11 September 2018By Michael Bookman
A married couple retains tax lawyers to challenge assessments made by the Canadian Revenue Agency (“CRA”). Their counsel advise that their case is strong and recommend an appeal of the CRA’s decision. Two years later, the couple’s tax lawyers reverse their position; what was once a strong case is now deemed weak. The couple, already invested in the CRA challenge, retain new counsel and continue the litigation.
If the couple wants to sue their tax lawyers, when does the limitations period begin to run against them? Is it from the time their former lawyers’ advice was reversed? Or is it from the time a court adjudicates the tax liability and their specific damages from the wrong advice are realized?
The Ontario Superior Court of Justice in Coveley v. Thorsteinssons LLP1 recently wrestled with this limitations period question. The Court held that the couple discovered all of the constitutive elements of their claim against their tax lawyers when their lawyers changed their advice rather than when the Tax Court of Canada (the “Tax Court”) rendered its decision on the appeal.
Background: Stella and Michael Coveley retained a firm of tax lawyers to provide advice on the CRA’s decision to disallow the couple’s claims for allowable business investment losses. The firm’s advice to the couple in May 2008 was that the Coveleys had a strong case. By October 26, 2010, the firm had reversed its advice: the challenges to the CRA assessments were unlikely to succeed.
By that time, the Coveleys had already invested fees in preparing the Tax Court proceedings. They decided to proceed with the litigation with new counsel.
In October 2012, the trial was held before the Tax Court. On November 2, 2012, the Coveleys commenced the action against their former tax lawyers for damages for breach of the retainer agreement, breach of fiduciary duties, and professional negligence.
On December 20, 2013, the Tax Court of Canada released its judgment rejecting the Coveleys’ position. An appeal to the Federal Court of Appeal was dismissed on December 1, 2014.
The firm of tax lawyers brought a motion for summary judgment dismissing the Coveleys’ claim against it, alleging the claim was barred by Ontario’s Limitations Act, 2002.2
The Court’s Analysis and Implications: The basic limitations period in Ontario is two years.3 The two-year clock begins when the plaintiff discovers (or should have discovered) the facts that support the claim.4
When did the Coveleys discover the claim? Was it when they realized, having spent money pursuing the claim that the CRA had wrongly disallowed the credit for business losses, that their lawyers had changed their advice? Or, did they discover their claim only after that advice was shown to be wrong as confirmed by the Tax Court’s decision?
The Court held, in this case, that the Coveleys knew they had suffered a loss through the fault of their lawyers when their lawyers reversed their position and advised that the Coveleys’ CRA challenge was unlikely to succeed, because they realized that their lawyers had been wrong and that it caused them damage.
The Coveleys argued strenuously that they only discovered their claim when the Tax Court denied their appeal of the CRA decisions. The Tax Court’s decision had the potential to eliminate the Coveleys’ “loss”. If the Tax Court rendered a decision in favour of the Coveleys, they would have no claim against their lawyers. The Coveleys relied on Presidential MSH Corp. v. Marr, Foster & Co. LLP.5 In that case, Pardu J.A. held that it would not have been appropriate for the taxpayer-plaintiff to commence the proceeding until the CRA appeal process had been exhausted.
The Court in this case, however, viewed the evidence to be different from that in Presidential. In this case, the Coveleys continued their claim with new counsel rather than continuing to rely on Thorsteinssons’ advice. Moreover, the evidence was that the Coveleys were not waiting for the Tax Court’s decision. Rather, the evidence was that the Coveleys knew of the loss caused by incorrect advice by October 27, 2010.
Accordingly, their claim against their lawyers was barred because it was issued on November 2, 2010, more than two years after discovering their claim. The Court granted the firm’s motion for summary judgment and dismissed the Coveleys’ claim.
The Takeaway: Plaintiffs must be vigilant in bringing their claims. The particular facts will determine when the clock begins to run but the legal principles of discoverability might mean that it begins earlier than when the damages associated with the claim become more specific or better known.
In this case, the clock began to run when the plaintiffs were told that the advice given was wrong. At that point, their damages were known. These only became more specific upon the Tax Court’s decision.
12018 ONSC 4804.
2SO 2002, c 24, Sch B.
3Section 4 of the Limitations Act, 2002 provides that “[u]nless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.”
4“Discoverability” is widely canvassed in the case law and depends on the particular facts of the case. Justice Perrell provides a succinct summary in Tender Choice Foods Inc. v. Versacold Logistics Canada Inc., 2013 ONSC 80 at paras. 52 and following.
52017 CarswellOnt 5780 (CA).