Immediately prior to the completion of the sale by plaintiff of shares of a private company, the company redeemed a portion of its shares held by the plaintiff thereby giving rise to deemed dividend equal to the estimated safe income of the company (determined after adding back the amount of lease cancellation payments which had been capitalized for accounting purposes but deducted for tax purposes). No Revenue Canada ruling was obtained, as s. 55(2) had been enacted only shortly before the time of the closing. In filing its tax return, the plaintiff reported only a capital gain arising on the disposition of the remaining shares of the company, and did not make an s. 55(5)(f) designation.
The defendants met the standard of the advice that a reasonably competent tax specialists might have given at the time, in advising that safe income should be increased by the amount of the lease cancellation payment, advising that the election procedure under s. 55(5)(f) should not be utilized, and in not advising of the risk that Revenue Canada might require that the safe income of the company be pro-rated amongst all its shares rather than being fully allocated to the shares which were redeemed. In addition, the settlement which the plaintiff reached with Revenue Canada (which permitted the total gain on the sale of the shares to be reduced by a pro-rata portion of the safe income of the company) did not result in the plaintiff paying any additional tax given that it was a business necessity that the shares be redeemed, rather than a cash dividend being paid to the plaintiff.