http://www.courts.gov.bc.ca/jdb-txt/SC/14/10/2014BCSC1083.htm 
Taiga Building Products Ltd. et al. v. Deloitte & Touche, LLP (June 16, 2014 – 2014 BCSC 1083) was a case where the plaintiffs sued their former auditors in connection with an aggressive tax plan which they had implemented; when they were reassessed by CRA the plaintiffs ultimately entered into a settlement without taking the matter to trial.
[1] For about 20 years the defendant firm of chartered accountants was the external auditor of the plaintiff, Taiga Building Products Ltd. (“TBPL”) which conducts business as a distributor of building products. In 2001 the defendant recommended to TBPL that it adopt what was known as the “Finco Plan” for a corporate reorganization to avoid the payment of taxes. TBPL agreed in writing to implement the Finco Plan (“the engagement letter”). By the engagement letter TBPL was to pay a one-time fixed fee to the defendant and an annual 20% contingent fee based on the taxes saved.
[2] Relying on the general anti avoidance rule found in the
Income Tax Act, R.S.C. 1985 c. 1 s. 245 (the “GAAR”), the Canada Revenue Agency (“CRA”) audited and reassessed TBPL and the plaintiff 2903 Ltd. (“2903”), which had been incorporated as part of the reorganization to implement the Finco Plan. In December 2003, TBPL required the defendant to resign as its auditors. TBPL engaged the services of other accountants with Cinnamon Jang Willoughby, and of tax lawyers with Borden Ladner Gervais, to resist the reassessments; however, in October 2008 it decided to settle with the CRA and three interested provinces.
[3] To achieve the settlement TBPL alleges it was required to pay additional taxes, interest, and penalties, which it seeks to recover from the defendant as damages. It also seeks return of the fees it paid pursuant to the engagement letter and seeks to recover the cost of the accounting and legal services it incurred in the course of reaching the settlement agreement.
[4] TBPL alleges that but for the negligence and breaches of fiduciary duty of the defendant it would not have implemented the Finco Plan. TBPL further alleges that because of the percentage fee agreement the defendant’s role as auditor conflicted with its financial interest in the success of TBPL in saving taxes. It alleges the conflict could not be waived because the Rules of Professional Conduct governing the defendant did not permit it to enter into a contingent fee arrangement with TBPL while it was its auditor. The defendant is alleged to have failed to consider the Rules of Professional Conduct adequately and to have failed to advise TBPL of their implications for the contingent fee. TBPL also alleges the defendant breached the engagement letter both by rendering bills for contingent fees after the CRA had challenged the Finco Plan and by refusing, in breach of its contractual and fiduciary duties, to assist TBPL to resist the reassessments by the CRA.
[5] In its counterclaim the defendant seeks judgment for the contingent fees TBPL refused to pay once the notices of reassessment have been delivered.
The actual Finco Plan was not complex by the standards of many forms of tax planning:
[6] The Finco Plan relied on what was characterized as a “loop hole” in section 2(2) of the
Corporations Tax Act, R.S.O. 1990 c. C-40 (“the Ontario Act”), as it read in 2001. A foreign corporation with a “permanent establishment” in Ontario was not taxed on interest income from property outside Canada. To take advantage of the loophole TBPL, on the advice of the defendant, implemented the Finco Plan by:
(a) incorporating the plaintiff 624858 B.C. Ltd. (“624”) as a wholly owned subsidiary of TBPL in British Columbia;
(b) incorporating 2903 as a wholly owned subsidiary of the plaintiff in the British Virgin Islands;
(c) arranging for 2903 to have a “permanent establishment” in Ontario;
(d) creating a general partnership between TBPL with a 99% interest and 624 with a 1% interest;
(e) transferring substantially all its assets to the general partnership in return for promissory notes of about $147,000,000 bearing interest at 9% (the “Finco Debt”); and
(f) assigning the Finco Debt to 2903 in return for shares.
[7] The intention of the Finco Plan was to create a large speciality debt, equivalent to all TBPL’s assets, owed by TBPL to 2903, a foreign corporation with a permanent establishment in Ontario. TBPL would have an interest expense but 2903 would pay no tax on the interest it earned on the speciality debt which was on foreign property. The general partnership would carry on the business of distributing building products and its income would be divided 99% to TBPL and 1% to 624 in accordance with their respective interests in the general partnership.
[8] There was also a savings in capital tax in Ontario which I do not need to discuss in these reasons at any length except to observe that the location of the specialty debt in the British Virgin Islands avoided application of the Ontario Corporate Minimum Tax, o Reg. 509/07, and that there is controversy between the parties about whether the Finco Plan had the effect of savings on the capital tax.
[9] The plaintiffs do not complain that the structure of the Finco Plan had technical faults, nor that it was improperly implemented. The complaint, apart from the conflict of interest, is that the Plan was understood by the defendant, to be an “aggressive” tax avoidance scheme with a “high risk” of provoking a vigorous challenge by the CRA, of which risk the defendant failed to advise the plaintiffs.
