2018 QCCQ 3595, 2018 QCCQ 3595

Michaelson c. RBC Dominion Securities Inc. 2018 QCCQ 3595 COURT OF QUEBEC Small Claims Division CANADA PROVINCE OF QUEBEC DISTRICT OF montreal Civil Division No: 500-32-153753-167 DATE: April 11, 2018 ______________________________________________________________________ BY THE HONORABLE Catherine pilon, J.C.Q. ______________________________________________________________________ Benjamin Michaelson Plaintiff v. R.B.C. Dominion Securities inc.

Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] Benjamin Michaelson claims $ 15 000 from RBC Dominion Securities Inc. (“RBC DS”) further to the sale of non-registered mutual funds which triggered taxable income and taxes of $ 33 625.38. He blames RBC DS for having failed to advise him of the tax implications of the sale. Mr. Michaelson has reduced his claim to $ 15 000 to be in a position to act before the Small Claims Division of this Court. [ 2 ] RBC DS contests the claim. It argues that Mr.

Michaelson was a seasoned investor who was aware, or should been aware, that the transaction on his account would trigger a capital gain and, as a result, taxable income. RBC DS further argues that regardless of any negligence, Mr. Michaelson has not suffered any loss given that he would have had to pay taxes on the capital gains resulting from the transaction at some point or another. Questions at Issue A. Did RBC DS have the duty to advise Mr. Michaelson of the tax implications of his transaction? B. Did Mr. Michaelson suffer any prejudice from the failure to advise him of the tax implications ?

Context [ 3 ] Mr. Michaelson, semi-retired from his truck repair business, was a client of RBC’s banking and investment services since 1972. In 2005, he transferred his investments to RBC DS. They investments consisted of registered and non-registered mutual funds, in regular and segregated funds. [ 4 ] The RBC DS Know Your Client (“KYC”) forms signed Mr. Michaelson and updated regularly from 2005 to 2014 all mention that he has good investment knowledge. “Good” is defined in the forms as good working knowledge of the markets and experience with various types of investments.

This definition is consistent over the years. [ 5 ] The 2014 KYC form indicates an estimated total net worth of $ 3,600,000 composed of $ 3,000,000 estimated net liquid assets, including mutual funds, and $ 600,000 estimated net fixed assets. [ 6 ] On November 3, 2015, Mr. Michaelson wrote to Andrew Barkman, his investment advisor at RBC DS, to sell and transfer some of his investments into others. [ 7 ] On November 4, Mr. Barkman responded to Mr. Michaelson advising him that a sale and purchase in a regular investment account, i.e. a non-registered account, would trigger a taxable capital gain.

He further inquired about the state of Mr. Michaelson’s taxable income for 2015, and suggested that it would be advisable to defer taxes by making the change in 2016. Mr. Michaelson never responded directly to this question. [ 8 ] On November 17, 2015, Mr. Michaelson wrote again to Mr. Barkman, this time to enquire about the state of his investments. Mr. Barkman replied with the same questions he had asked on November 4, including the question related to taxes. Mr. Michaelson ignored the question, and rather replied that two of the funds held in his account were not performing to his satisfaction. [ 9 ] Mr.

Barkman responded the next day indicating that the two funds in question were segregated since they included capital and income guarantees unavailable on regular mutual funds. He recommended “switching” the funds to the same family of segregated funds

to preserve their guarantees. Mr. Michaelson authorized this transaction on November 19, 2015. [ 10 ] The transfer of the two funds required a sale and purchase of new funds. This sale generated a capital gain of $ 133,926.02 which formed part of Mr. Michaelson’s taxable income for 2015, and generated federal and provincial taxes totalling $ 33,625.38. These taxes were paid by Mr. Michaelson in their entirety to both tax authorities in April 2016. [ 11 ] Mr. Michaelson testified at the hearing that he was aware that selling non-registered investments creates taxable capital gains.

He thought, however, that the disputed transaction was only a “switch” and would not result in taxable income. Had he been made aware of the tax impact, he would not have authorized the transaction. He also admitted at the hearing that the new funds purchased on his behalf by Mr. Barkman are performing better than the ones which were sold, but he could not indicate how this translates into specific amounts. Analysis A. Did RBC DS have the duty to advise Mr.

Michaelson of the tax implications of his transaction? [ 12 ] Financial institutions have a duty to properly inform their clients both at the outset of the contractual relationship, but also as the relationship continues and facts that are relevant to their client unfold. This duty to inform is ongoing. [ 13 ] Further to the duty to inform, financial institutions can have a duty to advise if they have also agreed to provide advice to their clients. In such a case, the advice must be diligent and competent. [ 14 ] RBC DS did not provide solely banking services to Mr. Michaelson, it also provided investment advice.

The question is whether this investment advice also included or required tax advice. [ 15 ] The Court considers that RBC DS did not have a duty to provide tax advice to Mr. Michaelson in respect of the proposed transaction for the following reasons. [ 16 ] A transfer of a mutual fund into another fund necessarily implies a sale and purchase. The sale of a non-registered fund can trigger a capital gain and therefore taxable income. This does not constitute a complex tax principle. [ 17 ] Additionally, Mr. Michaelson knew, or should have known, that there were potential tax impacts with the transaction.

He was an experienced businessman and investor, and by his own admission, he knew that when a non-registered fund is sold, a capital gain is a possibility. His belief that a “switch” does not include a sale and purchase is not credible, particularly given his extensive investment experience. [ 18 ] In any event, even if RBC DS had a duty to advise Mr. Michaelson of the tax implications of his transaction, the Court concludes that it did. On both November 4 and 17, 2015, contemporaneously to the disputed transfer, Mr. Barkman advised Mr.

Michaelson that other contemplated transactions could affect his taxable income. Mr. Barkman was entitled to believe that Mr. Michaelson had sufficient information to make an enlightened decision with the awareness that the transaction could lead to an obligation to pay taxes. [ 19 ] The Court finds that RBC DS, or its employee Mr. Barkman, has not committed any fault that resulted in the damages claimed by Mr. Michaelson. The answer to this question suffices to decide the outcome of this case. The Court will nonetheless address the other question at issue. B. Did Mr.

Michaelson suffer any prejudice from the failure to advise him of these tax implications? [ 20 ] Contractual, or extra-contractual, civil liability requires the plaintiff to demonstrate that the defendant has committed a fault, that he has suffered a prejudice and that there is a causal link between the two. [ 21 ]

Article 1611 of the Civil Code of Quebec defines how prejudice can be compensated: 1611 . The damages due to the creditor compensate for the amount of the loss he has sustained and the profit of which he has been deprived . Future injury which is certain and assessable is taken into account in awarding damages. (Emphasis from the Court) [ 22 ] Mr. Michaelson had the onus to prove that by selling his funds and paying taxes, he suffered a greater loss than if he had kept them. He did not present any such evidence.

Moreover, by his own admission, his new funds are performing satisfactorily, and it may be that this performance outweighs the amount paid in taxes following the sale of the other funds. The Court therefore cannot determine whether Mr. Michaelson suffered any loss from the payment of the taxes he claims against RBC DS. [ 23 ] In any event, Mr. Michaelson would eventually have had to pay taxes when he sold his funds. Determining the loss would require calculating the taxable income at the time of this sale.

This exercise is highly speculative and hypothetical which is why our courts usually do not consider taxes an actionable prejudice [1] . FOR THESE REASONS, THE COURT : DISMISSES the Application of the Plaintiff Benjamin Michaelson against the Defendant RBC Dominion Securities Inc.; THE WHOLE without costs.

__________________________________ CATHERINE PILON, j.c.q. Date of hearing: December 11, 2017