Referring Clients to Other Professionals

Tax and estate-planning practitioners commonly receive requests from clients for referrals to other professionals—bankers, lawyers, accountants, investment professionals, and the like. Most practitioners readily comply with these requests as another form of client service, but the SCC's decision in Salomon v. Matte-Thompson (2019 SCC 14) shows that referrals involve a professional liability risk—at least where commonsense boundaries on such referrals are not observed.

Mr. Salomon, a senior lawyer, practised in the areas of estate and succession planning. Mr. Salomon's client, the plaintiff, wanted to invest in a way that preserved capital. In 2003, Mr. Salomon introduced the plaintiff to his personal financial adviser, Mr. Papadopoulos, who focused on offshore investments, on the basis that one such offshore investment was "an excellent vehicle wherever security of capital is important." The plaintiff ultimately invested millions of dollars in various investments offered by Mr. Papadopoulos.

Mr. Salomon repeatedly represented to the client that the investments were safe and, at times, appeared to vouch for the investments. Mr. Salomon also received payments from Mr. Papadopoulos, who described those payments in one e-mail as "commissions." Following the 2007 publication of an article critical of Mr. Papadopoulos's investment vehicles, the plaintiff requested a redemption of all such investments. Unfortunately, it was revealed that Mr. Papadopoulos was running a Ponzi scheme (that is, money was simply being transferred among clients, without any real investment income), and the plaintiff incurred substantial losses.

The SCC found Mr. Salomon to be negligent and responsible to his client for the damages incurred. Does that mean practitioners should worry about making referrals? The facts in Salomon show that this was not a mere referral; there was an endorsement of the particular investments, and Mr. Salomon entered into a conflict of interest by taking a payment in any form from Mr. Papadopoulos. Codes of professional conduct governing lawyers may require a declaration of conflict of interest and independent legal advice when lawyers recommend an investment. That responsibility is undoubtedly heightened when the lawyer has a pecuniary interest in the investment, such as receipt of a commission.

The SCC expressed the following principle for professional liability in referrals:

Although lawyers do not guarantee the services rendered by professionals or advisors to whom they refer their clients, they must nevertheless act competently, prudently and diligently in making such referrals, which must be based on reasonable knowledge of the professionals or advisors in question. . . . [L]awyers can refer their clients to other professionals or advisors so long as they discharge their professional obligations in so doing.

The Salomon decision is a useful supplement to the cases pertaining to tax practitioner liability, which includes the following areas: negligently providing erroneous procedural advice on real estate tax appeals (Glivar v. Noble (1985), 8 OAC 60 (CA)); negligently setting up a non-interest-bearing shareholder loan, which created a tax liability pursuant to subsection 15(2) (285614 Alberta Ltd. v. Burnet, Duckworth & Palmer, 1993 CanLII 7020 (ABQB)); and not structuring a sale transaction to use the capital gains exemption (Silver v. Morris, 1995 CanLII 4346 (NSCA)). The first two cases successfully established liability in negligence, but the last case did not.

Graham Purse
MLT Aikins LLP, Regina

Canadian Tax Focus
Volume 9, Number 2, May 2019
©2019, Canadian Tax Foundation