Accountant liability for recommending charity tax shelter gifting scheme - Lemberg v. Michael Perris

July 14, 2010 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, What's New from the Charities Directorate of CRA, Canadian Charity Law, Ethics and Canadian Charities, Avoiding 'Charity' Scams

This case involves an accountant, Mr. Michael George Perris, recommending a charity tax shelter scheme to his client that was unsuccessful.  The case deals with whether this accountant is a fiduciary and if so whether he breached his fiduciary duties to his client.  In this case the court found that the accountant had a fiduciary relationship with the client.  The accountant had received a fee from the promoters for referring the matter, had not appropriately disclosed the “secret commission” and the court found that he did not act in the best interest of his clients. The judge noted “The legal opinions, which lent apparent legitimacy to the scheme, were carefully crafted and laid out assumed sets of facts that bore little resemblance to the circumstances of the actual transactions that were recommended.”  The court found that despite the plaintiffs being sophisticated business people “The Lembergs were vulnerable, in the sense that they trusted Mr. Perris’s integrity, and the independence of his advice.”  It will be interesting to see if there are more cases against professional advisors such as lawyers, accountants and investment advisors, who may have recommended that their clients participate in such schemes.  There are already 3 class action lawsuits against law firms for providing the opinion letters in different charity gifting tax shelter schemes

Here are some highlights of the case:

“[15] The scheme itself was propounded by AFE Consultants Limited.  In essence, limited edition prints would be purchased in bulk and sold to clients at a discount.  They would then be donated to various educational institutions in the United States.  The client who participated in the scheme, and who purchased a number of prints at a given discounted price, would be given a tax receipt for the purported market value of the prints, which invariably was several times higher than the actual amount paid for the prints.  An appraisal was supplied that purported to support the higher appraised value.  The client would claim a tax credit based on the appraised value of the prints, rather than the price the client actually paid for them.

[16] Legal opinions were secured from large, well-known Toronto law firms that purported to confirm that tax credits could be obtained based on the higher appraised value of the prints.  It should be noted, however, that the opinions were carefully crafted, and subject to a number of conditions.  As is usual, the opinions were based on certain assumed facts.  For example, it was assumed that no assurance would be provided to a purchaser of the art that the purchaser would have the opportunity to donate the art to one or more charities.  It was assumed that each purchaser would have the opportunity to decide which donees of the art would be most meaningful as a recipient, and that a charity selected would be chosen according to the background and interests of the donor.  It was pointed out that if receiving a tax benefit is the sole intention of a purchaser, then there may not be a gift as contemplated in the Income Tax Act.  In order to qualify as “personal use property” within the meaning of the Act, it was recommended that a purchaser actually take delivery of the art, make gifts of some pieces to family members and others, make donations over a period of time to a number of charities, and dispose of the art by way of donation concurrently with the acquisition of additional art for personal use or enjoyment.
...
[32] In 2006, the Lembergs became suspicious that Mr. Perris had made an undisclosed commission on the artwork.  They emailed AFE and asked the amount of the commission paid to Mr. Perris.  In response, they were advised: “I am not able to disclose the information concerning the amount of commission paid to Mike Perris.”

[33] In his evidence, Mr. Perris confirmed that he had received a “small” amount of money on the transactions.  He said it was about $7,500.  No confirming documents or other information were produced.  He said it was not a commission, but was a fee.  He insisted that the Lembergs were aware that he was earning a fee, and he referred to the paragraph in the annual engagement letter that disclosed that Mikary Investments would earn a fee on sales of securities.
...

Submissions
[40] Mr. Campbell, counsel for the plaintiffs, submits that the parties were in a fiduciary relationship.  While not a classic fiduciary relationship, such as trustee and beneficiary, or agent or principal, nevertheless, as a result of the confidential relationship built up over the years, it was nevertheless a fiduciary one. 

[41] Mr. Campbell points out that the Lembergs trusted Mr. Perris to act in their best interests.  He had been their accountant for many years, and he had advised them on how to minimize their taxes, both on an ongoing basis and, prospectively, looking forward to the day they would retire after selling their business.  He had become intimately acquainted with all of their financial affairs, and those of their corporation.  In the course of giving them tax advice generally, he had made recommendations on investments that were designed to minimize taxes.

[42] While a standard of perfection was not expected for his advice, (and indeed some of Mr. Perris’s recommendations regarding limited partnerships were not overly successful), Mr. Perris was expected to at all times act in the Lembergs’ best interests rather than his own, apart from the normal fees he would charge for his advice.

