$55 Million Suit Against Lawyers and Accountants for Tax Structure Dismissed by Supreme Court of Canada

Mark Feigenbaum

The Supreme Court of Canada recently decided a case in which a group of lawyers and accountants were sued for $55 million for professional faults in setting up a tax structure that exposed several corporations to unexpected tax liability.

Facts

Fiducie Maynard 2004 (“Fiducie”) was the sole shareholder of a holding company that controlled several corporations that comprised Groupe Melior, which owned, renovated and operated seniors’ residences. The appellants in this case are two individuals who acted as trustees for Fiducie.

In 2009, Revenu Québec issued unexpected notices of assessment against several corporations of Groupe Melior, which resulted in the bankruptcy of most of its corporations and caused the total loss of Fiducie’s patrimony, which was comprised exclusively of shares of the holding company.

In their capacity as trustees of the Fiducie, the appellants instituted proceedings to recover the lost value of Fiducie’s patrimony from the respondents, a group of lawyers and accountants. The appellants claimed that the respondents committed a number of professional faults in setting up the tax structure of Groupe Melior and, in so doing, breached their duty to advise Fiducie. They alleged that the tax structure set up by the respondents was not compliant with legislation and that it exposed the corporations to unexpected tax liability. The appellants sought damages totalling $55,000,000, based on the net value of seniors’ residences owned by Groupe Melior, as well as other damages.

The respondents moved to dismiss the action for lack of sufficient interest under art. 165(3) of the former Quebec Code of Civil Procedure (“CCP”), which stated that a defendant may ask for the dismissal of an action if the plaintiff clearly has no interest in the suit. They argued that Fiducie did not have a sufficient interest to bring a claim in relation to faults committed against the Groupe Melior corporations. They further argued that, as Fiducie was the sole shareholder of a holding company that was itself a shareholder of Groupe Melior, it could not assert a right of action that belonged solely to the corporations of Groupe Melior.

The motion was allowed by the Superior Court and the action was dismissed. The Court of Appeal unanimously dismissed the appeal.

Issues

 The appeal to the Supreme Court of Canada raised two issues regarding fundamental principles of procedural and corporate law.

The first issue related to the rules of standing under the CCP and what it takes to dismiss an action for lack of “sufficient interest” under art. 165(3).

The second related to the distinct legal personality of corporations and why shareholders do not possess a right of action under the Civil Code of Québec (“CCQ”) in relation to faults committed against the corporation in which they hold shares. 

Decision

The court considered procedural and corporate law principles in the case. They reviewed the basic rule of standing in Quebec that requires that a party bringing an action must have sufficient interest in the case. This interest must be direct and personal; it is not presumed by a court and must be established by the claimant. The sufficient interest of the claimant must be established before a court considers the claim on its merits. Article 165(3) of the CPC allows a defendant to challenge the sufficiency of interest at the preliminary motions stage and will succeed where the plaintiff clearly has no interest.

The court stated that in order to prove sufficient interest, the facts alleged by the claimant must relate to the substantive right at issue, since the existence of a sufficient interest cannot be determined in the abstract. Therefore, the appellants in this case needed to allege facts necessary to prove sufficient interest in their claim for damages against the respondents. However, under the corporate law rules of the CCQ, shareholders do not possess a right of action in relation to faults committed against a corporation in which they hold shares. In Quebec, shareholders themselves do not possess a right of action; the CCQ recognizes corporations as having a distinct legal personality and, therefore, shareholders may not personally exercise a right of action that belongs to the corporation.

A previous Supreme Court of Canada judgment has recognized that circumstances exist in which this rule will not apply, namely, where the shareholders can establish:

1. that the defendant breached a distinct obligation owed to the shareholders, and
2. that this breach resulted in a direct injury suffered by the shareholders, independent from that suffered by the corporation.

However, in this case, the court found that the appellants failed to demonstrate that Fiducie had an independent cause of action in civil liability against the respondents. First, the legal obligations owed by the lawyers and accountants were to Groupe Melior, not Fiducie. Additionally, the injury caused was suffered by the corporations of Groupe Melior and not directly by Fiducie.

As a result, the court found that the alleged facts were not sufficient to establish the required interest of the claimants. Therefore, the court concluded that the lower courts had not erred in deciding that the appellants had not demonstrated a direct and personal interest that would allow Fiducie to claim damages from the professionals. The appeal was dismissed.

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Contact Mark Feigenbaum to learn how he can assist you with your legal or tax matters and provide you with comfort in knowing that you are in highly experienced hands. Prior to forming his law firm, Mark worked in the cross-border tax department of an international Big 4 firm and held accounting management positions in a range of sectors in both Canada and the US. Mark combines this legal, tax, and business knowledge to provide thorough, multi-disciplinary advice and exceptional risk management for his clients. Mark offers services to clients in the U.S., Canada, and around the world. Contact Mark online, or at (416) 777-8433 or toll-free at (877) 275-4792 to book a meeting today.