Globe and Mail article “Noose tightens around donation tax schemes”

May 23, 2012 | 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

The Globe and Mail had an article today entitled “Noose tightens around donation tax schemes”.  It discusses litigation around some schemes that the CRA characterizes as “abusive gifting tax schemes”.

Here is a link to the Globe and Mail article:

Here is the decision of Strathy in Charette v. Trinity Capital Corporation et al - Decision of Strathy J May15, 2012

The decision is very well written and well worth reading.  Here are some of the highlights of the decision although I would suggest it is worth reading the whole decision linked to above:

[17] As will become apparent, this may have been a fateful step. FMC took on a solicitorclient
relationship with Charette and other donors. There is no evidence before me that FMC
advised Charette, then or at any later date, that it might have a conflict of interest in representing
him. FMC’s own interests and the interests of its client, Trinity, might conflict with Charette’s
interests, because Charette might have claims against both FMC and Trinity if their
representations concerning the effectiveness of the Program were not fulfilled. I will retum to
this issue later in these reasons.


[22) The letter from Trinity to Charette and to other participants in the Program that had
retained FMC set out the strategy that Trinity and FMC proposed to follow to challenge CRA’s
position, It said that CRA’s position was weak, had a “poor chance of success”, and that its legal
analysis was “flawed”, It accused CRA of trying to “intimidate” donors and suggested that CRA
might be found guilty of “misfeasance”. The letter said that taxpayers had no legal obligation to
pay the taxes if they had filed a Notice of Objection, but observed that some might wish to do so
to avoid the accrual of interest.


(30) On or about September 29, 2008, Charette was advised that due to a “financial dispute”
with Trinity, FMC had withdrawn from representing donors in the test case. The case was taken
over by the Miller Thomson law firm. In November 2008, Charette contributed funding for the
test case.

[31] On November 12, 2009, the Tax Court of Canada released its decision in the test case,
Canada v. Marechaux. 2009 TCC 587, [2009) 2 C.T.C. 2099. It held that the donor was not
entitled to the income tax credits that he had claimed for his donations to the Program in the
2001 tax year. Trinity advised Charette of this decision on about February I, 2010 and told him
that an appeal had been filed on December 11, 2009.

[32] On October 28, 2010, the Federal Court of Appeal dismissed Marechaux’s appeal and
affhmed the judgment of the Tax Court of Canada: Marechaux v. Canada., 2010 FCA 287,
[2011] 2 C.T.C. 77. An application for leave to appeal was dismissed on June 9, 2011: [2011]
S.C.C.A. No. 45.

[33] The statement of claim in this action was issued on March 11, 2011, This was less than
two years after the Tax Court’s decision in Marechaux, but almost five years after Charette
received the Notice of Reassessment of his 2002 return and paid the taxes owing.


Submissions of the Responding Party, the Plaintiff

[56] Charette’s response to these motions focuses primarily on FMC and on the fact that he
entered into a solicitor and client relationship with FMC for the purpose of responding to CRA’s
position that he was not entitled to a tax credit. He says that throughout the time FMC was
representing him, he was being advised that (a) FMC’s position was correct and CRA was
wrong; and (b) there was no deadline for CRA to deal with his objections and “pending the
adjudication of the test case ... Trinity and FMC do not intend to press CRA to do so.”

[57] Charette says that he simply followed the advice of his lawyers and waited until the “test
case” launched by FMC had been resolved by the Tax Court of Canada. He commenced this
action within two years of the decision in Marechaux.

[58] Charette says that, in view of his solicitor and client relationship with FMC, the law firm
breached its duty to him, and breached its· obligations under rule 6.09 of the Rules of
Professional Conduct, to advise him of his potential claim against FMC and to insist that he seek
independent legal advice, It is not disputed that FMC never advised Charette that he had a
potential claim againstt FMC or the other defendants, that there was a time limit to commence
such claims, or that he should obtain independent legal advice with respect to these matters.
[59] As well, Charette says that his relationship with FMC was one of dependency, which
made it impossible for him to assess whether he had a claim against FMC and whether a
proceeding was an appropriate means to seek a remedy: see Sheeraz v. Kayani (2009), 99 O.R.
(3d) 450, [2009] O.J. No. 3751 (S.C.J.), discussed below, at para. 48.

[60] Charette says that as a result of the conduct of FMC, it and the other defendants are not
entitled to rely on the limitation period.

[61] Charette says that even until this date, he has not received a Notice of Confhmation with
respect to the tax returns at issue.

[62] Charette therefore says that he has not sustained damage to start the limitation period
running, because his damage is contingent on the possibility that CRA will confirm its

(100] Price J, noted that rule 6.09 of the Rules of Professional Conduct requires a lawyer who
discovers an error or omission that may cause damage to the client to promptly advise the client
of the error, recommend that the client obtain independent legal advice and advise the client that
the lawyer may no longer be able to act. He observed that the lawyer’s failure to fulfill these
obligations could amount to a breach of fiduciary duty to the client.


[103] As I have determined that there is a genuine issue requiring a trial in this case, I should
make it clear that the observations that follow are not conclusive findings of fact but simply
preliminary conclusions about what a trial judge might find, based on the evidence that has been
presented on this motion.

[104] The evidence supports the conclusion that Charette retained FMC to assist him with the
tax problem caused by his reliance on the advice of FMC and BDO and the representations of the
promoters of the Program. This occurred before he received the Notice of Reassessment from
CRA and before he paid the $600,000.

[105] A trial judge could reasonably conclude that a solicitor and client relationship came into
existence between Charette and FMC.

[106] A trial judge could reasonably conclude that FMC had a conflict of interest.

