Globe and Mail article “Tax-scheme case revived against Bay Street law firm”

(9)        The Proposed Common Issues
[47]  On the certification motion, the Mr. Lipson proposed the following common issues:

Negligence

1.    Did the Defendant owe the Class a duty of care (in among other things, negligence or negligent misrepresentation) in the preparation of the Legal Opinions?

2.    If the answer to common issue 1 is “yes”, what is the content of the standard(s) of care?

3.    Did the Defendant breach the foregoing standard(s) of care? If so, how?

4.    If the answer to common issue 3 is “yes”, did the Defendant’s breach of the foregoing standard(s) of care cause or materially contribute to the damages of the Class Members?

Damages or Other Relief

5.    If the answer to common issue 4 is “yes”, what types or heads of damages, if any, are the class members entitled to?

6.    If the answer to common issue 4 is “yes”, what remedy or remedies, if any, are the Class Members entitled to?

7.    If the Class Member is entitled to a damages award, can some or all of that award be determined commonly? If so, what is the quantum and how?

(10)      Expert Opinion from Professor Vern Krishna
[48]  Mr. Lipson’s material on the certification motion included affidavits and letters of opinion from Professor Vern Krishna concerning the validity and appropriateness of the Cassels Brock legal opinions supporting the Timeshare Tax Reduction Program.

[49]  Professor Krishna’s letters of opinion address two main issues: i) Cassels Brock’s opinions concerning whether the donation of timeshare weeks constitutes a valid gift; and ii) Cassels Brock’s opinions concerning the general anti-avoidance rule.

[50]  In relation to the first issue, Professor Krishna concludes that the Cassels Brock opinions failed to address issues relevant to the validity of the gift in circumstances where the anticipated tax credit substantially exceeds the donor’s financial outlay. On that issue, he opines that the Cassels Brock legal opinions do not meet the standard of care expected of a tax lawyer.

[51]  In relation to the second issue, Professor Krishna states that while “existing jurisprudence suggests that the [Timeshare Tax Reduction Program] would violate the general anti-avoidance provisions of the Income Tax Act … the jurisprudence in the Supreme Court of Canada did not emerge until 2005.” Moreover, “even after the three Supreme Court of Canada’s decisions, there remains considerable uncertainty as to the scope and reach of GAAR.” On that issue, he opines that the Cassels Brock legal opinions reasonably address the anti-avoidance aspects of the Timeshare Tax Reduction Program in light of the available jurisprudence at the relevant time.

(11)      The Positions of the Parties on the Certification Motion
[52]  Cassels Brock and the third parties opposed certification of the proposed class action on the grounds that the claims of all class members, including Mr. Lipson, are statute-barred under the Limitations Act. In particular, they argued that the class members’ claims were discoverable when the CCRA disallowed their claims for tax credits. In addition, they claimed that, when it can be shown that a proposed representative plaintiff’s claim is statute-barred, he or she cannot be a member of the proposed class and he or she cannot act as the representative plaintiff.

[53]  Cassels Brock also submitted that the proposed class action failed to satisfy three of the five criteria for certification under s. 5(1) of the Class Proceedings Act, 1992, S.O. 1992, c. 6:

i)  The claims of the class members must raise a common issue (s. 5 (1)(c));

ii)  A class proceeding must be the preferable procedure for the resolution of the common issues (s. 5 (1)(d)); and

iii)  There must be a suitable representative plaintiff (s. 5 (1)(e)).

[54]  Finally, although Cassels Brock conceded that the proposed class action disclosed a cause of action for negligent misrepresentation, it argued that the negligence claim failed to disclose a reasonable cause of action (s. 5 (1)(a)) because none of the class members were clients of Cassels Brock.

C.        the motion judge’s decision
[55]  In the analysis section of his reasons, the motion judge dealt first with the question of whether, leaving aside the limitation issue, the proposed class action meets the criteria for certification. He held as follows:

·          It was not plain and obvious that either the negligent misrepresentation claim or the negligence claim failed to disclose a reasonable cause of action (s. 5(1)(a) of the Class Proceedings Act). Although the negligence claim may be novel, the question of whether Cassels Brock owed class members a duty of care should be left for trial.

·          The proposed class definition satisfies the identifiable class criterion (s. 5 (1)(b) of the Class Proceedings Act).

·          The claims of the proposed class raise common issues. Proposed questions one, two and three are suitable for certification as common

issues. Proposed questions five and six would be suitable for certification if revised.[2] Proposed questions four and seven, relating to causation and damages, are not suitable common issues. (Section 5 (1)(c) of the Class Proceedings Act).

