ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-11-441084

DATE: 20121221

BETWEEN:

JULIA GACESA Plaintiff – and – INVESTMENT PLANNING COUNSEL, DAVID PELLETIER, ACTUBEN CONSULTANTS INC., BRIAN JENKINS, MACDONALD PORTER DREES, BARRISTERS AND SOLICITORS, and MARY J.E. MARTIN Defendants

Edward Babin, Cynthia Spry, for the Plaintiff

Michael Kestenberg, Beverley Jusko, for the Defendants MacDonald, Porter Drees, Barristers and Solicitors, and Mary Martin

HEARD: December 7, 2012

J. wilson J.

REASONS FOR JUDGMENT

The Motion

[ 1 ] The plaintiff transferred her teacher’s pension to an Individual Pension Plan (the IPP transaction). The IPP transaction was flawed from the outset, as the plaintiff’s corporation did not meet the requirements of the primary purpose test stipulated in the Income Tax Act , R.S.C., 1985, c. 1 (5th Supp.) and Income Tax Regulations , C.R.C., c. 945 . The result has been a disaster for the plaintiff: the value of her pension has deteriorated, and she has been reassessed by Canadian Revenue Services and is required to pay taxes and penalties in excess of $360,000. To recover her significant losses, the plaintiff has brought this action against those involved in implementing the IPP transaction including the financial advisor, the actuary, and the law firm.

[ 2 ] The defendants MacDonald, Porter Drees, Barristers and Solicitors, and Mary J.E. Martin (Ms. Martin, the Firm) bring this motion for summary judgment pursuant to Rule 20 of the Rules of Civil Procedure , R.R.O., Reg. 194, seeking dismissal of this action and cross-claims against them. This motion has been brought at the conclusion of the pleadings and before discovery. The Firm argues that the scope of the plaintiff’s retainer in the IPP transaction was limited to a simple incorporation. Ms. Martin did not have knowledge or expertise in the area of pension law and did not understand or inform itself as to the nature of the IPP transaction. As the plaintiff did not rely upon the Firm for advice in structuring the IPP transaction, but rather relied upon the advice and expertise of the other defendants, the Firm argues that this action and the cross-claims should be dismissed.

[ 3 ] The plaintiff, Julia Gacesa (Gacesa) seeks a declaration that all defendants, including the Firm and Ms. Martin, were in breach of their fiduciary duties, as they were in a conflict of interest between their financial interests and the duties owed to the plaintiff. The plaintiff also alleges that the Firm and the other defendants were negligent. The plaintiff further argues that the retainer of the Firm was not limited to a simple incorporation. Ms. Martin signed the resolution setting up the corporate structure of the flawed IPP transaction upon the direction of Pelletier, and she was the sole director and shareholder of the corporation for the first year. The tax reassessment was retroactive to the date of incorporation. In the circumstances, the plaintiff argues that Ms. Martin could not blindly take instructions from the financial advisor, as she had a duty to inform herself as to the nature of the IPP transaction and to understand the role she assumed, as well as a duty to warn the plaintiff of the corporate requirements of the IPP transaction to ensure compliance.

The Issues

[ 4 ] The following issues relevant to whether Ms. Martin met the standard of care of a solicitor in the circumstances are raised by the parties in this motion:

• Is the evidence clear that the scope of the retainer of the Firm was limited to simply incorporating a company? Was the Firm entitled to rely upon the expertise of others and take instructions from the financial planner and actuary without question or inquiry?

• When a solicitor is retained to incorporate a company to create an IPP, including passing and signing the resolution setting up the structure of the IPP, does the solicitor have an obligation to inform himself or herself of the general requirements of an IPP?

• Is there a duty for the Firm setting up the mechanics of an IPP transaction to advise the client of the risks and requirements of incorporating a valid IPP?

• In the facts of this case, does the Firm owe a fiduciary relationship to the plaintiff?

• Was the Firm in a conflict of interest, preferring its financial interests to the needs of the plaintiff/ client?

Background Facts

[ 5 ] As the plaintiff approached retirement age after a long career as a math teacher, she consulted with the co-defendant David Pelletier (Pelletier) of Investment Planning Counsel, about the potential benefits of transferring her teacher’s pension plan to an individual pension plan. Pelletier recommended the IPP transaction as a valid method to save significant taxes in the future. The plaintiff was advised by Pelletier that to complete the transaction, she must retain an actuary for advice and a law firm to perform the necessary incorporation.

