4258843 Canada – Quebec Superior Court finds a tax advisor negligent for failing to advise of a GAAR risk and of a subsequently-published adverse CRA position

The principal (“Pilon”) of an incorporated family business (“Gennium”) sought to secure asset protection for the significant dividends paid by Gennium. To this end, both a family trust (“FFLP”) to hold the Gennium shares and a holding company (“9134”) were formed. Pilon’s objectives would have been achieved if the dividends received by FFLP had been paid by it to 9134 as a corporate beneficiary of FFLP (the “base case”). However, the tax plan presented by Pilon’s tax advisors (KPMG) involved the formation of a second family trust (Satoma Trust) to which s. 75(2) applied, so that Gennium dividends which, in fact were paid to Satoma Trust, were attributed to 9134 and qualified for the intercorporate dividend deduction. This KPMG plan, if it worked, had the tax advantage over the base case of permitting the tax-free distribution of the Gennium surplus to the family members by Satoma Trust – but instead, the Gennium dividends were retained in Satoma Trust for reinvestment.

A more robust variant of the above tax plan (in which an asset-protection trust had not already been formed) was reviewed by the KPMG GAAR Committee, who concluded that GAAR should not apply if it could be demonstrated that the s. 75(2) trust was put in place for asset-protection (or other non-tax) purposes – but otherwise it was more likely than not that GAAR would apply. This view and the GAAR risk were not communicated to Pilon.

In Satoma Trust, Noël CJ confirmed CRA’s application of GAAR to include the Gennium dividends in the income of Satoma Trust.

Before finding that KPMG was liable in negligence for damages equal to the Part I tax plus interest for which Satoma Trust had been assessed, Davis JCS stated:

[O]ne can only wonder why KPMG did not evaluate the risk of the CRA concluding that the primary purpose of the new structure was to provide a tax benefit. At the very least, KPMG should have had a full and detailed discussion with Pilon about the risk of the CRA seeing a tax benefit and applying the GAAR. The consequences of possible application should also have been discussed.

Davis JCS also noted that a year following the structure’s implementation, CRA indicated at the 2006 APFF Roundtable that essentially this structure “would trigger the application of subsection 245(2),” and stated:

… KPMG's obligation to keep Mr. Pilon informed of the risk of applying the GAAR did not end in 2005. …

Timely advice on CRA's new approach could have led to rectification of the structure and minimized both the risk and the extent of an assessment.

Neal Armstrong. Summary of 4258843 Canada Inc. v. KPMG, 2024 QCCS 760 under General Concepts – Negligence.