·          A class proceeding would be the preferable procedural for resolution of the common issues. Although there is little to suggest that the class proceeding is necessary to ensure access to justice or to modify behaviour, the judicial economy factor justifies a class proceeding in which the common issues at trial will focus essentially on the opinions of Cassels Brock. (Section 5 (1)(d) of the Class Proceedings Act).

·          As Mr. Lipson had selected competent and experienced counsel and, as his litigation plan was unchallenged, there was no reason to believe he would not move the action forward to the common issues stage. Leaving aside the limitations issue, he is a suitable representative plaintiff (Section 5 (1)(e) of the Class Proceedings Act).

[56]  As for the limitations issue, the motion judge concluded that no independent factual inquiry was necessary to dispose of it. Based on the Supreme Court of Canada’s decision in Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147, and a review of the facts alleged in the statement of claim, the claims for negligence and negligent misrepresentation should have been discovered in 2004 when the CCRA denied the validity of the tax credits or, at the very latest, in 2006, when Thornsteinssons was retained to sue the CCRA. The claims of Mr. Lipson and the other class members were therefore statute-barred.

D.        The Appeal
(1)        Did the motion judge err in dismissing the appellant’s claim as statute-barred?
(a)      The Positions of the Parties on Appeal

[57]  On appeal, Mr. Lipson submits that the motion judge acted without jurisdiction or authority in dismissing the action as statute-barred on a certification motion. He argues that the purpose of a certification motion is purely procedural. Such a motion is intended to determine whether the proposed claims are suitable as a class proceeding and there is to be no preliminary review of the merits of any proposed defence.

[58]  Further, Mr. Lipson says that, in the absence of a Rule 21 motion or a summary judgment motion, he had no proper notice of the limitation issue. The record he placed before the court was intended to address only the certification issue. It was not intended to address a merits defence. It was particularly not intended to address a merits defence for the class that had never been certified as a common issue – and one which, by its very nature, is not a common issue in any event. 

[59]  In the alternative, if the motion judge was entitled to address the limitation issue under s. 5(1)(a) of the Class Proceedings Act – as relating to whether the statement of claim disclosed a reasonable cause of action – Mr. Lipson submits that the motion judge erred by failing to accept the facts as pleaded in the statement of claim and in the reply as true. In both documents, Mr. Lipson pleaded facts indicating the claim was not discovered until approximately January 2008 when the test case had significantly progressed and it became apparent that the CCRA would likely be successful in denying a substantial portion of the tax credits claimed.

[60]  Further, whether the motion judge proceeded under s. 5(1)(a) or 5(1)(e) (proper plaintiff) of the Class Proceedings Act, Mr. Lipson submits that he erred by misinterpreting Central Trust Co. v. Rafuse as standing for the proposition that, in a claim for negligence arising from a solicitor’s opinion, the limitation period begins to run when the validity of the opinion is challenged.

[61]  Cassels Brock asserts that a motion judge on a certification hearing is required to perform a gatekeeping function – accordingly, where it is apparent on the certification motion that an action is bound to fail, the certification judge has the authority both to decline to certify the action and to dismiss it without the need for a cross-motion. The motion judge’s decision in this regard is entitled to deference.

[62]  In this case, Mr. Lipson had notice of the limitations issue by virtue of the statements of defence that were delivered. Further, on Mr Lipson’s own evidence, it was clear – and the motion judge concluded – that the limitation period had expired. Mr. Lipson did not read the Cassels Brock opinions. Moreover, he testified that he understood the opinions to mean that the Timeshare Tax Reduction Program was legal and that there was no risk that the CCRA would reassess him. He learned in 2004 that that was not the case – he also began incurring damages in the form of legal and accounting fees at that time.

[63]  Further, all members of the class were aware of the reassessments and had begun incurring legal and accounting fees by no later than 2006 when the test case litigation was commenced.

[64]  Except for acknowledging that it may have been preferable for Cassels Brock to have brought a formal motion to dismiss the action, the third parties, take the same position as Cassels Brock. They assert that the motion judge had authority to decline to certify the action because it was clear on the evidence that the limitation period had expired and Mr. Lipson was fully aware of this issue.

(b)      The Discoverability Principle

[65]  As the motion judge observed, in this case, the application of the two-year limitation period turns on the discoverability principle, now codified in s. 5 of the Limitations Act. That section provides as follows:

5. (1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i)  that the injury, loss or damage occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

(2) A person with a claim shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved.

(c)      Discussion

[66]  In our view, it is unnecessary that we resolve the question of whether it is open to a certification judge to dismiss a proposed class action based on a finding that the action is statute-barred, and in particular, in the absence of a cross-motion under either Rule 20 or Rule 21.

