Docket: CACV1979 Lynn Quinney, William Kidd, Brian Kidd, Patrick Kidd, Wayne Baker v. Peggy Baker, 2012 SKCA 53

THE COURT OF APPEAL FOR SASKATCHEWAN Citation: 2012 SKCA 53 Date: 20120508 Between: Docket: CACV1979 Lynn Quinney, William Kidd, Brian Kidd, Patrick Kidd, Wayne Baker and Peggy Baker Appellants (Plaintiffs) - and - Robert Orr, William Hill, Douglas McKillop, Kelly Lutz, Douglas Frondall, David Prost, Orr & Company Chartered Accountants, Gee 5 Investments Inc., Raebert Holdings Inc., Debrenlar Holdings Ltd., Caylie Holdings Ltd., Mei Ling Investments Inc. and Orr & Company Management Consultants Respondents (Defendants) Coram: Klebuc C.J.S., Lane and Richards JJ.A. Counsel:

Beaty F. Beaubier and Janet L. Stevens for the Appellants Shannon L. Metivier and Sheila E. Caston for the Respondents Appeal: From: 2010 SKQB 228 Heard: October 28, 2011 Disposition: Appeal dismissed Written Reasons: May 8, 2012 By: The Honourable Mr. Justice Richards In Concurrence: The Honourable Chief Justice Klebuc The Honourable Mr. Justice Lane Richards J.A. I. Introduction [ 1 ] The appellants started a business venture in Romania.

The respondent, Robert Orr (“Orr”), provided them with tax planning advice. [ 2 ] The venture did not prosper and the appellants filed their 1996 and 1997 income tax returns on the basis that they were entitled to apply the venture’s business losses against their personal incomes. The Canada Revenue Agency (“CRA”) disagreed and disallowed their attempt to deduct the losses. The reassessment and associated interest penalties left the appellants with hefty bills owing to CRA. As a result, they sued Orr and his partners.

They alleged various causes of action including negligence, breach of contract and breach of fiduciary duty. [ 3 ] The trial judge rejected key aspects of the appellants’ testimony. In the end, she found they had not proven the heart of their case and dismissed all of their claims except for the one grounded in breach of fiduciary duty. She awarded them nominal damages of $1,000. [ 4 ] The appellants allege various mistakes on the part of the trial judge. Their main arguments raise questions about: (

a) whether Orr should have recommended a different business structure in 1997, (

b) the application of Romanian law, (

c) agency relationships as tax planning devices, (

d) the doctrine of volenti non fit injuria , (

e) the “at risk” taxation rules for partnerships and, (

f) whether Orr negligently failed to follow through on a 1998 decision to change the business structure of the venture. II. Background A. Some Tax Concepts [ 5 ] Given that this case is grounded in issues relating to the appellants’ income tax liability, it is useful to begin by confirming some of the key taxation concepts relevant here, as they were explained by the experts who testified at the trial: (

a) In calculating tax liability, Canadian resident individuals are required to include all of their income from all sources, domestic or international. (

b) The taxpayer is then entitled to deduct any losses incurred, domestic or international, to arrive at a taxable income figure. (

c) A partnership is a “flow-through entity.” Partnerships themselves are not taxed. Rather, they calculate their income and allocate it to each of the partners. The partners include their share of the income (or loss) in their individual tax calculations. This applies to both domestic and foreign income (or losses).

(

d) If business is conducted through an agent, the agent is effectively ignored for taxation purposes. Income (or losses) are attributed to the principal. (

e) Non-capital losses, at the time relevant to this appeal, could be carried back three years and forward seven years and be set off against income from any source. (

f) A capital loss can be carried back three years and forward indefinitely. But, a capital loss is not as valuable to a taxpayer as a non- capital loss: (

i) it can only be deducted against capital gains, and (ii) only a portion of it (presently 50 percent) is deductible. B. The Facts [ 6 ] The trial took three weeks. In her reasons for decision, the trial judge reviewed the evidence in some detail. (See: 2010 SKQB 228 ) I do not intend to plow the same ground here. Nonetheless, it is necessary to broadly sketch the main features of the record so as to set the stage for an assessment of the appellants’ arguments. [ 7 ] The appellants William (“Bill”), Brian and Patrick Kidd farm in the Macklin area. [ 8 ] The appellant Lynn Quinney farms in the Kindersley area.

