Here’s an item that should come as no surprise to anyone: accountants who earn undisclosed commissions from tax shelter promoters could be held liable to their clients if they are reassessed.
In a recent Ontario Superior Court decision, Michael Perris, an Oakville chartered accountant was found liable for recommending an “art flip” tax scheme to his clients and was ordered to pay over $45,000 in damages.
First of all, CA’s are members of a profession that adheres to a code of ethics. A CA is an advisor and has a fiduciary duty to his client. In Ontario, earning a commission – and not disclosing it to the client – is a clear ethical breach. It is not yet known if the Ontario Institute of Chartered Accountants plans to take disciplinary action.
The clients in this case, Eric and Valerie Lemberg, sued their CA for damages. They had invested $78,500 in a deal where they purchased a block of paintings at a discount, donated them to a charity and claimed a donation tax credit for an amount equal to their appraised market value of about four times their cost. This type of transaction was very popular in the 1990’s, but many participants have since been reassessed by the CRA, and have had little success in the courts. After the CRA assessed them, the Lembergs discovered that their accountant had earned a $7,500 commission on the deal, and sued for the $38,500 of taxes they owed, plus more than $75,000 in interest payable to the CRA.
Mr. Perris had recommended the deal, but had not informed his clients that he was making a fee on the other end. The court held that “…they relied on his advice and his integrity. As it happened, their trust was misplaced. His advice was not independent”. The clients were awarded an amount equal to the taxes owing, plus the accountant’s commission. Mr. Perris was not required to pay his client’s interest charges, since they had use of the funds during the period in question and could have invested it at rates as high as what the CRA was charging.
This case could become a precedent for future lawsuits, and should serve as a warning to accountants or other advisors with a responsibility to their clients to ensure that they do not violate the ethical boundaries of their professional relationships.