[ 6 ] Gacesa retained the actuary, Brian Jenkins of Actuben Consulting Inc. for advice. The plaintiff, through Pelletier, retained the Firm and Martin to incorporate a company to implement a transfer of her teacher’s pension plan to an IPP.

[ 7 ] Mr. Jenkins advised the plaintiff that approximately four months after the incorporation of the IPP she would receive a threatening letter from Revenue Canada about potential non-compliance with the IPP requirements. He told her that there was no need to worry as she was in compliance. Mr. Jenkins sent the plaintiff a sample form letter from Revenue Canada.

[ 8 ] Ms. Martin had been retained by Pelletier to perform some 30 to 40 similar transactions setting up IPP transactions for other individuals.

[ 9 ] The evidence confirms that Ms. Martin did not receive any information from Pelletier or Jenkins about the structure of the IPP transactions, nor was she provided with a copy of the Revenue Canada form letter. It is also clear that at no time did she ask for clarification or sample documents or make an effort to understand globally the nature of an IPP transaction and her role in its execution.

[ 10 ] There was no direct contact between Ms. Martin and the plaintiff. Ms. Martin never met or spoke to the plaintiff. According to the defendant, Pelletier or Jenkins provided the only instructions or information to Ms. Martin, and any direct discussion about the incorporation and correspondence was between Ms. Martin and Pelletier. In her cross-examination, at times Ms. Martin appeared to be unclear whether she was instructed by Pelletier or Jenkins.

[ 11 ] Ms. Martin did not request the plaintiff to sign a retainer agreement defining or limiting the scope of her retainer. As there is nothing in writing defining the scope of the retainer, this issue must be determined upon the evidence.

[ 12 ] Ms. Martin incorporated the company upon the instructions of Pelletier. She signed the initial shareholder resolution in accordance with the document provided by Pelletier, upon the instructions of Pelletier. Ms. Martin was the initial shareholder and director of the plaintiff’s corporation for the first year. She charged $350.00 for her services.

[ 13 ] The resolution setting up the IPP transaction contained the following terms:

1. A pension plan to be known as “Pension Plan for Presidents of 1456854 Ontario Inc.” (the “Plan”) shall be established effective December 28, 2000.

2. Those employees who meet the eligibility requirements of the Plan will join the Plan.

3. For the purposes of the plan, the earnings recognized for a member shall be the lesser of:

(a) the actual compensation of the member, and

(b) the greater of:

(i) the year’s money purchase limit as defined in the Income Tax Act divided by 18; and

(ii) $86,111.11.

[ 14 ] The resolution referred to more than one employee participating in the IPP transaction and working for the company, when clearly the only person contemplated to be involved in the IPP transaction was the plaintiff.

[ 15 ] The structure of the IPP transaction was flawed from the beginning. The contents of the resolution signed by Ms. Martin on the instructions of Pelletier appear to be a thinly veiled attempt to comply with the requirements of the primary purpose test of the Income Tax Regulations . Pursuant to Reg. 8501 of the Regulations, a pension plan cannot be registered unless it meets the primary purpose test in Reg. 8502(a) of the Regulations which states that, “the primary purpose of the plan is to provide periodic payments to individuals after retirement and until death in respect of their service as employees”.

[ 16 ] Ms. Martin signed the resolution without questions or inquiry as to the nature of the transaction, and without questions or inquiry as to whether the assertions outlined in the resolution signed by her were factually true.

[ 17 ] The contents of the resolution were not true. From the beginning, the IPP transaction did not meet the primary purpose test for such a transfer. As well, the company did not generate the required minimal level of income of $65,000.00.

[ 18 ] As predicted, the plaintiff received the threatening letter from Revenue Canada four months after the incorporation. The plaintiff consulted with Pelletier and Jenkins, but did not consult or advise Ms. Martin of the Revenue Canada letter. Pelletier and Jenkins told the plaintiff that there was nothing for her to worry about.

[ 19 ] Over one year after the incorporation, in February 2002, Ms. Martin prepared the reporting letter to the plaintiff confirming that the shares had been transferred to her and confirming that the plaintiff was now the officer and director of the corporation. There was no mention in the reporting letter of the contents of the resolution setting up the structure of the IPP transaction, or its requirements to ensure compliance.