His wife, Maureen, is a sister of the Kidd brothers. Lynn and the Kidd brothers own a John Deere dealership in Unity. [ 9 ] Lynn and Maureen Quinney have two children: a son, Stacey and a daughter, Jodi. Jodi is married to Brett O’Meara. [ 10 ] Wayne and Peggy Baker’s names appear in the style of cause. However, they discontinued their actions before the trial. [ 11 ] In order to avoid confusion, in these reasons I will refer to the appellants and their family members by their first names. [ 12 ] The respondent Orr was the Quinneys’ long-time accountant.

The other respondents were Orr’s partners. [ 13 ] In the summer of 1996, Brett told Lynn, his father-in-law, about a potential business opportunity in Romania. It concerned acting as a distributor of fast-moving consumer goods (soaps, etc.). [ 14 ] Lynn, Bill, Brett and Stacey flew to Romania and spent about two weeks investigating the venture. While there, they met with Unilever and other suppliers, a lawyer with a Romanian law firm and accountants. They decided to proceed with the venture and moved ahead with leasing a warehouse, hiring personnel and the like.

In due course, they established FRD, a Romanian corporation. [ 15 ] Lynn testified that he met with Orr prior to going to Romania. He said he thought a partnership consisting of himself and the three Kidd brothers had been established. Bill’s evidence was to the same general effect. He was emphatic that the appellants had operated as a partnership throughout the life of the venture.

As will be seen, the trial judge ultimately refused to accept their evidence. [ 16 ] In late 1996, Orr proposed a somewhat elaborate business structure for the venture involving a Canadian corporation, KQ International Ltd. (owned by the appellants), and various offshore companies. FRD was to be owned by a Cayman corporation. [ 17 ] At about the same time, the appellants were encountering difficulty in obtaining adequate financing for the venture. As a result, Orr put the implementation of the proposed corporate structure on hold. [ 18 ] Stacey had previously established a Cayman company called Q Corporation.

Orr suggested to the appellants that it could be made the shareholder of FRD. Q Corporation was 100 percent owned by Wolverine Trust, a Cayman Islands trust owned by Stacey. All of this moved forward and, by the end of December of 1996, FRD was incorporated as a Romanian corporation, with its shares owned by

Q Corporation. [ 19 ] In both their 1996 and 1997 tax returns, the appellants applied the business losses from the venture against their other income. They did so on the basis that they had operated as a partnership. [ 20 ] CRA conducted an audit. It disallowed the deductions because there was not sufficient evidence to confirm the business was initially formed and operated as a partnership, whether with FRD as its agent or otherwise.

CRA assessed additional taxes and imposed interest penalties. [ 21 ] The appellants then launched their lawsuit claiming, most centrally, that Orr had been negligent in providing them with tax planning services. C. The Trial Decision [ 22 ] The trial judge concluded that Orr had not acted negligently by setting up the appellants’ venture as a corporate structure rather than as a partnership with FRD as its agent. Her analysis in this regard had two aspects. First, she rejected the testimony of Bill and Lynn to the effect that a decision had been made at the outset to operate as a partnership.

Second, the judge found the appellants had expected to make significant profits and that, from a tax planning perspective, this meant it was reasonable and appropriate for Orr to have proposed a corporate structure. As a result of both of these conclusions, the trial judge dismissed the claim that Orr had been negligent in failing to recommend and implement a partnership arrangement with FRD as the partnership’s agent. [ 23 ] The trial judge then went on to examine the corporate structure actually put in place by Orr.

In this regard, she agreed with the appellants that Orr had overstepped his abilities and his qualifications by preparing legal documents and, moreover, had simply not understood the tax consequences of what he had done. Nonetheless, although the overall structure implemented by Orr clearly had been flawed, the trial judge found it had not led to the reassessment of the appellants’ tax returns or the damages they were claiming. Notwithstanding the problems with what Orr had done, CRA had allowed the appellants to claim the capital losses incurred by the venture.

This was all they would have been entitled to claim by or through a properly designed corporate arrangement. [ 24 ] Next, the trial judge dealt with the allegation that Orr had negligently prepared the appellants’ 1996 and 1997 tax returns by claiming the business losses later disallowed by CRA. Simply put, she rejected the testimony of Lynn and Bill on this point. Instead, she accepted Orr’s evidence to the effect he had explained the risks of claiming the Romanian losses as business losses and that the appellants had assumed the risk of being reassessed by CRA.