[43] In this case, Mr. Campbell submits that Mr. Perris did not act in the Lembergs’ best interests.  In 1998, he attended on Mr. Lemberg and exerted pressure on him to enter into the transaction.  He had in his possession certain information about the scheme, including legal opinions, that he did not disclose to the Lembergs.  Even if he did not specifically say there was no risk, as the Lembergs testified, he said nothing that would indicate that there was any significant risk.  Indeed, had he examined the legal opinions, he would have realized that there was indeed a significant risk.  Those opinions were based on assumed sets of facts and circumstances that bore little resemblance to the circumstances of the transaction he urged on Mr. Lemberg.

[44] Most significantly, Mr. Perris had a financial interest in the transactions that he did not disclose to the Lembergs.  While he called it a fee rather than a commission, Mr. Perris acknowledged that he earned at least $7,500 through the transactions.  While he claimed that the paragraph in the annual engagement letter, to the effect that Mikary Investments Limited would earn a commission on sales of securities, constituted disclosure to the Lembergs, it is clear that this is not so.  This tax avoidance scheme did not involve the sale of securities; rather, it involved the purchase and donation of artwork, which cannot conceivably be construed as a sale of securities.  The Lembergs were adamant that they would not have entered into these transactions had they known Mr. Perris was earning a secret fee or commission, and there is no reason to doubt their evidence in this respect.
...

[50] Ms. Squires, for the defendants, submits that Mr. Perris was not in a fiduciary relationship with the Lembergs.  He was retained as an accountant to provide a defined range of services, which included advising as to appropriate tax saving vehicles.  In doing so, he provided options for the Lembergs to consider, which they were free to accept or reject as they saw fit.  Indeed, on at least one occasion the Lembergs rejected Mr. Perris’s advice, and refused to buy units in a particular limited partnership that he recommended.

[51] Ms. Squires points out that the Lembergs were not unsophisticated neophytes.  Mr. Lemberg was an intelligent businessman, who had built up a successful business over the years.  He was not ignorant of tax issues, and he was familiar with terminology such as the CNIL.  He was well able to sit down with Mr. Perris on an annual basis and intelligently discuss Mr. Perris’s recommendations for the current year, and his expectations for the future.

[52] Ms. Squires submits that the Lembergs were perfectly capable of assessing the risk of entering into these transactions, or at least obtaining other advice.  It is highly unlikely that a chartered accountant would advise a client that there would be no risk in entering into a transaction of this sort, and Mr. Perris denied that he did so here.  A person in the position of the Lembergs would know that it is always possible that the CRA may reassess a taxpayer, and that if the taxpayer is reassessed it would be prudent to pay the disputed tax in order to stop interest accruing.  They could have taken steps to minimize their loss, but did not.

[53] With respect to the alleged secret commission, Ms. Squires submits that there was nothing secret about the fee Mr. Perris received.  She submits that a reasonable construction of the paragraph in the engagement letters that referred to Mikary Investments should be sufficient to put the plaintiffs on notice that Mr. Perris could earn a fee on any of these transactions, whether they are, strictly speaking, sales of securities.  Furthermore, Mr. Perris testified that he advised the Lembergs that he would receive a fee, and his evidence should be accepted.

[54] At best, Ms. Squires submits that the Lembergs’ loss is $39,795, as referred to above, and that is the maximum amount to which they should be entitled.  However, Ms. Squires submits that there should be deducted from that amount the corporate tax savings that resulted from increased bonuses declared for Mr. and Mrs. Lemberg so that they could take advantage of the scheme.  This resulted in a corporate tax saving of $42,120.  Therefore, at the end of the day, the Lembergs have actually suffered no loss.

...
[64] On the facts of this case, I have no hesitation in concluding that, in relation to matters of tax planning, Mr. Perris had undertaken to act solely on behalf of the Lembergs and had relinquished his own self-interest in that regard, except for the normal fees he would charge for providing his advice.

[65] The parties had developed a relationship of mutual trust and confidence over a number of years.  Mr. Perris had become fully familiar with the financial affairs of his clients, and his tax advice was given with the sole objective of improving their tax position, both in the short and long term.  The Lembergs were entitled to assume that any advice given to them regarding tax matters would be advice honestly given by Mr. Perris with a view to advancing their interests, and not those of Mr. Perris.  As was the case in Hodgkinson, the elements of discretion, influence, vulnerability and trust were present.

[66] For the foregoing reasons, I conclude that Mr. Perris was in a fiduciary relationship with the Lembergs.

(b)  If Mr. Perris was a fiduciary, did he breach his fiduciary obligations?

[67] Based on the evidence as a whole, I have no doubt that Mr. Perris breached his fiduciary obligations.

[68] The most fundamental way in which Mr. Perris breached his fiduciary obligations was by obtaining a secret commission.  I accept the evidence of the Lembergs that the fee or commission earned by Mr. Perris was not disclosed to them.

