24 September 1999 External T.I. 9916865 - 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: In the absence of facts and circumstances that indicate a trustee and beneficiary relationship, it does not appear that a lawyer or law firm acting on behalf of a client in a commercial transaction would be considered to be a "legal representative" as defined in subsection 248(1) of the Act.

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.

						991686
XXXXXXXXXX 				T. Lanzer
(613) 957-2129
Attention:  XXXXXXXXXX 

September 24, 1999

Dear Sirs:

Re: Subsection 159(1) of the Income Tax Act

We are writing in response to your letter of June 16, 1999 wherein you requested our interpretation of the liability of the legal representative of a taxpayer pursuant to subsection 159(1) of the Income Tax Act ("the Act").

In your view, a broad reading of the definition of "legal representative" in subsection 248(1) could include a lawyer or law firm acting on behalf of a client in a commercial transaction. The consequence is that the lawyer or law firm could be jointly and severally liable with the client for all tax liabilities owing by the client at any time pursuant to subsection 159(1). You are concerned that such 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 commercial transaction.

In this context, you have raised three questions:

1. Is a law firm acting on behalf of a client in a commercial transaction considered to be a "legal representative" as defined in subsection 248(1) of the Act?

2. Does it matter if the client is a resident or non-resident of Canada, assuming, in the case of a non-resident, that a certificate was not obtained pursuant to section 116 of the Act?

3. If the law firm is a "legal representative" as defined in subsection 248(1) of the Act, is the "amount payable under this Act" by the taxpayer restricted to the assessed tax liability of the taxpayer for previous taxation years? Is there an "amount payable" in respect of the transaction giving rise to the funds held in trust prior to the "balance-due date" of the taxpayer, as defined in subsection 248(1) of the Act, and/or prior to a return of income actually being filed for the taxation year of the taxpayer in which the sale transaction occurred and/or prior to such return being assessed?

Our Comments

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 light of the foregoing, your three questions are answered as follows.

1. In the absence of facts and circumstances that indicate a trustee and beneficiary relationship, it does not appear that a lawyer or law firm acting on behalf of a client in a commercial transaction would be considered to be a "legal representative" as defined in subsection 248(1) of the Act.

2. If a lawyer or law firm acting on behalf of a client in a commercial transaction is not considered to be a "legal representative" as outlined in the answer to the first question, it does not matter for purposes of subsection 159(1) if the client is a resident or non-resident of Canada.

3. If the law firm is a "legal representative" as defined in subsection 248(1) of the Act, the "amount payable under this Act" by the taxpayer is not limited to the assessed tax liability of the taxpayer that remains unpaid. If a certificate from the Minister pursuant to subsection 159(2) is not obtained, the legal representative is personally liable for the payment of all amounts for which the taxpayer is or can reasonably be expected to become liable under the Act at or before the time a distribution is made, and for the payment of which the legal representative can reasonably be expected to become liable in that capacity. However, under subparagraph 159(1)(a)(i), 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 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