The case occupied 20 days at trial and the resulting reasons for judgment run to 158 paragraphs. What is somewhat striking about the decision is that Deloitte was completely successful on all issues, including its counterclaim for unpaid contingency fees.
The court provides a very helpful, and concise, summary of its findings as follows:
[137] In summary I conclude the following:
1. When the defendant proposed the Finco Plan it informed TBPL of the risks of implementing the plan as follows:
a. The Ontario Tax Authorities “would not like” the Plan;
b. TBPL and other plaintiffs incorporated for the purpose of implementing the Plan, could be subject to audits and reassessment by the CRA relying on the provincial GAAR to recover the taxes which had been avoided by the Plan;
c. although the application of the provincial GAAR was uncertain the Plan was likely to survive a challenge based on the GAAR;
d. tax audits and reassessments would impose legal and accounting costs if they were resisted; and
e. the Ontario government would probably introduce legislation to amend the Ontario Act which would render the Plan ineffective; and
f. that information met the standard of care.
2. The defendant did not have a fiduciary or contractual obligation to assist the plaintiffs to resist the notices of reassessment.
3. The Rules of Professional Conduct applicable to the defendant when it proposed the Plan did not preclude a fee contingent on the tax savings and there was no conflict of interest as alleged.
4. The mere delivery of notices of reassessment did not constitute a successful challenge to the Plan within the meaning of the engagement letter.
5. The defendant is not obliged to refund the contingent fees already paid.
6. The defendant did not breach a duty to the plaintiffs by continuing to render bills for contingent fees after the notices of reassessment were delivered.
What is more, the court did not accept that the plaintiffs had proven any damages. They called a Mr. Wong, whose evidence as to damages the court found unconvincing:
[155] TBPL managed its expenses, its debt servicing and investments through its cash flow and through complex arrangements with its bankers which no doubt would have varied from time to time over the years depending on general business conditions and TBPL’s particular circumstances. In my view it is not appropriate to attempt to determine the effect of the Finco Plan without a broad consideration of the whole of the financial circumstances of TBPL in the years between 2001 when the Finco Plan was implemented and when the settlement agreement occurred in October 2008. Once those circumstances were known it would then be necessary to compare them with TBPL’s circumstances as they probably would have been if the Finco Plan had not been implemented. Over those years the board and management of TBPL would have made multiple decisions, many unconnected to the Finco Plan, each with its individual impacts on TBPL’s earnings before taxes and thus its tax obligations. Little if any analysis of these considerations has been done by Mr. Wong.
[156] I appreciate the complexity of such an analysis but in my view its absence presents an insuperable barrier to reliance on Mr. Wong’s report. One example may assist to illustrate the difficulty I have in relying on Mr. Wong’s report. Between 2002 and 2005, 2903 received cash payments pursuant to the partnership agreement. No evidence was given as to their amounts. In 2005, 2903’s assets were transferred to TBPL. Mr. Wong does not mention these events and I have no other evidence to allow me to understand their impact on gains or losses experienced by TBPL from the Finco Plan.
[157] When I couple my difficulty with Mr. Wong’s report with the evidence of Mr. Sandy and Mr. Robinson, which in my view supports the proposition that the plaintiffs made a prudent settlement agreement preserving at least some of the benefits of the Finco Plan, I am not persuaded the plaintiffs have met their burden of demonstrating that they suffered any loss as alleged in the amended statement of claim.
While there are a number of complex evidentiary and legal issues dealt with in this decision, in my view the critical factor was probably that subsequent to the plaintiff’s settlement with CRA two other groups of taxpayers successfully defended what seems to have been essentially the same plan before the courts:
[111] The plaintiffs did not challenge the notices of reassessment in the courts but instead settled with the CRA. They had the right to do so but not to impose the results, if unfavourable to the tax savings, on the defendant. It might be possible to take the opposite view if the jurisprudence made a legal challenge so precarious that it would have been unwise to embark on it. However, when the plaintiffs were negotiating towards the settlement, no judicial decision had yet been made which was critical of a finco plan as a violation of provincial GAAR. A few years later two companion cases in Alberta held that provincial GAAR was not breached when, as with the plaintiffs in the case before me, a corporate tax payer reorganized and refinanced through a related company thus enabling an interest expense deduction for the debtor company while the financing company took advantage of the Ontario Act to avoid tax. See Husky
Energy Inc. v. Alberta, 2012 ABCA 231, leave to appeal to SCC refused, [2012] S.C.C.A. No. 411, and
Canada Safeway Limited v. Alberta, 2011 ABQB 329. These authorities were not available to the plaintiffs when they made their decision to settle with the CRA. However, along with the absence of hostile jurisprudence in the years leading up to the settlement, and the evidence of Mr. Weder that he had advised the plaintiffs that successful resistance in the courts was a reasonable prospect, they at least suggest the defendant’s insistence that the plaintiffs were not entitled on the terms of the engagement letter to settle without any attempt to test the waters in the courts, is reasonable.