Court of Appeal for Ontario

Date: 2018-06-15 Docket: C64470

Judges: Juriansz, Benotto and Fairburn JJ.A.

Between

Barry McPeake Plaintiff (Appellant)

and

Cadesky & Associates and Barry Seltzer Defendants (Respondents)

and

George Jones Third Party

Counsel

Yan David Payne and Karen J. Sanchez, for the appellant

Sandra E. Dawe, for the respondent Cadesky & Associates

Alfred J. Esterbauer and Sydney Hodge, for the respondent Barry Seltzer

Geoffrey D.E. Adair, for the third party

Heard: May 29, 2018

On appeal from: the judgment of Justice Robyn M. Ryan Bell of the Superior Court of Justice, dated September 27, 2017 with reasons reported at 2017 ONSC 5705.

Reasons for Decision

Background

[1] The appellant appeals the dismissal of his action against the two respondents on summary judgment motion.

[2] The appellant, together with two associates, owned a company in the business of computer software research and development. In 1996, they contemplated selling the company to Pretty Good Privacy Inc., but the sale fell through. They had sought to structure their affairs to minimize the significant taxable capital gains that would be realized, by creating family trusts to which they conveyed their shares in the company. Then, in 1999, they sold the company to Microsoft Corporation for a vastly greater amount. Of this amount, approximately $4,800,000 was received by the appellant's family trust. The proceeds were paid to the beneficiaries and the capital gain was reported on the beneficiaries' respective tax returns.

[3] The Canada Revenue Agency ("CRA"), upon auditing the appellant, took the position that s. 75(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) applied because the appellant was a beneficiary of his family trust, and he, as trustee, could unilaterally control distributions from the trust. The CRA attributed all the gains in the family trust to the appellant personally, and reassessed him for some $2,400,000 in taxes, interest and penalties.

[4] The appellant, who was resident in British Columbia, retained tax counsel who obtained orders of the British Columbia Supreme Court rectifying the appellant's family trust so that he was not a beneficiary and could not unilaterally control distributions from the trust. Later, the Federal Court of Appeal ruled that the CRA's interpretation of s. 75(2) was incorrect, and concluded it did not apply to property acquired by a trust from a beneficiary in a bona fides sale transaction: Canada v. Sommerer, 2012 FCA 207, 2012 D.T.C. 5126. The appellant's tax liability was ultimately reduced to approximately $57,000.

[5] The appellant served a Notice of Action in July 2006, and filed a statement of claim in November 2013, claiming damages from the respondents for professional negligence. The respondent Seltzer was a lawyer who had acted for the appellant's company, and the respondent Cadesky & Associates was an accounting firm that had provided accounting services to the appellant's company, his trust and to him. In his action, the appellant claimed the fees payable to the tax counsel who obtained the rectification orders, the amount of tax he paid, and other damages.

Motion Judge's Decision

[6] The motion judge dismissed the appellant's claim against Seltzer, finding the evidentiary record provided no support for the allegation that Seltzer was retained to advise upon or prepare the family trust. On appeal, counsel for the appellant advanced no oral submissions as to how the motion judge erred. We agree with the motion judge that there is no genuine issue for trial regarding Seltzer's alleged negligence.

[7] The motion judge found there was a genuine issue for trial as to whether Cadesky & Associates was retained with regard to the formation of the family trust or the preparation of the family trust deed. However, she was satisfied that she could determine the issue by resorting to the fact-finding powers set out in rr. 20.04(2.1) and (2.2) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. We are not persuaded the motion judge made any error in this regard. She had before her an extensive evidentiary record that included multiple affidavits and extensive cross-examinations.

[8] After a review of the record, the motion judge found that Cadesky & Associates was not retained, and provided no advice or other service with regard to the formation of the appellant's family trust or the preparation of the family trust deed. In fact, she found that Cadesky & Associates was not retained until after the family trust was established. The documentary evidence, and the appellant's own admissions on cross-examination, provided the motion judge with ample basis to conclude the appellant's recollections were poor and to reject his affidavit evidence as to when he initially discussed the family trust with the Cadesky firm and the trust's formation. We agree with her assessment of that evidence.