[107] FMC’s interests were at stake, because if its opinions were wrong and CRA’s
assessments were maintained, it could face an enormous liability. This liability would extend not
only to its immediate clients and to the promoters, but also to the participants in the Program,
like Charette, who had made millions of dollars in “donations” as a result of its positive opinion.
FMC had a clear interest in rectifying Charette’s problem. A trial judge could conclude that it
should have been obvious to FMC, however, that if Charette’s tax problem could not be rectified,
he had potential causes of action against FMC itself, BDO, and FMC’s clients, Trinity and the

[108] No partner or associate of FMC has provided evidence on this motion concerning the
services rendered in connection with the Program or, significantly, concerning the services
rendered to Charette and other participants after CRA disallowed their tax credits. FMC’s
evidence consists of an affidavit sworn by a partner in BDO and an associate in BDO’s law firm,
together with certain documentary evidence. Significantly, therefore, there is no evidence as to
what advice, if any, FMC gave to Charette when it agreed to act for him in his challenge of the
CRA assessment.

[109] It is undisputed that Charette was not advised of this conflict and was not advised of his
potential remedies. He was not advised that he should obtain independent legal advice.

[110] Charette found himself in the middle of a high stakes dispute with CRA what could
be described as a “hostile and hideously complicated environment”, to use the expression of
Binnie J. in R. v. Neil, [2002] 3 S,C,R, 631, [2002] S.C.J. No. 72 at para. 12. In the
circumstances, he was entitled to expect candour and undivided loyalty from his law firm. If they
were conflicted, they should have declined to act and should have ensured that he obtained
independent legal advice.

[111) Instead, the evidence suggests that FMC continued to act for Charette and re-assured
him, through BBK, that FMC’s opinion was right, CRA’s position was wrong and that he had no
legal obligation to pay the taxes CRA claimed were owing. Charette was not advised that there
was a limitation period within which he was required to sue FMC and the other defendants or
that his payment of the CRA assessment might have the effect of crystallizing his damages and
triggering the commencement of the limitation period,

[112] Considering all these circumstances, as well as the confusing and intimidating nature of
the CRA assessment and appeal process, a trial judge might conclude that even a sophisticated
taxpayer like Charette did not and could not know that damage had occurred or that a legal
proceeding against the defendants would be an appropriate remedy. The lawyers against which
he might have a claim were acting for him in connection with the assessment he could
reasonably expect, indeed was entitled to expect, that their interests were not in conflict and that
there was no issue between them.

[113) The defendants rely on McWhorter and Kenderry-Esprif (Receiver oj) v. Burgess,
MacDonald, Martin & Younger (2001), 53 O.R. (3d) 208, (2001] O.J, No, 776 (S.C.J.) and
lngredia S.A. v. Canada, 2009 FC 389, [2009] F.CJ. No. 491 at plll’a, 51, aff’d 2010 FCA 176, in
support of their submission that the plaintiff cannot simply wait to see whether a judgment is
established against him or her to decide whether to sue the lawyers. Once the plaintiff knows that
there is a “live issue” concerning the quality of the lawyer’s work, the time begins to run:
lndcondo Building Corp. v .. Steeles-Jane Properties Inc. (2001), 14 C.P.C. (51
h) 117, (2001) O.J, No, 3316 (S,CJ,),  I do not disagree with this as a general proposition. There is a genuine issue,
requiring a trial, as to whether the plaintiff knew or ought to have known that there was a live

[114] The defendants also suggest that the limitation period must have begin to run when
FMC got off the record in 2008 and new lawyers stepped in to take over the test case. If that is
so, the action would have been time-barred at the time it was commenced,

[115] It will be an evidentiary question as to whether those new lawyers had any duty to
inform Charette of his rights against FMC or whether they were retained solely to prosecute the
test case. It will also be an evidentiary question as to whether the cloud over Charette’s
knowledge as a result of FMC’s conflict was lifted, because it ceased to act for him. The issue of
when the clock resumes numing in cases of fraudulent concealment was left open by Moldaver
J.A. in Giroux Estate and it remains an open question here.

[ 116] I have concluded that this is one of those cases in which the nature of the issues and the
nature of the evidence requires a trial for the fair resolution of the proceeding.

[ 117] This case raises difficult, novel and important questions of mixed fact and law,
(a) whether FMC had a conflict of interest;
(b) if so, whether any of the other defendants are affected by that conflict;
(c) if there was a conflict, whether it affected the discoverability of
the claim or otherwise had the result of postponing, interrupting or
extending the limitation period in relation to FMC and the other
(d) whether, once interrupted, the limitation period began to run
again and, if so, when.

[ 118] In my view, these issues should be addressed on a full factual record. There is virtually
no evidence in the record from FMC concerning its conduct, its relationship with Charette or its
relationship with the other defendants. Nor is there evidence from BDO and Arnold on this issue,
As well, a trial is required to assess Charette’s evidence and his credibility.

[119) There are two other reasons why a trial is required, in my view. First, this is a putative
class action, Some of the issues of fact may be capable of resolution on a class-wide basis, If the
action is certified, and some of the above issues are found to be common issues, their resolution
will have implications for the class as a whole.

(120] Second, the responsibilities of lawyers providing advice to large and disparate groups
of clients, particularly when those clients have relationships with other clients of the law firm,
are matters of increasing concern to both the public and the legal profession, It is appropriate that
such matters be addressed on a full factual record.

[121] While the circumstances of BDO and Amold are different from FMC, I have concluded
that their positions are so intertwined with FMC’s that it would not be in the interests of justice
to resolve the claims against them by way of summary judgment.

[122] For the foregoing reasons, the motions are dismissed. Costs, if not otherwise resolved,
may be addressed by written submissions.

Do you require legal advice with respect to Canadian or Ontario non-profits or charities?


Charity Lawyer Mark Blumberg

Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.
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