She concluded the appellants had known the business structure they were operating under, had known there was no partnership in place and had been advised of the risks involved in proceeding as they did. [ 25 ] The trial judge also dealt with several less significant points. First, she examined an argument to the effect that Orr had breached the Rules of Professional Conduct of the Institute of Chartered Accountants by advising CRA auditors, when he knew differently, that a partnership among the appellants had existed since 1996.

The judge accepted the merits of this argument but concluded a breach of professional conduct by Orr could not be the basis of an action in negligence. Second, the trial judge dismissed the appellants’ claims of breach of contract because those claims stemmed from the same factual allegations she had rejected with respect to their negligence claim.

Third, the trial judge found the ultimate cause of delay in preparing a partnership agreement to have been the result of the appellants’ tardiness in providing Orr with necessary information. (This issue arose because, in 1998, Orr had retained a lawyer with a view to having documents prepared to reflect the positions the appellants had taken on their tax returns.) [ 26 ] Finally, the trial judge considered the claim that Orr had threatened Lynn in 2000 by saying he would cause problems for Lynn with the CRA audit. The particulars of this incident are not material to this appeal.

Suffice it to say that the judge found the appellants had failed to testify fully and honestly on the point. Thus, although she concluded Orr had breached his duty, she awarded the appellants only nominal damages in the amount of $1,000. III. Analysis [ 27 ] In this Court, the appellants are no longer advancing a claim with respect to the 1996 taxation year. Rather, they contend the trial judge made a number of errors in relation to assessing the liability of Orr and his partners with respect to the 1997 and 1998 taxation years. Their submissions raise the following issues: (

a) Did the trial judge err by failing to find Orr to have been negligent because he did not recommend a change in ownership structure prior to June of 1997?

(

b) Did the trial judge err by determining the content of Romanian law in the absence of expert evidence? (

c) Did the trial judge err by ignoring evidence that, notwithstanding the requirements of Romanian law, the appellants could have used an agency relationship with FRD to claim the venture’s losses as business losses on their individual tax returns? (

d) Did the trial judge err in applying the doctrine of volenti non fit injuria in connection with the filing of the appellants’ tax returns? (

e) Did the trial judge err in failing to find negligence in relation to Orr’s understanding or handling of the “at risk” rules? (

f) Did the trial judge err by failing to find that Orr was negligent because, after deciding to change the structure of the venture in 1998, he did not properly follow through on his decision? [ 28 ] I will deal with each of these issues in turn. A. The Failure to Change the Business Structure [ 29 ] The appellants’ fundamental position at trial was that the Romanian venture had operated from the outset as a partnership with FRD as their agent. On this factual foundation, they argued that Orr had acted negligently in failing to document the arrangement in a way satisfactory to CRA.

All of this is reflected in their Amended Statement of Claim: 12. In or around August of 1996, the Plaintiffs formed a partnership. The partnership was formed for the purpose of carrying on a business respecting the distribution of goods in Romania (the “Venture”). … 15. The Defendants advised the Plaintiffs to carry on the Venture through the following Business Structure: (

a) the establishment of a Canadian partnership, the partners of which would consist of the Plaintiffs… (

b) the partnership would operate the Venture in Romania through a corporation, namely First Romanian Distribution Ltd. (“FRD”); and (

c) FRD would act as agent for and on behalf of the Plaintiffs’ partnership… 16. The Defendants advised the Plaintiffs that they would prepare all the appropriate documentation… 17. The Plaintiffs at all material times were advised by Orr and believed and understood it to be true that FRD carried on the Venture in Romania as an agent for and on behalf of the Plaintiffs’ partnership. [ 30 ] As recounted above, the trial judge rejected the appellants’ evidence concerning the facts relevant to this argument.

However, the appellants contend the trial judge failed to deal with the related question of whether, in light of the changing profitability picture of the venture in 1997, Orr should have proposed or implemented a different business structure. They submit that, even if Orr acted reasonably at the outset in proposing a corporate structure for their business, he should have recommended a different arrangement by June of 1997. [ 31 ] Counsel for Orr says the appellants’ submissions on this point should not be entertained because they were not advanced at trial.

