24 September 1999 External T.I. 9905605 - LIABILITY OF LEGAL REPRESENTATIVE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Extent of liability of the legal representative of a taxpayer under subsection 159(1) of the Income Tax Act.

Position: Absent other circumstances, it does not appear that a lawyer or law firm would be considered to be a "trustee . . . or any other like person" where the lawyer or law firm holds funds in a trust account and disburses those funds to close a transaction.

Reasons: The legal representative of a taxpayer is a person who stands in the place of, and succeeds to the interest in property of, another individual or corporation. A legal representative represents the interests of, and oversees the legal affairs of, another person.

						990560
XXXXXXXXXX 						T. Lanzer
(613) 957-2129
Attention:  XXXXXXXXXX 

September 24, 1999

Dear Sirs:

Re: Liability of legal representative under subsection 159(1) of the Income Tax Act

We are writing in response to your letter of March 3, 1999 wherein you requested our interpretation of the liability of a taxpayer's legal representative pursuant to subsection 159(1) of the Income Tax Act ("the Act").

In your view, a broad reading of subsection 159(1) could find a taxpayer's legal representative liable for all tax liabilities owing by the taxpayer at any time. In particular, you are concerned that:

(1) the legal representative's liability is not limited to the liabilities that arise from property in his or her possession and control; and

(2) the legal representative's liability is not limited to the value of the property in his or her possession or control.

You are also concerned that a broad interpretation of liability under subsection 159(1) would compel lawyers or law firms to seek a Revenue Canada audit of their clients before any client funds could be disbursed from the lawyer's or law firm's trust accounts to close a transaction.

Our Comments

With respect to the extent of the legal representative's liability, subparagraph 159(1)(a)(i) states that a legal representative's liability is limited to the property in his or her possession or control, in the capacity of legal representative, at the time that an amount becomes payable under the Act. In addition, subsection 159(3) establishes that the legal representative of a taxpayer is personally liable for the payment of any amount payable by the taxpayer under the Act where the legal representative, acting in that capacity, distributes any property in his or her possession without obtaining a certificate from the Minister pursuant to subsection 159(2), to the extent of the value of the property distributed.

With respect to your concern about liability for the disbursement of funds from a lawyer's or law firm's trust accounts to close a transaction on behalf of a client, paragraph 159(1)(a) sets out the circumstances in which a person who is the legal representative of a taxpayer is jointly and severally liable with the taxpayer for unpaid amounts payable under the Act. Pursuant to paragraph 159(1)(a), the legal representative is jointly and severally liable with the taxpayer

(i) to pay each amount payable under this Act by the taxpayer at or before that time and that remains unpaid, to the extent that the legal representative is at that time in possession or control, in the capacity of legal representative, of property that belongs or belonged to, or that is or was held for the benefit of, the taxpayer or the taxpayer's estate. [emphasis added].

Fundamental to section 159 is the definition of "legal representative" found in subsection 248(1) of the Act:

"legal representative" of a taxpayer means a trustee in bankruptcy, an assignee, a liquidator, a curator, a receiver of any kind, a trustee, an heir, an administrator, an executor, a committee, or any other like person, administering, winding up, controlling or otherwise dealing in a representative or fiduciary capacity with the property that belongs to or belonged to, or that is or was held for the benefit of, the taxpayer or the taxpayer's estate. [emphasis added].

Whether a lawyer or law firm that holds client funds in a trust account for subsequent disbursement in accordance with the client's instructions is a trustee depends on the facts and circumstances of each case. Although a fiduciary relationship between lawyer and client is automatically assumed, a trustee and beneficiary relationship may not exist.

With respect to the broad scope of the definition of "legal representative", the rule of statutory interpretation known as the limited class rule, or ejusdem generis, helps to clarify the meaning. This rule holds that when one finds a clause that sets out a list of specific words followed by a general clause, it will normally be appropriate to limit the general clause to the genus of the narrower enumeration that precedes it. Thus, the final clause of the definition is properly limited in scope to the kind of persons that precede it, namely, a trustee in bankruptcy, an assignee, a liquidator, a curator, a receiver of any kind, a trustee, an heir, an administrator, an executor, or a committee.

In general, the enumerated individuals stand in the place of, and succeed to the interest in property of, another individual or corporation. They represent the interests of, and oversee the legal affairs of, another person.

In your hypothetical example, absent other circumstances, it does not appear that a lawyer or law firm would be considered to be a "trustee . . . or any other like person" where the lawyer or law firm holds funds in a trust account and disburses those funds to close a transaction.

In accordance with paragraph 22 of Information Circular 70-6R3, the opinions expressed in this letter are not income tax rulings and are, therefore, not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch