expression of opinion is offered by solicitors to experienced men of business, at all events where the possibility of the opinion being wrong has by some means been brought to the attention of the client, or where the potential consequences of it being wrong are evident, the solicitor’s duty does not ordinarily require that he advise that his opinion may be wrong”; Grimm v Newman, [2001] EWHC Ch 454. It is also cited in the leading UK textbook John Powell et al, eds, Jackson & Powell on Professional Liability, 8th ed (London: Sweet & Maxwell, 2017) at 837, s 11-162.

4. Re Securities Act and Alder Apartments Ltd (Vancouver Registry, January 31, 1977), an appeal from a decision of the Financial Services Commission upholding the ruling of the Superintendent of Brokers.

5. Later elevated to the BC Court of Appeal.

6. Ormindale (SC), supra note 2 at para 21.

7. Ibid at para 31.

8. Ibid at para 23.

9. Ibid at paras 29–30.

10. Ibid at para 25.

11. Ibid at para 26.

12. Ibid at para 31 [emphasis in the original].

13. Ibid at para 33.

14. Ibid at para 35.

15. Ibid

16. Ibid at para 36.

17. Ibid at para 38.

18. Ibid at para 39.

19. Ibid at paras 39–40.

20. Ormindale, supra note 2 has been discussed in a number of other articles. See e.g. David W Smith, “Dealing with Tax Risk in an Opinion”, Report of Proceedings of Forty-Sixth Tax Conference, 1994 Conference Report (Toronto: Canadian Tax Foundation, 1995), 38:1 at 38:5/6.

21. 1992 CarswellBC 2851 (SC).

22. An interesting point is that the tax opinion, as is almost always the case, was based on facts assumed by the tax lawyer to be true. The plaintiffs criticized him for assuming such facts without verifying them, but Justice Catliff absolved him of any liability for assuming the facts to be true, stating:

[25] There was criticism of the solicitors for basing their opinion on “assumed facts”, but unless the solicitors had undertaken independently to verify the facts, it is difficult to see how otherwise their opinion could have been based. (In fact Mr. Gillespie I’s participation was independently verified.)

Mr. Seifert said that Mr. Shaver advised him that he had verified the facts on which his opinion was based, i.e. independently confirmed their truth, but I find Mr. Shaver did not advise Mr. Seifert of this. I accept Mr. Shaver’s evidence in this regard and find that his opinion was based on facts he obtained from sources he believed trustworthy, but were not facts he independently verified. For more on “facts” and “assumptions”, see Jean Potvin, “The Legal Liability Incurred in Giving a Tax Opinion”, Report of Proceedings of Forty-Sixth Tax Conference, 1994 Conference Report (Toronto: Canadian Tax Foundation, 1995), 35:1 at 35:10; Smith, supra note 20 at 38:16.

23. Currently cited as RSC 1985, c 1 (5th Supp), as amended but at the time cited as SC 1970-71-72, c 63, as amended [Act].

24. I was a lawyer in a firm retained to make such submissions. I do not remember if I participated in drafting such submissions, although I may have.

25. Supra note 21 at para 58.

26. Ibid at para 66 [emphasis added].

27. Laidar Holdings Ltd v Lindt & Sprungli (Canada) Inc, 2018 BCSC 66 at para 466.

28. International Submarine Engineering Co v Briant, 1988 CarswellBC 2732 at paras 165–66 (SC), aff’d 1990 CarswellBC 1592 (CA).

29. 2018 ONSC 7424.