Counsel for the appellants, on the other hand, says the argument was put to the trial judge. All of this leaves this Court in a somewhat awkward position. But, in the end, this controversy is neither here nor there because, in my view, the appellants’ argument cannot succeed. [ 32 ] According to the appellants, two main considerations should have led Orr to recommend changing the ownership structure of the venture: (

a) The individual who had been managing the venture in Romania was fired in February of 1997 and Brett (who apparently had no meaningful business background) took his place. In other words, say the appellants, the quality of management had become suspect and

this made losses more likely. (

b) Financing was a major issue. The Bank of Montreal turned down the appellants’ financing request in late 1996. They then turned to RBC but received less support from RBC than they had sought. Efforts to attract investment funds from Blair Richardson came to nothing in May of 1997. In the appellants’ submission, risks were increasing and, without proper financing, there could be no profits.

In their view, this meant the underlying basis for expecting profits no longer held water. [ 33 ] The question, therefore, is whether Orr acted negligently in 1997 when he did not change, or recommend changing, the business structure to one where the appellants would have been in an agency relationship with FRD. More specifically, the question is whether the trial judge erred by failing to make such a finding. [ 34 ] In examining this issue, it is important to underline a basic point. FRD was on the scene in Romania.

Given this, and according to the experts who testified at the trial, a regular corporate structure would have been appropriate if the venture had been expected to grow and generate profits. This is because a corporate structure allows greater flexibility and tax savings. On the other hand, an agency-type relationship, with FRD acting as the agent for a partnership or for individual appellants, would have been appropriate if extensive losses had been anticipated.

This is because, in an agency-type relationship, losses can be applied against individual investors’ other income and thereby used to reduce their tax burdens. Here, the trial judge found as a fact that the appellants expected to make a considerable profit and to do so quickly.

As a result, she concluded Orr had acted reasonably in opting for a corporate structure with no agency relationship between FRD and the appellants. [ 35 ] With this starting point in mind, several considerations indicate the trial judge did not err by failing to find that Orr should have shifted gears and recommended a change of business structure by June of 1997. [ 36 ] First, and most importantly, there is an absence of expert evidence with respect to the advisability of changing business structures. Both Mr. Stack and Ms.

Webb indicated that it was possible , from a Canadian tax perspective, to change the structure of the business on a go-forward basis. However, the appellants did not adduce any evidence to the effect that a reasonable tax advisor should have recommended a change in the structure of the venture by June of 1997. [ 37 ] Second, the record does not bear out the appellants’ submission that, by June of 1997, it was “abundantly clear” to Orr that the venture would continue to incur losses. The interim financial statements and projections prepared in May of 1997 by Mr.

Koch showed a loss of $98,892 in the first four months of operations but estimated a profit increasing month to month in the latter part of the year. The full year profit for 1997 was projected to be $717,670 ($444,955 after tax). There might have been some concerns in early 1997, and perhaps there were storm clouds brewing, but the situation does not appear to have been nearly as clear cut as the appellants suggest. [ 38 ] Third, there is nothing in the facts as found by the trial judge to suggest the profitability of the venture would be short-term only.

Indeed, the appellants themselves did not testify that, at some point in time, they came to believe the venture could not or would not turn a profit. [ 39 ] Fourth, changing the legal structure of a business is not as simple as flipping a switch. For example, the expert Ms. Webb testified as follows: Certainly that structure could be changed.

You would have to go through the analysis from a tax perspective to see what the implications are of the change and you’d also have to go through what the long-term or the short-term plan is, to ensure that there are few risks that the losses would be deductible on a go-forward basis.

Clearly, any losses incurred by the corporation to that date of the change would be deductible, and to ensure that you are going to get the deduction for Canadian tax purposes, you would need to show that there is basically subject to the general rules, the purpose of earning income, et cetera, et cetera, and that was your main purpose. [ 40 ] Fifth, there was no evidence before the trial judge as to the Romanian law consequences of putting an agency relationship in place. This point is significant because Ms.

Webb identified this as an issue that would have to be considered and understood by a competent Canadian tax advisor before a call could be made as to whether such a change in structure was advisable: … The implications of putting in an agency relationship would basically change the foundation of the structure, so from a Canadian tax perspective you would be looking at having the income and expenses earning directly by the Canadians and therefore subject to tax in Canada at the applicable Canadian rate.