[67]  Based on our review of the motion judge’s reasons, his decision to dismiss the proposed class action as statute-barred turned on his interpretation of the Supreme Court of Canada’s decision in Central Trust Co. v. Rafuse and his application of that decision to the facts of this case.

[68]  In our respectful view, the motion judge erred in interpreting and applying Central Trust Co. v. Rafuse. Moreover, when that decision is interpreted properly, it is apparent that the record before the motion judge did not disclose whether Mr. Lipson’s claim was statute-barred. Nor did it support the conclusion that the limitation period applicable to Mr. Lipson’s claim also applied to the entire class.

[69]  The motion judge’s findings concerning Central Trust Co. v. Rafuse begin at para. 138 of his reasons where he said that, in his view, the Supreme Court of Canada’s decision in that case is dispositive of the question of whether the class members’ claims in this case are statute-barred.

[70]  The motion judge correctly described the issues in Central Trust Co. v. Rafuse. In that case, the defendant solicitors had acted for Central Trust on a mortgage transaction in 1969 and had certified that Central Trust had a valid mortgage against the title to the property on which it was registered. However, in a subsequent action by Central Trust against the mortgagor, the mortgage was held to be void ab initio because it contravened a statutory prohibition against a certain form of lending.

[71]  In 1980, Central Trust sued the solicitors who acted for it on the mortgage transaction. A major issue was whether the solicitors could be held liable both in contract and in negligence. If the solicitors could be found concurrently liable in negligence, further issues arose concerning whether the doctrine of discoverability applied in determining the limitation period, and, if so, when the limitation period began to run. 

[72]  However, the motion judge had this to say at paras. 146-147 of his reasons about the Supreme Court of Canada’s conclusions about discoverability:

[146] Justice Le Dain’s succinct analysis of discoverability is found in paragraph 77 where he stated:

Since the [lawyers] gave the [Central Trust] a certificate on January 17, 1969 that the mortgage was a first charge on the Stonehouse property, thereby implying that it was a valid mortgage, the earliest that it can be said that [Central Trust] discovered or should have discovered the respondents’ negligence by the exercise of reasonable diligence was in April or May 1977 when the validity of the mortgage was challenged in the action for foreclosure. Accordingly [Central Trust’s] cause of action in tort did not arise before that date and its action for negligence against the [lawyers] is not statute-barred.

[147] It should be noted that the damage suffered by Central Trust occurred when it accepted a mortgage that could be challenged as illegal. It later transpired that the mortgage was challenged, and Justice Le Dain held that the limitation period for the claim of solicitor’s negligence commenced running with the manifest challenge to the mortgage, even though the actual declaration of invalidity of the mortgage would occur still later. [Emphasis added.]

[73]  In our respectful view, the motion judge’s conclusion about Justice Le Dain’s holding in Central Trust Co. v. Rafuse is incorrect. Justice Le Dain did not hold that “the limitation period for the claim of solicitor’s negligence commenced running with the manifest challenge to the mortgage”. Rather, he concluded that the earliest date on which the claim for solicitor’s negligence could have commenced running was the date on which the validity of the mortgage (and therefore the validity of the solicitors’ opinion) was challenged.

[74]  Because the applicable limitation period for solicitor negligence was six years when Central Trust Co. v. Rafuse was decided, it was unnecessary that Justice Le Dain go further and determine the actual date on which the limitation period commenced – the action for solicitor negligence had been started well within six years after the earliest date on which Justice Le Dain found the cause of action was discoverable.

[75]  In Kenderry – Esprit (Receiver of) v. Burgess, MacDonald, Martin and Younger (2001), 53 O.R. (3d) 208, at para. 19, Molloy J. recognized that Central Trust Co. v. Rafuse is not binding authority for the proposition that the limitation period in an action for solicitor negligence begins to run on the date of a manifest challenge to the solicitor’s opinion.

[76]  Instead, Molloy J. held that, in an action for solicitor negligence arising from a solicitor’s opinion, “[t]he date upon which the plaintiff can be said to be in receipt of sufficient information to cause the limitation period to commence to run will depend on the circumstances of the particular case.”

[77]  We agree with that conclusion and note that it was adopted by the majority in this court’s decision in Ferrara v. Lorenzetti, Wolfe Barristers and Solicitors, 2012 ONCA 851, at para. 71.