30. Ibid at para 1.

31. Act, s 143.1(3).

32. Supra note 29 at para 28. Interestingly, in finding that the tax lawyer was negligent, the court rejected his submission that expert evidence as to the applicable standard of care (which the plaintiff did not tender) was required and held, “as a general rule, that it will not be possible to determine professional negligence without expert evidence except in cases where: 1. the court is faced with non-technical matters; 2. an ordinary person may be expected to have knowledge; or 3. the impugned actions of the defendant are so egregious that his or her conduct has fallen short of the standard of care, even without knowing the precise parameters of the standard” (ibid at para 46, cited with approval in Li v Macnutt & Dumont and Walters, 2019 PECA 30 at para 19). The court held that exception 3 applied (“[t]he defendants’ failure to advise the plaintiff of the significant legal risk in pursuing the Plan falls squarely within the exception of a failure to warn where the duty to warn was clear. In such cases, expert evidence of solicitor’s negligence is not required”: ibid at para 50).

33. Supra note 29 at para 50. In a related matter, Continental Casualty Company v Lawyers’ Professional Indemnity Company, 2020 ONSC 7131, the company that insures lawyers in Ontario, LawPRO, was sued by the insurers that had agreed to provide excess insurance to LawPRO. The excess insurers’ claim was that Lindsay’s lawsuit had involved more than one “claim”, so that LawPRO was required to contribute $1 million for each claim, whereas LawPRO viewed everything as a single claim.

34. (1996), [1997] IRLR 214 (QB), application for directions on leave to appeal dismissed, unreported, UKCA, November 23, 1998.

35. Ibid at para 17.

36. [2015] EWHC 2187 (Ch).

37. [2001] EWCA Civ 1360.

38. [2012] EWHC 1492 (Ch).

39. Supra note 36 at para 356 [emphasis added].

40. Ibid.

41. [2010] EWCA Civ 494.

42. Supra note 36 at para 358 [emphasis added].

43. 1993 CarswellAlta 297 (QB).

44. Ibid at para 38.

45. Grimm v Newman, [2001] EWHC Ch 454 at para 73.

46. (1982), 126 SJ 157 (CA) [Carradine].

47. In Doolan v Renkon Pty Ltd, [2011] TASFC 4 the court referred to this passage from Carradine and said:

[37] Those words do not appear verbatim in the report of the case in the Solicitors’ Journal, which gives only a summary of the judgment. However they were quoted with approval by Peter Gibson LJ, with whom Hobhouse and Leggatt LJJ agreed, in National Home Loans Corporation v. Giffen Couch & Archer, [1998] 1 WLR 207 at 213. However, the Carradine decision is reported at [1955-95] PNLR 219, available on Westlaw, where the full quotation is as follows:

A solicitor’s duty to his client is to exercise all reasonable skill and care in and about his client’s business. In deciding what he should do and what advice he should tender the scope of his retainer is undoubtedly important, but it is not decisive. If a solicitor is instructed to prepare all the documentation needed for the sale or purchase of a house, it is no part of his duty to pursue a claim by the client for unfair dismissal. But if he finds unusual covenants or planning restrictions, it may indeed be his duty to warn of the risks and dangers of buying the house at all, notwithstanding that the client has made up his mind and is not seeking advice about that. I say only that this may be his duty, because the precise scope of that duty will depend inter alia upon the extent to which the client appears to need advice. An inexperienced client will need and will be entitled to expect the solicitor to take a much broader view of the scope of his retainer and of his duties than will be the case with an experienced client. [Emphasis added.]

In Calvert v Badenach, 2015 TASFC 8, the court expressed this thought as follows: “What can be distilled from the discussion in Renkon is that, in determining the scope of a solicitor’s duty of care to a client in contract, some regard should be paid to the particular client and, what I might describe as, the dynamics between the client and the solicitor” (para 20 [emphasis added]).

48. Iain Paul Barker v Baxendale Walker Solicitors (a firm), [2017] EWCA Civ 2056. The tax lawyer, Mr. Baxendale, is a very famous or, some may say, infamous person. See “Paul Baxendale-Walker”, Wikipedia, online: <en.wikipedia.org/wiki/Paul_ Baxendale-Walker>.

49. 1984, c 51.

50. [2016] EWHC 664 (Ch).