The transition to the corporate structure would have to be analyzed in a number of ways: (1) is to look at the Romanian law, and I would have to get legal advice from Romania to ascertain whether the principles of beneficial ownership would also be recognized in Romania. Given that Romania is not a common-law country there--it would be dangerous to assume that they would have the same concepts in law.

If that were the case then it is quite feasible that you could have the company still taxed in Romania, and that the Canadian residents could be taxed in Canada, but because the tax would be imposed on a separate entity there would be very little opportunity for the benefits of a tax credit on that income. [1497]

[ 41 ] Accordingly, in light of all of these considerations, I conclude the appellants have not established that the trial judge erred in failing to find Orr was negligent because he did not recommend a change of business structure in the first part of 1997. B. Romanian Law [ 42 ] Subsection 4(3) of The Evidence Act , S.S. 2006, c. E-11.2 says that, unless otherwise agreed, a judge shall determine the law of a jurisdiction outside of Canada only by way of the evidence of a qualified expert:

(3) In determining a law of a jurisdiction outside of Canada, a judge shall consider only the evidence adduced by qualified expert witnesses, whether legal practitioners or not, except if the parties agree otherwise. [ 43 ] The appellants contend the trial judge erred in law when she said, at para. 63 of her decision, that “[t]he evidence is clear that Romanian law required the foreign entity that owned FRD be a corporation.” They submit this offended s. 4(3) because no expert in Romanian law had testified at the trial. [ 44 ] In order to address this argument, it is useful to consider the whole of para. 63 of the trial judge’s reasons.

It reads as follows: [63] The evidence is clear that Romanian law required the foreign entity that owned FRD be a corporation. Orr obtained this information from Romanian lawyers, and he was entitled to rely upon it. The evidence is also clear that Orr obtained from, and relied upon, advice from lawyers and accountants advising on Romanian tax law.

While professionals such as Jonathan Woodbridge and Ron Barden from the Price Waterhouse accounting office in Bucharest were initially retained by the plaintiffs, or Stacey or Brett on their behalf, this was advice that Orr considered in his decision to implement a corporate structure, not a partnership for the plaintiffs. The experts agree that this is a reasonable course of conduct for a tax advisor. [ 45 ] As is apparent, when the sentence impugned by the appellants is seen in its full context, it becomes clear that the trial judge was not purporting to apply Romanian law to the issues before her.

Rather, she was dealing with an allegation of professional negligence and, in that regard, she was considering the information provided to Orr by foreign consultants. [ 46 ] This is significant because both of the experts, Mr. Stack and Ms. Webb, testified that a competent tax advisor making recommendations about an international tax plan is entitled to rely on information provided by foreign consultants. The trial judge found that Orr had acted reasonably in relying on such information. In other words, the real issue addressed by the judge was not the objectively true or correct content of Romanian law.

It was the propriety of Orr acting on the advice of consultants about the impact of such law. [ 47 ] In my view, this aspect of the appellants’ submissions cannot succeed. The trial judge did not offend s. 4(3) of The Evidence Act . C. Ignoring the Role of Agency Relationships [ 48 ] The appellants further contend that the trial judge ignored or overlooked evidence concerning the importance of agency relationships in tax planning.

This oversight is said to be important because, notwithstanding any requirement of Romanian law as to the ownership of FRD, an appropriately documented agency relationship would have allowed the losses of the venture to have been claimed as business losses on the appellants’ individual tax returns. The argument, as I understand it, is that the trial judge did not appreciate this basic point of tax law. [ 49 ] In this regard, the appellants refer specifically to the evidence of Mr. Stack.

He said there was no reason why there could not be an agency agreement between a Romanian corporation like FRD and individual investors like the appellants so that the corporation could act as the agent of the individual investors. If this was done, any profit or loss would be a profit or loss in the hands of the investors. Mr. Stack said this same result would be achieved if the individual investors were working together through the vehicle of a partnership or joint venture. Ms.