[ 20 ] The plaintiff’s corporation was audited, and in 2010 the Canada Revenue Agency (CRA) concluded that the IPP was not bona fide and did not comply with the requirements of the Income Tax Act and Regulations. The plaintiff’s taxation for the year 2001 when the incorporation and transfer took place has been reassessed to include the amount of $558,871 into income. Along with various penalties and interest, the plaintiff’s resulting tax liability is in excess of $360,000.

[ 21 ] CRA concluded that although Ms. Martin was a shareholder of record, she was not involved in any of the business activities. The CRA concluded that the plaintiff was the de facto owner of the company and hence the primary purpose test in the Income Tax Regulations could not be met.

[ 22 ] The letter outlining the reasons for the reassessment by the Canada Revenue Agency confirm:

a. Mrs. Gacesa signed a letter dated January 19, 2001, which said that she did not directly or indirectly own any shares of the company;

b. although Ms. Martin was a shareholder of record, she was not involved in any daily business activities and she did not engage in any financial matters;

c. the CRA had concluded that Mrs. Gacesa was a de facto owner of the company;

d. the CRA had concluded that the company did not meet the “primary purpose” test necessary for establishing the IPP; and

e. the IPP had never qualified for registration under the Income Tax Act .

The Expert Evidence

[ 23 ] The Firm retained the services of an expert witness for the purpose of this motion for summary judgment.

[ 24 ] The opinion letter from the expert addresses the narrow question of the standard of care of a reasonably competent solicitor acting on an incorporation and organization of a company in 2002 based upon the facts which he assumes to be true. Mr. Gray confirms in his written opinion that the standard of care had been met, based upon the limited facts available at this juncture.

[ 25 ] As the opinion letter confirms, Mr. Gray does not address the other aspects of a professional malpractice case, “including to whom a duty of care is owed, the express scope of the retainer, whether a duty is owed in contact or in tort, remoteness, reliance, causation, mitigation, limitation period or damages”. These are matters for determination by the Court.

[ 26 ] Mr. Gray is a corporate solicitor at a large firm. Before this retainer to provide expert advice, he had no knowledge about IPP transactions. To inform himself and to, in his words, “put himself in the shoes of Ms. Martin” he contacted a partner with expertise in pension law to learn something about what a solicitor would do to incorporate a company for an IPP transaction and how the solicitor’s work would fit into the overall context of the transaction.

[ 27 ] Mr. Gray was advised categorically by his partner that setting up an IPP was “notorious in the pension field, that a lot of people had been hurt and he described them as criminal”. Mr. Gray confirmed that these transactions required skepticism and concern as the IPP concept was being abused. Mr. Gray in his own words described the situation as “toxic” (q. 115 on p. 31; q. 123-124 on p. 33).

[ 28 ] This evidence is based upon present knowledge in 2012. There is no evidence before me as to what was generally known in the pension field in 2001 when this transaction took place.

[ 29 ] The evidence of Mr. Gray in his cross-examination was quite different from his brief and limited opinion letter. Many of Mr. Gray’s comments may be interpreted as largely supportive of the plaintiff’s position that Ms. Martin had a duty to inform herself in the circumstances as to nature of the transaction in general and to understand her role in the IPP transaction. First, Mr. Gray confirmed numerous times during his cross-examination that in his view, placing himself in Martin’s shoes, he would have first made some inquiry to inform himself to understand some basic principles of the IPP transaction and the role of the Firm in the IPP transaction. Second, he confirmed that this need to make inquiries was enhanced when Ms. Martin signed the initial resolution structuring the IPP transaction, and when she assumed the role of director and shareholder for the first year of incorporation.

[ 30 ] He stated that:

A. “I would have wanted to have some comfort level before I proceeded, especially with the initial transaction. If I had been doing this a while, and I know it is accepted or its following the same pattern that we’ve been there before, I would at some stage get more comfortable with the structure of the transaction”. (q. 221 on p. 59)

Q. “So I’m just suggesting to you that before you passed a resolution which included factual statements that might be reviewed by the tax authorities, you want to have to get some comfort that they’re actually true….