Ongoing Retainer Argument

[9] The appellant's final argument is that Cadesky & Associates was retained on an ongoing basis to provide accounting and tax advice to the appellant and to the appellant's family trust in the years after its formation, and was negligent during this ongoing retainer in failing to advise of the alleged deficiencies in the structure of the family trust.

[10] Cadesky & Associates submits there were no deficiencies in the structure of the family trust, as the Federal Court of Appeal in Sommerer ultimately confirmed that s. 75(2) did not apply. In response, the appellant argues that Cadesky & Associates was negligent in failing to advise of the CRA's position, which was made abundantly clear in its interpretation bulletins, and of the likely expenses that would be incurred in disputing the CRA's interpretation should the trust be audited. These are the very expenses that the appellant did incur and which he claimed in his action.

Expert Evidence Requirement

[11] The motion judge noted that neither the appellant nor the respondent filed expert evidence regarding the standard of care of an accountant in the circumstances. The motion judge found there was no genuine issue for trial by applying the well-established rule that a plaintiff is required to lead expert evidence establishing a breach of the standard of care to support a claim of professional negligence. She declined to find that the case fell within the exception to the general rule requiring expert evidence for professional negligence: where it is obvious that the professional's conduct fell short of the standard of care.

[12] On appeal, the appellant advances three arguments as to why the motion judge erred. First, he submits a plaintiff need not file expert evidence to support a professional negligence claim when defending a summary judgment motion, particularly when the moving party has filed no such expert evidence. Second, he submits that this is a case where it is obvious that the professional's conduct fell short of the standard of care. Third, he asserts that he had filed adequate expert evidence. We address each argument in turn, below.

Analysis of Appellant's Arguments

Argument 1: Expert Evidence Not Required at Summary Judgment

[13] The appellant relies on the decision of Connerty v. Coles, 2012 ONSC 5218 to support his position that a plaintiff need not file expert evidence to support a professional negligence claim when defending a summary judgment motion. In Connerty, in refusing to grant leave to appeal the dismissal of a summary judgment motion, C.T. Hackland R.S.J. noted there were conflicting decisions and opined that decisions dealing with the need for expert opinions in summary judgment motions should be understood to be a product of the particular factual circumstances in each case. He noted that the case before him was brought at an early stage, before the defendants had even filed their statement of defence. He added that sometimes the lack of a supporting expert opinion would result in a dismissal of the claim, though this would not always be the result.

[14] The summary judgment motion in this case was not brought at an early stage of the proceedings. As noted, the motion judge had before her extensive evidence and was able to develop a full appreciation of the facts. The motion judge also considered Connerty. We are not persuaded she erred.

Argument 2: Obvious Breach of Standard of Care

[15] The motion judge recognized there was an exception to the general rule requiring expert evidence establishing a breach of the standard of care to support a claim of professional negligence. She found, however, that this was not a case where it was obvious that the professional's conduct fell short of the standard of care, absent expert evidence. The Federal Court of Appeal in Sommerer confirmed Cadesky & Associates' view that s. 75(2) of the Income Tax Act did not apply. Subsequent to the decision in Sommerer, the CRA settled with the appellant. In the factual circumstances of this case, evidence of the parameters of the standard of care was required. We are not persuaded there is any basis to interfere with the motion judge's discretion to decline to resort to the exception to the general rule.

Argument 3: Adequate Expert Evidence

[16] Finally, we agree with the motion judge that there was no expert evidence on the standard of care before her. Putting aside Mr. Rachert's lack of independence, the evidence the appellant points to merely shows there was widespread reliance by tax advisers on the CRA's erroneous interpretation of s. 75(2) of the Income Tax Act at the relevant time.

Decision

[17] The appeal is dismissed with costs payable to each respondent fixed in the amount of $20,000.00 all inclusive.

"R.G. Juriansz J.A."

"M.L. Benotto J.A."

"Fairburn J.A."