Here is an article that appeared in Valuation Law Review entitled “Lemberg, et al. v. Perris” dealing with accountant liability when referring clients to charity schemes. 

 

“Valuation Law Review Volume 17, Issue 2, copyright by The Canadian Institute of Chartered Business Valuators, www.cicbv.ca 277 Wellington St. West, Suite 710, Toronto, ON, M5V 3H2, is reproduced with permission.”
Editor:
Dennis Turnbull, CBV
September 2011

Lemberg, et al. v. Perris
Ontario Superior Court of Justice, June 30, 2010 (Docket: 682/07)

The plaintiffs were the sole shareholders of Polymark Manufacturing Inc., a small manufacturer of polyurethane products. Mr. Perris was a chartered accountant acting for both Polymark and the plaintiffs personally from 1985 to 2004. Mr. Perris gave the plaintiffs personal tax advice as part of his function as their accountant. Mr. Perris sent Polymark an annual engagement letter in which the terms of his engagement were outlined. Included in the letter was a statement that the client was aware that a company owned by Mr. Perris would earn a commission on any securities sold through that company. While the engagement letters related to Polymark, it appeared to be recognized that the terms of those letters also applied to any services rendered to Mr. and Mrs. Lemberg personally.

In 1998 and 1999, Mr. Perris spoke with Mr. Lemberg about the charitable donation scheme that was the subject of the litigation. In essence, limited edition art prints would be purchased in bulk and sold to clients such as the Lembergs. They would then be donated to various educational institutions. Individuals who participated in the scheme would be given a tax receipt for the prints with a claimed fair market value which was several times higher than the actual amount the individuals had paid for them.
In 1998 Mr. Lemberg agreed to purchase 100 limited edition prints at $310 each for a total cost of $31,000. Mr. Lemberg testified that he and Mr. Perris had a brief discussion about the transaction and that Mr. Perris had strongly recommended participation in the scheme. He did not question Mr. Perris, except to a limited degree because he assumed that Mr. Perris had done due diligence. Mr. Lemberg received a receipt for income tax purposes which recorded the donation of the prints at a total value of $136,500. Mr. Lemberg claimed a tax credit based on that amount which was initially accepted by Canada Revenue Agency (CRA).

Both plaintiffs participated in the scheme in 1999. In total the Lembergs paid $78,500 for prints and claimed about $250,000 in charitable donations in respect to them.
In 2001 the Lembergs were reassessed by the CRA. Ultimately the CRA allowed them to deduct only their $78,500 purchase price. AFE Consultants, the scheme’s promoter, took a test case to the Tax Court which was dismissed (see Klotz v. Canada, reviewed in The Valuation Law Review — Taxation Volume 11, Issue 2, March 2005, and Volume 12, Issue 3, May 2006).

In 2006, the Lembergs became suspicious that Mr. Perris had been paid an undisclosed commission on their art purchases. After inquiry they found that this was the case and brought a suit for damages against Mr. Perris and his firm. The Lembergs had a net cost of $39,797 for the artwork after a $38,703 tax credit. They had also paid approximately $75,000 in interest on their outstanding taxes while the case was under appeal and paid an additional $29,000 in interest on the money they borrowed to pay their back taxes. At trial they claimed all of these amounts as damages along with the $7,500 undisclosed commission for a total claim of $151,500.

The issue at trial was whether Mr. Perris was a fiduciary, and if so, did he breach his fiduciary duties? If he did, what was the measure of compensation payable to the plaintiffs? If he was not a fiduciary, was he liable in negligence, and if so, what was the measure of the plaintiffs’ damages? The plaintiffs argued that the parties were in a fiduciary relationship. While not a classic fiduciary relationship, such as trustee and beneficiary, their relationship was fiduciary because of the confidential relationship between them. They had trusted Mr. Perris to act in their best interests. He had been their accountant for 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. They expected Mr. Perris to at all times act in their best interests rather than his own apart from the normal fees he would charge for his advice. However Mr. Perris, because of his commission, had a financial interest in the transactions which he had not disclosed to the Lembergs. 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 the Court found no reason to doubt their evidence in this respect.

The defendant argued that he 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. The defendant argued that the Lembergs were perfectly capable of assessing the risk of entering into these transactions, or at least obtaining other advice. With respect to the alleged secret commission, it was submitted that there was nothing secret about the fee Mr. Perris received. Defendant’s counsel argued that a reasonable construction of the engagement letters should have been sufficient to put the plaintiffs on notice that Mr. Perris could earn a fee on any transaction he recommended. Furthermore, at trial, Mr. Perris had testified that he advised the Lembergs that he would receive a fee for recommending the art purchase and his evidence should be accepted.

The Court determined that Mr. Perris was a fiduciary and that he had breached his fiduciary obligations. The Court concluded that Mr. Perris had undertaken to act solely on behalf of the Lembergs in relation to their tax planning and had relinquished his own self-interest in that regard except for the normal fees he would charge for providing his advice. The Lembergs were entitled to assume that any advice given to them by the defendant regarding tax matters would be advice honestly given with a view to advancing their interests and not his own. The Court stated that 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.

The Court considered it significant that the commission was paid by the promoters of the scheme. This meant that Mr. Perris was working for the promoters and he had a financial interest in the transaction which was at odds with the interests of the Lembergs. While the Lembergs had relied on Mr. Perris’s advice and his integrity, their trust had been misplaced because his integrity was impaired by self-interest.

Based on this the Court concluded that Mr. Perris must compensate the Lembergs for their losses and awarded them $45,295. This total was based on two amounts, the difference between their cash cost to purchase the artwork and the tax refund they received for their donation, and the $7,500 commission received by the defendant. The trial judge did not agree that the Lembergs’ losses included the interest that they paid CRA for their unpaid taxes or the interest on the money they borrowed to eventually pay them. The Lembergs had the use of the funds until they paid their taxes and the Court had no evidence that the Lembergs could not have paid the amounts required out of their own resources rather than borrowing the money. In these circumstances the Court did not consider that including the claimed interest in the damages was appropriate.