Bay Street law firm Cassels Brock & Blackwell LLP should face a class-action trial for its role in a so-called donation tax-shelter scheme deemed offside by the Canada Revenue Agency, the Ontario Court of Appeal has ruled.
On Tuesday, the court reversed a lower-court ruling and certified, or gave the go-ahead, to a class-action lawsuit against Cassels Brock. The lawsuit alleges the firm was negligent for issuing legal opinions saying it was unlikely the CRA would successfully challenge the tax scheme, which involved the issuing of inflated charitable-donation receipts.
The allegations in the lawsuit, which Cassels denies, have not been proven in court. A Cassels spokeswoman declined to comment. The law firm, which has also launched third-party claims against other law firms and accountants involved in the scheme, has not said whether it will attempt to appeal the ruling to the Supreme Court of Canada.
The lawsuit is one of a series similar cases launched in recent years by burned taxpayers against promoters of this kind of tax shelter and the lawyers whose opinions have been used to market them.
Most of the tax schemes are complex, but the results are similar: Taxpayers receive inflated receipts for charitable donations, which they use in an attempt to lower their tax bills.
But the CRA has cracked down on this kind of tax shelter over the past decade, warning that anyone who participates in such a shelter will be audited. The agency has clawed back more than $5-billion in taxes and penalties from tens of thousands of taxpayers, and dozens of groups have been stripped of their charitable status for getting mixed up in the schemes.
The case against Cassels, launched by a taxpayer who participated in the scheme from 2000 to 2003, involves athletic charities and the donation of resort timeshare weeks that were paid for by an offshore third party.
In 2004, the CRA challenged the tax scheme, and participants would end up seeing almost all their claimed tax credits denied.
David O’Connor, a lawyer for the plaintiff in the case, Jeffrey Lipson, said the Ontario Court of Appeal decision sends a message to other lawyers and consultants facing similar allegations.
“It really indicates that there is potentially some greater liability in these cases when you offer these sorts of tax-shelter opinions,” Mr. O’Connor said.
The Ontario Court of Appeal ruled that the November, 2011, decision by Mr. Justice Paul Perell of the Ontario Superior Court was wrong to deny the certification of the case as a class action because the lawsuit was filed after the expiry of a two-year limitation period.
The lawsuit was launched in 2009, despite the fact that the CRA first told Mr. Lipson it was challenging his tax credits in 2004.
But his lawyers argued it was not clear that Mr. Lipson and the other taxpayers would lose their court fight with the CRA until January, 2008.
The Court of Appeal also agreed with Mr. Lipson that Cassels Brock could be sued for negligence by all of the tax scheme’s 900 participants collectively, rather than on an individual case-by-case basis.