A: “I would want to be satisfied. Again, personally I would want to be satisfied that the statements in the resolution are true. I would want to be comfortable with it that my signing the resolution was not inaccurate” (q. 281 on pp. 73-74)

[ 31 ] Rule 5.0.2 of the Law Society of Upper Canada Rules of Professional Conduct in effect confirms that, “[w]hen retained by a client, a lawyer shall make reasonable efforts to ascertain the purpose and objectives of the retainer, and to obtain information about the client necessary to fulfill this obligation”. It is the plaintiff’s position that the Firm has not met this obligation.

Test for Summary Judgment

[ 32 ] The Court of Appeal in Combined Air Mechanical Services Inc. v. Flesch , 2011 ONCA 764 , interpreted the meaning of the amended Rule 20 of the Rules of Civil Procedure and provided comprehensive guidelines to the profession and to motion judges.

[ 33 ] The new rule provides enhanced powers to the motions court to weigh evidence, evaluate credibility and draw reasonable inferences from the evidence guided at all times by the overarching principle of the “full appreciation test”.

[ 34 ] The “full appreciation test” is a primary guideline to decide whether or not a trial is necessary in the interest of justice and is outlined at paras. 50-55 of Combined Air. I cite paragraphs 51 and 55:

[51] We think this “full appreciation test” provides a useful benchmark for deciding whether or not a trial is required in the interest of justice. In cases that

call for multiple findings of fact on the basis of conflicting evidence emanating from a number of witnesses and found in a voluminous record, a summary judgment motion cannot serve as an adequate substitute for the trial process. Generally speaking, in those cases, the motion judge simply cannot achieve the full appreciation of the evidence and issues that is required to make dispositive findings. Accordingly, the full appreciation test is not met and the “interest of justice” requires a trial.

[55] Thus, in deciding whether to use the powers in rule 20.04(2.1), the motion judge must consider if this is a case where meeting the full appreciation test requires an opportunity to hear and observe witnesses, to have the evidence presented by way of a trial narrative, and to experience the fact-finding process first-hand. Unless full appreciation of the evidence and issues that is required to make dispositive findings is attainable on the motion record – as may be supplemented by the presentation of oral evidence under rule 20.04(2.2) – the judge cannot be “satisfied” that the issues are appropriately resolved on a motion for summary judgment.

[Emphasis added.]

[ 35 ] As confirmed in Combined Air at paragraphs 57 and 58, caution should be exercised in determining a complex case at an early stage of a proceeding before discovery:

[57]… we add an important caveat to the “best foot forward” principle in cases where a motion for summary judgment is brought early in the litigation process. It will not be in the interest of justice to exercise rule 20.04(2.1) powers in cases where the nature and complexity of the issues demand that the normal process of production of documents and oral discovery be completed before a party is required to respond to a summary judgment motion. In such a case, forcing a responding party to build a record through affidavits and cross-examinations will only anticipate and replicate what should happen in a more orderly and efficient way through the usual discovery process.

[58] Moreover, the record built through affidavits and cross-examinations at an early stage may offer a less complete picture of the case than the responding party could present at trial.

Analysis

[ 36 ] Counsel confirmed that there is no case directly on point, where a lawyer takes instructions and relies upon the expertise of others to accept referrals to incorporate a series of cookie cutter repetitive corporate transaction, without making any independent inquiry, or informing himself or herself as to the corporate requirements to ensure compliance with the objectives of the corporate transaction.

[ 37 ] The Firm argues that it may rely upon the expertise of others and follow instructions without making any independent inquiry. The plaintiff relied upon the expertise of others, not the Firm. The Firm argues that there is no duty for a lawyer to inform himself or herself as to the nature of the transaction, and hence no duty to warn the client of the corporate requirements of a valid IPP and the risks attendant with non-compliance.

[ 38 ] The plaintiff argues that the Firm had an independent duty to inform itself as to the nature of the transaction and to ensure that client was made aware of the requirements of an IPP and the risks of non-compliance.

[ 39 ] Counsel for the parties had different interpretations of the import of Mr. Gray’s expert evidence, which illustrates the need for this matter to be determined upon a full factual record in the context of a trial. It would be fair to say that the evidence of Mr. Gray in his cross-examination leaves many questions about what the appropriate conduct of Ms. Martin should have been in the circumstances.

[ 40 ] Although the plaintiff did not retain an expert at this stage in the proceeding, in light of the evidence of Mr. Gray on his cross-examination, I conclude that there is certainly a triable issue about whether a lawyer in the circumstances of Ms. Martin, without a clear, limiting retainer, can simply be the conduit of documentation and information from other experts without making any independent inquiry whatsoever about the nature of IPP transactions and without understanding her part in the transaction, and advising the client accordingly.

