The Lawyers Weekly - April 6, 2012

THE LAWYERS WEEKLY
April 6, 2012 | 11

Saga continues over
charity tax opinions

SEAN KILPATRICK / THE CANADIAN PRESS

The Canada Revenue Agency reassessed tens of thousands of donors, many of whom are still in the appeals process.

The recent certification of a class action against two law firms that prepared tax opinions on the legality of a charitable donation structure is another chapter in the continuing saga of consequences for participants in a number of these structures, and serves as further warning to lawyers on the perils of providing tax opinions to support them.

On Jan. 18, Justice George Strathy of the Ontario Superior Court certified a class action against the promoters of a charitable donation tax scheme and the law firms that provided supporting opinions, in Cannon v. Funds for Canada Foundation, [2012] O.J. No. 168.

Just the day previous, Justice Strathy approved the settlement of a similar class action against Fraser Milner Casgrain, related to the Banyan Tree Foundation Gift Program that operated from 2003 to 2007 in the total amount of $11-million (Robinson v. Rochester Financial Limited, [2012] O.J. No. 534).

Both cases involved complex schemes that sought to maximize a donor’s tax savings using either a leveraged loan or a multilevel trust structure, which often left little money in the recipient registered charity or amateur athletic association compared with the fees paid to the promoters, lawyers and others involved.

In both instances, the Canada Revenue Agency reassessed tens of thousands of donors largely on the basis that their donations were invalid, resulting in substantial tax, interest and penalties. Many of the CRA reassessments are still in the tax appeals process;

as a result, many of the donors have begun class actions against the promoters, lawyers and others involved in an effort to recoup the funds they lost.

In Cannon, the two law firms (Patterson Palmer Law and McInnes Cooper) were included as defendants based on what is alleged to be the uncontrolled and imprudent use of their tax opinions, “comfort letters,” and the reputation of a particular lawyer in the marketing of the tax scheme.

The lawyer in question, who had been employed by both firms at different times, prepared legal opinion letters regarding the legality of the scheme on three occasions. The court stated that the 2005 letter implied that a donor would be entitled to receive tax credits for both a cash donation and a donation in-kind of the sub-trust units that were allegedly obtained by the donors. This implication was made express in the 2006 and 2007 legal opinions, subject to the qualification that the General Anti-Avoidance Rule may be found to apply.

According to the lawyer, his opinion letters were issued on the basis that they were not to be shown to the donors, although the donors’ professional advisors could use them when advising their clients. All the donors were required to sign a waiver that they had received independent legal

KAREN J.
COOPER

advice and were prepared to assume the risk of reassessment.

The lawyer also provided what the court referred to as a “comfort letter” for the promoters on three occasions. It is alleged that these were intentionally given to potential donors to provide them with comfort that the tax scheme had been vetted by a lawyer for compliance with the Income Tax Act and regulations, and that the lawyer understood that they would be used by the promoter to inform potential donors that he had issued the opinion letter for the benefit of the promoter.

The marketing brochures for three years each included a signed letter from the lawyer on firm letterhead, stating that the tax scheme was “in compliance” with the tax act and regulations and that the opinion could be viewed by professional advisors of donors. Notably, the brochure included a statement addressed to donors with the lawyer’s credentials, biography and photograph. As well, there was a note from the promoters addressed to the donors that indicated an opinion had been prepared by the lawyer in relation to the tax scheme. These brochures were accompanied by the comfort letter.

The representative plaintiff claimed negligent misrepresentation and negligence against the law firms based on the donors’ use of the opinion and comfort on whether to participate in the scheme.