51. Ibid at para 147.

52. Ibid at para 61 [citations omitted, emphasis added].

53. Ibid at para 59.

54. Ibid at para 65.

55. Ibid.

56. Ibid

57. In a decision of the same court decided only ten months previously, Balogun v Boyes Sutton and Perry, [2017] EWCA Civ 75, cited in Barker, a sub- tenant argued that his solicitors had failed to follow his instructions to provide him with adequate advice as to the permission he needed from the superior landlord to use a ventilation shaft for his restaurant. He argued that the sublease did not correspond with the head lease and accordingly he did not enjoy a right to connect to the ventilation shaft. The trial judge found that he had not given such instructions. The subtenant appealed and argued that even if he had not given such instructions, the solicitors should have advised him to negotiate an amendment to the sublease so as to avoid the risk. The Court of Appeal held that on a proper construction the sublease did create a right to connect to and use the ventilation shaft. Nevertheless, the court held as follows:

[36] It seems to me, however, that there is more substance in the second version of the appellant’s case under this ground. In the Queen Elizabeth’s School case a solicitor was asked to advise the school on the meaning of a restrictive covenant which the solicitor had negotiated. In subsequent legal proceedings in professional negligence against the solicitor the court was not asked to rule on the meaning of the covenant but only on whether there was real scope for doubt as to what it meant. The Court of Appeal concluded that there was. Arden LJ (at [47]) considered that the solicitor knew that a dispute was potentially to emerge with a neighbour over the effect of the clause and in those circumstances it behoved him to point out there was a risk about his construction of the clause. The arguments supporting the contrary construction were of sufficient significance to meet the threshold that they should have been pointed out to the client. Sedley LJ (at [49]–[50]) considered that this was a covenant which was likely to give quite a lot of trouble to a court called on to construe it. However, even accepting that the solicitor’s interpretation was entirely defensible, so that there was no way of saying that a competent solicitor could not arrive at it, it could on no defensible view have been so confident as to relieve the solicitor of the need to enter the caveat that a court might construe it differently. (See also Herrmann v. Withers LLP [2012] EWHC 1492 (Ch), per Newey J. at [73] – [74].)

[38] The question whether a solicitor is in breach of a duty to warn his client of the risk that a court may come to a different interpretation from that which the solicitor advises is correct will necessarily be highly fact-sensitive and will depend on the strength of the factors favouring a different interpretation and thereby giving rise to the risk. In the present case, there was no notice that a contrary view was held. Nevertheless, I consider that if Mr Davies had considered the relevant provisions as he should, he would have appreciated that there was a possible non-correspondence between the terms of the headlease and the underlease in relation to access to the ventilation shaft, a matter of great importance to his client’s project. Notwithstanding my conclusion as to the correct interpretation of the provisions, I consider that the risk of a court coming to a different conclusion was sufficiently great to require Mr Davies to advise his client accordingly and to take steps to amend the draft underlease so as to remove the risk. Accordingly I consider that Mr Davies was in breach of duty owed to his client in failing to do so. [Emphasis added.]

58. [2022] EWHC 457 (Ch).

59. In Laidar Holdings, supra note 27, it was argued that a person who relies on a lawyer’s incorrect (but not negligent) advice has been contributorily negligent. The court disagreed and held: “A solicitor is not negligent merely by failing to correctly predict the result of potential litigation, nor by failing to warn a sophisticated client that an opinion might not prevail” (para 466 [emphasis added]).

60. See Austrust Ltd v Astley (1993), 60 SASR 354 at 372 (SC), citing Ormindale, supra note 2.

61. Cannon v Funds for Canada Foundation, 2012 ONSC 6101 at para 150 (Div Ct).

62. The court noted: “The defendants might have said: ‘This is our opinion; we have complete confidence in it; but you must understand that it could be wrong. No one can be certain what a Court will decide on a question of law, and even when a Court has decided, its decision may be upset on appeal’. But I do not think a lawyer is required to give that sort of formalistic warning to experienced business clients” (para 148 [emphasis added]).