Webb, the other expert, offered essentially the same opinion. [ 50 ] I am not persuaded that the trial judge made any error in relation to this point. She was clearly aware of the appellants’ position as to the significance of an agency relationship. For example, at para. 50 of her decision, she said this: [50] The issue is whether Orr was negligent, or alternatively, in breach of his contract with the plaintiffs, by setting up the venture as a corporate structure rather than having the plaintiffs operate the venture through a partnership, with FRD as its agent.

It was through a partnership that the plaintiffs could allocate the business losses of this venture against their Canadian income to obtain the most beneficial tax treatment from the CRA.

[emphasis added] [51] Moreover, as is obvious, an agency relationship with FRD and a written agency agreement would have been significant only if theappellants had in fact organized the business among themselves on the basis of a partnership. But, as the trial judge found, this had notbeen the case. The venture had been expected to be very profitable and, as a result, the trial judge concluded Orr had acted reasonably instructuring the appellants’ affairs using a regular-type corporate model.

In other words, she effectively found that it would not have beenappropriate for Orr to have had FRD act as the appellants’ agent. [52] In the end, the appellants cannot succeed on the basis of an argument that the trial judge did not take into account the tax planningpotential of agency relationships. D. Volenti Non Fit Injuria [53] The trial judge rejected the appellants’ account of what had happened with respect to the filing of their 1996 and 1997 tax returnsand accepted Orr’s version of events.

Put somewhat differently, she concluded the appellants knew that no partnership agreement was inplace and understood the consequent risks of claiming business losses from the venture against their personal incomes. She summarizedher assessment of the situation with a reference to the defence of volenti non fit injuria: [117] ... the plaintiffs knew the risks of claiming business losses against their personal income taxes in 1997, as well as 1996. Theyknew there was no partnership in place. They were astute businessmen who resolved matters amongst themselves, without asking foranyone’s advice.

Their denial that Orr did not advise them of the risks incurred is not credible. [118] In short, I find that the defendants are successful in raising a defence of volenti non fit injuria. I find that the plaintiffsappreciated and assumed the risks of the filing position Orr took on their behalf with CRA on both their 1996 and 1997 income taxreturns. Any damages arising from CRA reassessing the plaintiffs’ 1996 and 1997 income tax return [sic] are barred by this defence. [54] The appellants say the trial judge erred by relying on the volenti non fit injuria concept. Relying on Crocker v.

SundanceNorthwest Resorts Ltd., (SCC), [1988] 1 S.C.R. 1186 at p. 1202, they submit the volenti defence applies only where aplaintiff has assumed “both the physical and the legal risk involved in the activity.” They then go on to say they accepted only thephysical risk of the filing position Orr took on their behalf, i.e. the risk of a CRA audit and reassessment.

They say they did not waivetheir right of action in the event they were injured by an audit and reassessment. [55] I have doubts about whether it is useful or appropriate to attempt to fit the facts of this appeal into the framework of a caseinvolving the risks associated with riding rubber tubes down a mountain. But, more fundamentally, I believe a discussion of, or areliance on, the volenti doctrine serves only to complicate the relatively straightforward situation presented here. This is because volentioperates as a defence to claims in tort, including claims in negligence.

As a defence, it engages only when a plaintiff proves negligenceon the part of a defendant. If negligence is established, the defendant can then rely on the volenti concept and attempt to prove that theplaintiff assumed or consented to the relevant risk. [56] In the circumstances at issue here, I am unable to see the negligence against which volenti non fit injuria could operate as adefence. In the applicable part of her judgment, the trial judge was addressing Orr’s filing of the appellants’ 1996 and 1997 tax returns.

She found as a fact that Orr explained the risks of filing those returns on the premise that the venture’s business losses could be set offagainst the appellants’ other income. She also found as a fact that the appellants understood those risks. In other words, as I read herdecision, she effectively held that Orr had not been negligent with respect to the filing of the 1996 and 1997 returns. Rather, he hadadequately explained the risks to the appellants and then acted on their informed instructions. [57] As a result, I see the trial judge’s reference to volenti non fit injuria as something of a red herring.

