Court Releases Decision on Certification of Donation Tax Shelter Class Action

December 29, 2011 | Andrew Valentine

In November 2011, the Ontario Superior Court of Justice released its decision on a motion for class action certification in Lipson v. Cassels Brock & Blackwell LLP.  The case arises out of a charitable donation tax shelter arrangement that was promoted and carried out between 2000 and 2003.  The tax shelter involved the donation of both cash and timeshares to registered Canadian amateur athletic associations in respect of which donors claimed donation tax credits.  CRA denied the majority of the tax credits claimed, and the participants sought to have a class action certified against a law firm that provided legal opinions suggesting that the tax credits would not be successfully denied.  Although the Court denied certification in this case, the decision has interesting implications for class actions against law firms opining on donation tax shelter arrangements.

The decision was not a final ruling on the merits of the case, but rather a decision as to whether the case would be permitted to proceed as a class action. If a class action is certified, a representative plaintiff is permitted to pursue a claim on behalf of a class of plaintiffs with sufficiently similar claims against a common defendant.  The plaintiff in this case, Mr. Lipson, sought to be certified as a representative plaintiff on behalf of all participants in the donation arrangement, seeking damages against the law firm for negligence and negligent misrepresentation. Often the crucial fight in class proceedings comes at the certification stage, where defendants argue that the claim should not proceed as a class action but should rather be pursued individually by the class members.

The Court considered two main issues: (i) whether the action met the legal criteria for certification as a class action, and (ii) whether the claims advanced were statute-barred due to being commenced outside the relevant limitation period.

Test for Certification

The Court first considered whether the action met the test for certification as a class proceeding.  Under the Class Proceedings Act, 1992 (Ontario), a class action can only be certified if the following conditions are met:

  1. the pleadings disclose a cause of action;
  2. there is an identifiable class of plaintiffs;
  3. the claims raise common issues of fact or law;
  4. a class proceeding would be the preferable procedure; and
  5. there is a representative plaintiff who would adequately represent the interests of the class without conflict of interest, and who has produced a workable litigation plan.

The central issues in the case were criteria (c) and (d).  The common issues advanced by Mr. Lipson related primarily to whether the law firm owed the individual participants a duty of care in preparing the legal opinions on the arrangement, whether this duty was breached, and what damages are available to the participants for such a breach.  The defendant argued that these issues lacked commonality and that grouping them together as a class action would prevent the law firm from fully defending itself.  It argued that the court must consider the individual circumstances of each plaintiff, including whether each plaintiff had knowledge of the opinion letters, what representations were made to them by other advisors, what reliance was placed on the opinion letters, and the actual loss suffered by each.  These issues, the defendant argued, are inherently idiosyncratic and must therefore be addressed in separate trials.

The Court held that the questions of the duty owed by the law firm to the participants in the program, and whether this standard was breached, were appropriate common issues to be addressed as a class proceeding.  However, it held that the questions of whether individual participants relied on the legal opinions, whether these opinions caused the plaintiffs’ loss, and the quantification of damages, would need to be addressed via individual trials.  The Court held that a class proceeding would be a preferable procedure to resolve the common issues, with individual trials to follow to address the issues of reliance, causation and quantification of damages.

Accordingly, the Court held that but for the limitation issue addressed below, and subject to the need for individual trials to address reliance, causation and damages, Mr. Lipson’s action satisfied the criteria for certification as a class action.

Limitation Period

After indicating that the action would be appropriate for class action certification, the Court addressed whether the claim fell outside the relevant limitation period.  In this, the timing of the events in this matter was important.  As noted, the tax shelter program operated between 2000 and 2003. In 2004, CRA issued letters to all participants in the program disallowing all tax credits claimed. Following receipt of these CRA letters, Mr. Lipson and other participants in the program had sought advice from a tax litigation firm in 2004 and 2005 and commenced litigation against CRA in 2006 as test cases to determine the availability of tax credits for the donations.  The litigation settled in 2008, with CRA permitting the plaintiffs to receive a tax credit only for the cash portion of the donation, but denying the remaining credits. Following settlement, Mr. Lipson commenced the proposed class action against the law firm in 2009.

Under the Limitations Act, 2002 (Ontario), a two-year limitation period commences from the date on which a claim is discovered by the plaintiff.  A claim is considered to be discovered when the plaintiff discovers or ought to have discovered the existence of facts that would support the claim.  The fact that the plaintiff may not appreciate the legal significance of these facts does not postpone the commencement of the limitation period.

The Court held that the plaintiffs discovered or should have discovered their tort claims against the law firm in 2004, when they began receiving letters from CRA denying the tax credits claimed.  Accordingly, it held that the claims were statute-barred and dismissed the action.  The Court rejected an argument that the limitation period should run only from when the settlement was reached with CRA.


This decision is interesting in its implications for future class proceedings of this nature.  It confirms that certain issues may proceed by way of a class proceeding, but that there are also certain issues that must by their nature be tried individually.  It also confirms that the limitation period to begin such a class action begins as soon as the participants in the tax shelter become aware that CRA is seeking to reassess or deny tax credits – it is not postponed until the ultimate tax liability of the participants is determined.

It is unclear whether this decision – and particularly its conclusions regarding the need for individual trials – will increase or decrease the attractiveness of class action litigation against the promoters of tax shelters and law or accounting firms that provide opinions in support of them.  Certainly, it underscores the increased rise of tort liability faced by such firms that provide opinions on tax shelter donation arrangements.  An appeal has been filed in this matter, and so a final determination of these questions will have to wait until the appeal has been decided.


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