[69] Article 2.07 of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario provides as follows:
2.07 Unauthorized benefits
A member or student shall not, in connection with any transaction involving a client or an employer, and a firm shall not, in connection with any transaction involving a client, hold, receive, bargain for, become entitled to or acquire, directly or indirectly, any fee, remuneration or benefit for personal advantage or for the advantage of a third party without the knowledge and consent of the client or employer, as the case may be.

[70] Mr. Perris undoubtedly knew that he was required to disclose any commission or fee earned through a transaction involving a client, over and above his normal professional fees.  That is why, in my view, the paragraph in the annual engagement letters was included.  In that paragraph, Mr. Perris disclosed that his company, Mikary Investments, would earn a fee on sales of securities. 

[71] Clearly, in my view, the paragraph in the annual engagement letters is not sufficient to qualify as disclosure of the secret commissions here.  First of all, these transactions did not involve sales of securities.  By no stretch of the imagination can they be construed to be so.

[72] Second, the secret commission here was paid by the proponent of the scheme, not by the Lembergs.  That means that in fact, Mr. Perris was working for the proponent of the scheme.  The commission meant that Mr. Perris had a financial interest in the transaction that was at odds with the interests of the Lembergs.  The Lembergs were entitled to independent, unvarnished advice as to whether the transactions were in their best interests.  Instead, unbeknownst to them, the transactions were in the interests of Mr. Perris, who earned an undisclosed fee or commission.

[73] The fact that Mr. Perris had a financial interest in the transactions goes some way, in my view, to explaining the rest of his conduct.  Mr. Perris paid scant attention to warning signs that should have alerted him to the risk his clients were undertaking.  The legal opinions, which lent apparent legitimacy to the scheme, were carefully crafted and laid out assumed sets of facts that bore little resemblance to the circumstances of the actual transactions that were recommended.  Mr. Perris made no attempt to apprise the Lembergs of the information he had in his possession about the scheme, including the legal opinions themselves.  I accept the evidence of Mr. Lemberg that Mr. Perris exerted considerable pressure on him to participate.  The relevant purchase orders were filled out before Mr. Perris even arrived.  The purchase orders were in Mr. Perris’s handwriting.  In 1999, Mr. Perris advised that Mr. Lemberg should act quickly, as time was running out. 

[74] The Lembergs were vulnerable, in the sense that they trusted Mr. Perris’s integrity, and the independence of his advice.  They assumed he had done the requisite degree of due diligence, so that they would not have to do so themselves.  They assumed that any appreciable risk would be disclosed to them.  They relied on his advice and his integrity.  As it happened, their trust was misplaced.  His advice was not independent; he had a financial interest in the transaction, which he did not disclose.  He either did insufficient due diligence, or if he did, he paid it no heed.  His recommendations were accompanied by pressure and haste, and little, if any, time for reflection by his clients.  His integrity was impaired by self-interest.

[75] For the foregoing reasons, I conclude that Mr. Perris breached his fiduciary obligations to the Lembergs.

...


[88] I think it is possible to summarize the appropriate principle as follows.  While it may not be appropriate to directly apply the concept of contributory negligence to the calculation of losses flowing from a breach of fiduciary duty, as stated by Cooke P. in Day v. Mead, and as adopted by La Forest J. in Canson, it may be appropriate to apply the concept by analogy where it is equitable to do so.  That is how I read the judgment of McLachlin J. in Canson.  At the end of the day, the question is whether it is equitable, in the particular circumstances of the case, to reduce the recovery of the plaintiff because he or she failed to take some reasonable step that might have reduced or eliminated the loss.

[89] In my view, if the question is put this way the answer in this case is clearly no.  In hindsight, one can easily say that the plaintiffs should have been more suspicious of these transactions.  Indeed, it seems that Mr. Lemberg was, in fact, somewhat suspicious.  He asked why everyone would not enter into this sort of transaction if it is such a good deal.  He did not take the next step of securing a second opinion.

[90] In the final analysis, I do not think second guessing of the plaintiffs’ action or inaction in this way is productive.  The Lembergs relied on Mr. Perris, and assumed that he had done his due diligence.  They trusted Mr. Perris, and if he said the transaction was something they should enter into, they assumed it was all right.  In the end, I do not think the plaintiffs’ compensation should be reduced because, in 20/20 hindsight, the plaintiffs might have ignored Mr. Perris’s advice and done something different.

[91] For the foregoing reasons, Mr. Perris must compensate the Lembergs for all of their losses.  The question is what those losses are.

[92] The parties are agreed that the basic loss is $39,795.  To that must be added disgorgement of the secret commission of $7,500.”


For the full text of the case see: .Lemberg v. Perris & McIntyre LLP

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