The doctrine was simply notnecessary to her conclusion with respect to Orr’s possible liability in relation to the filing of the 1996 and 1997 returns. E. The “At Risk” Rules [58] The “at risk” rules found in the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 apply to limited, but not general, partnerships. Mr.Stack, one of the experts, explained the principles. He said a limited partnership is a flow-through mechanism in the same way as is a

general partnership. However, in a limited partnership, the loss claimed by a partner cannot exceed the amount of capital he or she has contributed to the partnership. [ 59 ] Against this background, the appellants point to various places in the evidence where Orr referred to the at risk rules as explaining his firm’s failure to claim business losses for the Romanian venture in the appellants’ 1998 tax returns. The appellants contend, as I understand it, that this was negligent on the part of Orr and his firm. [ 60 ] The transcripts do in fact reveal that Orr did not understand the at risk rules.

Nonetheless, it is not at all clear where this takes the appellants. A misapprehension of this sort would have been of some consequence if the appellants had been organized as a general partnership. In that event, Orr and his firm would have failed to deduct allowable business losses from the appellants’ other income. But, the appellants were not organized as a partnership. The trial judge found that no partnership structure had been either recommended or implemented. [ 61 ] In the result, Orr’s misunderstanding of the at risk rules was of no practical impact.

The appellants’ argument on this point does not advance their cause. F. Failure to Implement Changes in 1998 [ 62 ] In his oral submissions, counsel for the appellants also developed a argument which I understood to be to the effect that Orr had acted negligently in 1998 when he undertook to change the business structure of the Romanian venture but then failed to follow through with the necessary implementation.

The argument began with the suggestion that, in late 1997 or early 1998, Orr had learned of losses incurred by the venture and, as a result, had decided to alter its structure to that of a partnership with FRD acting as the agent of the partnership. The appellants say Orr then contacted Alain Gaucher, a tax lawyer in Saskatoon, but never followed up properly or instructed Mr. Gaucher to prepare the agency agreement. [ 63 ] For her part, Orr’s counsel vigorously opposed the appellants’ efforts to move the appeal in this direction.

She said the appellants had never contended there had been a separate act of negligence of this sort. In her view, the appellants were advancing a wholly new line of argument. [ 64 ] I have considerable sympathy for the position advanced on behalf of Mr. Orr. As indicated above, the appellants’ position at trial was that a partnership-agency structure for the venture had been in place from the outset. Lynn and Bill both stressed this point in their testimony. At trial, as best I can determine, the appellants pointed to Orr’s dealings with Mr.

Gaucher as being evidence of the fact that a partnership arrangement had in fact existed from the beginning of the venture. They said this organizational structure is what Orr had failed to have properly documented. For example, para. 26 of the appellants’ trial brief reads as follows: 26. If there was a partnership (as the Plaintiffs submit), Orr took far too much time in contacting legal counsel to prepare a partnership agreement. Orr did not seek Alain Gaucher’s assistance until April 1998, about a year and a half after the Venture began.

Even then, Orr was unaware of the need for an agency agreement, even though Mr. Gaucher invited instruction in this regard in his letter of July 23, 1999… [ 65 ] At the trial, the appellants did put their alleged damages for 1998 in issue. I do not question this. Paragraph 20 of the Amended Statement of Claim illustrates the point. However, I do not see anything to suggest the appellants argued that, in late 1997 or early 1998, Orr undertook to change the structure of the venture but then failed to do so.

Rather, as indicated, they seem to have argued that Orr had failed to adequately document the original structure, as they saw it. [ 66 ] I note, as well, that neither the Amended Statement of Claim nor the Notice of Appeal makes reference to the idea that Orr was negligent because he decided to change the organizational structure of the venture but failed to carry through. [ 67 ] There is at least one other difficulty with the appellants’ argument on this front.

The pages of the transcript to which they refer indicate that Orr became aware of losses in early 1998, considered the possibility of treating FRD as an agent and told the appellants “this would be something that we’d have to look into and do some further research and perhaps consult, you know, a tax lawyer… .” He did not actually say that he had decided the structure of the venture should be changed. [ 68 ] In the result, it would not be appropriate to give effect to this aspect of the appellants’ argument.

IV. Conclusion [ 69 ] I conclude this appeal must be dismissed. The respondents are entitled to costs in the usual way. DATED at the City of Regina, in the Province of Saskatchewan, this 8 th day of May, A.D. 2012. “Richards J.A.” _____________________ Richards J.A. I concur “Klebuc C.J.S.” _____________________ Klebuc C.J.S. I concur “Lane J.A.” _________________________ Lane J.A.