[ 41 ] The scope of the retainer is a live issue. It appears clear from the evidence of Mr. Gray that the level of involvement of Ms. Martin, as the initial shareholder and director and in signing the resolution that sets up the structure of the IPP transaction, enhanced the scope of the retainer beyond a simple incorporation. As there is no written retainer specifying the nature of the retainer, the issue must be determined upon the evidence.

[ 42 ] The decision of Connerty v. Coles , 2012 ONSC 2787 at paragraphs 15 and 16 , confirms that determining the scope of a retainer based upon the evidence when there is no written retainer and the facts are in dispute necessitates a trial. I conclude that there is insufficient evidence to meet the full appreciation test to determine the issue of the scope of the retainer at this preliminary stage of the proceeding.

[ 43 ] Another issue which in my view requires the full context of a trial, is whether there was a duty for Ms. Martin to warn the plaintiff.

[ 44 ] Counsel for the Firm acknowledged in argument that if Ms. Martin had knowledge of the requirements of the primary purpose test in incorporating the company, that she would have had a corresponding duty to inform the client of the requirements of the primary purpose test, and the risks of non-compliance. It is the Firm’s position that it was entitled to rely on the expertise of others, and that it had no obligation to understand the transaction, and hence no duty to warn the client.

[ 45 ] In assessing the scope of the duty, the nature of the relationship is relevant. Counsel for the Firm pleads that there is no fiduciary duty owed by Ms. Martin to the plaintiff. However, Mr. Gray confirmed in his cross-examination that Ms. Martin owed a fiduciary duty to both the plaintiff and to the corporation.

[ 46 ] The issue of the duty to warn is complex and factually dependent. This issue should be determined upon a full factual record. I cannot possibly assess the evidence fully and fairly applying the full appreciation test based upon the materials before me.

[ 47 ] Another issue requiring the full factual context of a trial, is whether the Firm was in a conflict of interest. Clearly, Pelletier was a significant and repetitive source of business to the Firm. By 2001, the time of this transaction, Pelletier had made 30 or 40 such referrals to Ms. Martin. Whether there is an argument that the Firm was in a conflict of interest as a result of this referral arrangement, with a duty to disclose the conflict to the client, is yet another matter for trial.

Conclusions

[ 48 ] For the reasons outlined, I conclude that it is clear that this matter must proceed to trial, and that this case cannot possibly meet the full appreciation test on a motion for summary judgment. The request of the Firm and Ms. Martin to dismiss the action and cross-claims is therefore dismissed.

Costs

[ 49 ] Counsel argued the issue of costs at the conclusion of argument, before knowing the results of the motion. Counsel for the Firm, if successful, sought costs in the amount of $35,000.00 based upon his bill of costs for the action. Counsel for the plaintiff first argued for substantial indemnity costs. He did not have a bill of costs prepared, but agreed with the amount suggested by counsel for the Firm as appropriate for partial indemnity costs of this motion.

[ 50 ] Counsel for the Firm argued that the plaintiff’s factum exceeded the practice direction for a 30 page limit upon facta by some 24 pages, and that there should be a penalty imposed for the extra work necessary. I am not going to impose a penalty, but I voice the concern that lengthy, repetitive facta are not in the interests of a client and are not helpful to the court. There was nothing extraordinary about this case warranting such a lengthy factum.

[ 51 ] There is no justification for an award for substantial indemnity costs in this motion in favour of the plaintiff. The submissions made by counsel for the Firm include costs of the entire action, not just the motion for summary judgment. Taking into account the factors in Rule 57 of the Rules of Civil Procedure, I fix costs for this two hour motion for summary judgment in the amount of $17,000.00, plus HST and assessable disbursements.

J. Wilson J.

Released: December 21, 2012

ONTARIO SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-11-441084

DATE: 20121221

BETWEEN:

JULIA GACESA Plaintiff – and – INVESTMENT PLANNING COUNSEL, DAVID PELLETIER, ACTUBEN CONSULTANTS INC., BRIAN JENKINS, MACDONALD PORTER DREES, BARRISTERS AND SOLICITORS, and MARY J.E. MARTIN Defendants

REASONS FOR JUDGMENT

J. Wilson J.

Released: December 21, 2012