KPMG Case A Wake Up Call For Tax Advisers

Canada KPMG Case a Wake-Up Call for Tax Advisers
James Munson, Correspondent, Bloomberg Tax
April 1, 2024
A court decision in Canada finding KPMG liable for professional misconduct over a tax avoidance
plan is sending a strong message to tax advisers—spell out legal risks clearly to clients when
approving their tax strategies.
The client in the case successfully sued KPMG for failing to warn him that his tax planning could be
considered a tax avoidance strategy under Canada’s laws. KPMG was ordered to pay the client’s
$2.9 million tax bill as a result.
“This decision should be a wake-up call to tax advisors,” Allan Lanthier, former partner at Ernst &
Young and former chair of the Canadian Tax Foundation, said in a statement.
Quebec Superior Court Justice Thomas Davis said in a March 6 ruling that KPMG committed
professional misconduct after recommending that Louis Pilon, a businessman in the pharmaceutical
industry, create a trust and pursue certain transactions as part of a p lan to invest in generic drug
manufacturing.
The Canada Revenue Agency issued tax assessments in 2011 that found the plan breached the
General Anti-Avoidance Rule, or GAAR, because it allowed taxable dividends to be transformed into
tax-paid amounts without any tax actually being paid.
Court decisions in June 2017 and April 2018 backed the agency’s decisions.
Pilon sued KPMG in late 2020 after he exhausted his appeals in his dispute with the agency. He
claimed to the Quebec Superior Court the Big Four accounting firm should pay the C$3.9 million
($2.9 million) in taxes his trust paid for breaching the GAAR, as well as the C$150,000 fee he paid
for the tax advice.
In his judgment, Davis sided with Pilon that KPMG should pay the C$3.9 million tax bill, but he
disagreed the fee should be returned because Pilon has kept the trust intact.
KPMG Canada didn’t respond to requests for comment on the decision.
The ruling should have an impact on tax advisers because it spells out the level of attention they
need when informing clients about the legal risks of their tax strategies, said Mortimer Freiheit,
Pilon’s lawyer and founder of Freiheit Legal Attorneys.
“The important thing is that tax practitioners explain to their clients the risks of their deals, not just
how clever a deal is, but the risks of a deal if it doesn’t go his way so that there’s an informed
decision as to whether he wants to take that course of action,” Freiheit said in an interview.
The court found KPMG’s own internal committee on GAAR estimated the tax plan was “more likely
than not” to trigger the GAAR and a taxpayer’s chance of legal success after implementing it was
only in excess of 30%.
Pilon could only recall he had a “very brief” discussion on GAAR with KPMG and the firm was in
“sales mode” when it presented the plan, the court found.
“There was no record, really, of them ever sitting down with him and going through the details,”
Freiheit said.
‘Wild West’ of Compliance
The judgment could also reshape how tax advisers across Canada think about their ongoing duty to
inform clients as the legal landscape changes, Sunita Doobay, partner at Blaney McMurtry LLP, said
in an interview.
The tax strategy KPMG marketed to Pilon in 2005 was considered by the Canada Revenue Agency
to be in line with its anti-avoidance rules. The agency communicated this stance at an annual
meeting of tax officials and professionals known as the Canada Revenue Agency Roundtable in the
same year, according to court documents.
Pilon created the trust at the center of the business plan KPMG recommended in December 2005,
according to court documents.
But at a 2006 roundtable, after the plan was put in place, the agency said its view had changed and
that strategy was no longer compliant with Canada’s anti-avoidance rules.
KPMG never discussed this policy shift with Pilon, the court found.
“Do you have an obligation to an ongoing client, but who is not an ongoing project, to go back to the
client and say, ‘Something has changed?’” Doobay said. “I think you do.”
The court also backed the idea that a greater duty to inform a client exists when the legal uncertainty
of a tax plan is greater, Hugh Neilson, director at Kingston Ross Pasnak LLP, said in an interview.
KPMG’s own expert witness on the GAAR told the court when the tax plan was implemented, the
application of the GAAR was considered the “Wild West” on account of the few precedent -setting
decisions at the time.
The GAAR, during this period, included terms that weren’t found in the rest of Canada’s Income Tax
Act and there were only a handful of decisions that could help a lawyer guide a client on whether the
GAAR would apply in any particular case, the court found.
“The judge turned that around and said, ‘if it was the Wild West and it was anybody’s guess how this
might comply, shouldn’t the taxpayer have been told that that was the state of the law?’” Neilson
said.
Parliament Review
Parliament is currently reviewing a bill that would insert new concepts into the GAAR like an
economic substance test.
In May 2023, the Supreme Court of Canada backed the agency’s dispute with investment firm
Deans Knight Income Corp. in a ruling that some tax lawyers have said gives the agency greater
power to apply the GAAR on a discretionary basis.
“In light of the 2023 Supreme Court decision and new legislation that strengthens the GAAR, the
application of the GAAR is less certain today than in 1988 when it was enacted, or in 2005 when
KPMG pitched the plan to its client,” Lanthier said.
“It is even more important today that tax advisors inform their clients if there is a possible GAAR risk
and that they document the fact that this advice was given,” he said.

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Canada KPMG Case a Wake-Up Call for Tax Advisers

James Munson, Correspondent, Bloomberg Tax

KPMG Canada didn’t respond to requests for comment on the decision.

‘Wild West’ of Compliance

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