[78]    The motion judge in this case applied his understanding of Central Trust Co. v. Rafuse to the facts pleaded in the Fresh As Amended Statement of Claim at paras. 148 to 158 of his reasons.  We excerpt the most relevant portions of these paragraphs below:

[148] The same analysis can be applied to the case at bar. The Class Members, including Mr. Lipson … should have discovered their tort claims against Cassels Brock when the validity of the tax credits was denied by Canada Revenue in 2004. At that time and certainly not later than 2006, when Thornsteinssons LLP was retained to sue Canada Revenue, the Class Members knew or ought to have known the material facts on which the negligence claim or negligent misrepresentation claim against Cassels Brock was based.

[149] Like Central Trust, … the Class Members made donations that turned out to be ineligible for tax credits. It is alleged that the Class Members relied on Cassels Brock’s opinions or but for Cassels Brock’s opinions they would have not participated in the Timeshare Program. In both situations … their awareness of the material facts of their claim against Cassels Brock came … when Central Trust or the participants in the Timeshare Program respectively learned that there was a potential problem with the tax credits.

[150] In the case at bar, as soon as the letters from Canada Revenue started to arrive, Mr. Lipson and the Class Members knew or ought to have known that Cassels Brock’s opinion had caused damage because they had actually relied on the opinions, or, but for those opinions they would not or could not have participated in the Timeshare Program and suffered damages. Given that Canada Revenue was challenging the validity of the trust, the validity of the gift, the donative intent of the participants, and the value of the donation, the donors knew that Canada Revenue could successfully deny the tax credit.

…

[157] At the time of the letters from Revenue Canada, the Class Members’ loss was actual not potential and they knew who to blame for that actual loss. The Class Members had been denied the tax credits in their entirety, and they allegedly had been lured into a transaction or not properly warned about a transaction that they allege they would have avoided but for the role played by Cassels Brock. The Class Members incurred expenses, i.e. special damages, in an attempt to fix their problems by retaining another law firm in bringing proceedings against Canada Revenue.

[158] In the case at bar, no independent inquiry of the facts is necessary to determine whether or not the Class Members’ claims are statute-barred. Indeed, this is apparent from the statement of claim that sets out the material facts for the discovery of the negligence and negligent misrepresentation claims that occurred when the letters of from Canada Revenue arrived denying the tax credits to the Class Members. [Emphasis added.]

[79]  In our respectful view, the motion judge’s reasons concerning this issue are not entirely clear.

[80]  On the one hand, although the motion judge seems to acknowledge that the notices of disallowance were not a final disposition of the tax credit issue – and therefore at best provided notice of a potential claim – he appears to have concluded that all class members should have known when they received the notices of disallowance that the CCRA could successfully challenge their claims for tax credits and that the action therefore became statute-barred at that time (for example, see paras. 150 and 158).

[81]  Further, the motion judge appears to have treated the class members’ knowledge that they were incurring professional fees to challenge the CCRA’s denial of the claimed tax credits as a relevant factor affecting the commencement of the limitation period (for example, see paras. 148, 157 ).

[82]  In our view, neither the fact that the CCRA was challenging the claimed tax credits nor the fact that the class members may have been incurring professional fees to challenge the CCRA’s denial of the tax credits is determinative of when the class members reasonably ought to have known they had suffered a loss as a result of a breach of the standard of care on the part of Cassels Brock.

[83]  As pleaded in the Fresh As Amended Statement of Claim, the Cassels Brock opinion was that it was unlikely that the CCRA could successfully deny the claimed tax credits. Accordingly, the fact of a CCRA challenge to the tax credits did not, in itself, mean the challenge would likely be successful or make the Cassels Brock opinion invalid. Further, even accepting that receipt of the notices of disallowance prompted class members to obtain professional advice and to launch test case litigation to challenge the denial of the tax credits, that conduct does not demonstrate when class members knew, or ought reasonably to have known, that the test case litigation would not likely be entirely successful.

[84]  The test case litigation did not settle until 2008. The answer to when the limitation period began to run for each Class Member may very well depend on several factors, including what position, if any, Cassels Brock took in response to the CCRA challenge; what notice, if any, Cassels Brock gave to class members of their position, if any, on the CCRA challenge; and what each class member was told by his or her professional advisor(s) and when: see Ferrara v. Lorenzetti, Wolfe Barristers and Solicitors. Importantly, this may be an issue that must be determined individually for each class member, depending on what individual class members were told and when.

[85]  In the Fresh As Amended Statement of Claim, Mr. Lipson pleaded that he and the other class members settled with the CCRA when it became “at least likely, if not certain” that the CCRA would be successful in challenging the tax credits claimed by Mr. Lipson and the other class members. In his Reply, he pleaded that “ntil January 2008, during the test case litigation … it was not known or reasonably discoverable that it was at least likely … that [the CCRA] would be successful in challenging the tax credits claimed by Lipson and the other Class Members.”