Ethics for CPAs: Professional Ethics CPD for Tax Practitioners

Tax advice is the most common reason CPAs are sued, and every note, docket, and email is discoverable. Three parts covering the Rules of Professional Conduct, negligence and standard of care, will and should opinions, the six CRA challenge types from technical to sham, and what goes wrong in trust engagements.

Michael Cadesky FCPA, FCA, FTIHK, CTA, TEP (Emeritus)

Nancy Yan CPA, CA, TEP

license

3.0h Verifiable CPD

Qualifies as Professional Ethics for CPAs

$150 CAD

Ethics for CPAs: Professional Conduct, Standard of Care, Opinion Levels, GAAR and Sham Challenges, and Trust Engagements

A planning position is filed, the client is reassessed, and the file shows no note of the risk, no record that the client was warned, and an engagement letter with no limitation of liability. Tax advice is the most common reason CPAs are sued, and every note, docket, and email is discoverable.

Whether a CPA is liable is largely settled before the reassessment arrives. Was the work inside the practitioner's expertise, was the opinion level identified and stated, was the risk documented and the client warned, and does the engagement letter limit liability. None of it can be created after a statement of claim is served, and the same file that protects the CPA is a roadmap for CRA.

check_circle Negligence and the standard of care in tax practice. Duty of care, breach, damages, and proximate connection; the reasonably competent tax practitioner measured against the consensus in the tax community; the higher standard for holding out as a specialist; and contributory negligence where the client made the decision.
check_circle Opinion levels: will, should, and balance of probabilities. The confidence each level asserts, the four sources that support a should opinion, the duty to warn where they diverge, and why CPAs give will level opinions without recognizing them as opinions.
check_circle Misrepresentation, gross negligence, culpable conduct, and tax evasion. The conduct standard that reopens a statute barred year, the 50% gross negligence penalty, the penalty assessable against the advisor, and where the burden of proof sits at each level.
check_circle The six CRA challenges. Technical, reasonableness, recharacterization, valuation, legal character, and sham, with the fact patterns that attract each one, including GAAR on a technical position and a note that could never have been repaid.
check_circle Subsection 75(2), section 74.4, and subsection 56(4.1) in trust engagements. Attribution that costs the income splitting benefit and the multiplication of the capital gains exemption, the blocked rollout at the 21 year mark, and the conduct that turns a trust into a sham.
check_circle Engagement letters, privilege, and dealing with a claim. Limitation of liability wording, why CPAs hold no privilege of their own and the agency route that can preserve it, insurance notification under CPA Ontario Regulation 4-4, and what becomes discoverable.

What You'll Learn

Fourteen sections across the three parts of the program, in the order they are delivered: Accountants' Liability, then Measuring Risk in Tax Practice, then Ethics, Trusts and CPAs.

expand_more Rules of Professional Conduct: The Five Fundamental Principles, Rule 205 on False or Misleading Documents, and Rule 206 on Professional Standards

The rules a complaint is actually assessed against, rather than the general idea of them.

Where the rules come from CPA Ontario rules adopted under the bylaws made under the Chartered Accountants Act, with the provincial Code covering both conduct and the discipline process that follows a breach.
Professional behaviour Conduct at all times that maintains the reputation of the profession and its ability to serve the public interest.
Integrity and due care Straightforward, honest and fair dealing, work performed diligently, with adequate training and supervision.
Professional competence Skills kept current with developments in professional standards, in every function the member practises or is relied on for.
Confidentiality No disclosure to a third party without proper cause and specific authority, and no exploitation of the information for the member's own or a third party's advantage.
Objectivity Judgment not compromised by bias, conflict of interest, or the undue influence of others.
Rule 205 No signing of or association with any letter, report, statement, or financial statement the member knows or should know is false or misleading, with a disclaimer of responsibility offering no protection, and the same standard applied to oral representations.
Rule 206.1 Professional services in the practice of public accounting performed in accordance with generally accepted standards of practice.
Rule 206.2 General purpose financial statements presented fairly under GAAP or the other framework required in the circumstances.
Rule 206.3 The duty of a member sitting on an audit committee or board asked to review or approve those statements, carried out with care and diligence enhanced by the member's own skills and knowledge.

expand_more Auditor's Liability and Duty of Care to Third Parties: Privity, the Known Limited Class Test, and Claims Brought Through a Receiver

How the duty to third parties was narrowed, and the two routes that get around the narrowing.

The contract route Third party users historically blocked for want of privity, since the engagement is an agreement between the auditor and the client.
The four elements of negligence A duty of care owed to the plaintiff, a breach of that duty, damage resulting, and a reasonably proximate connection between the breach and the damage.
The indeterminacy concern Judicial reluctance to impose liability in an indeterminate amount, for an indeterminate time, to an indeterminate class.
Negligent misstatement Recovery of pure economic loss allowed where the relationship between the parties is sufficiently proximate.
The known limited class test A duty arises where the accountant knows the results will be relied on, the plaintiff belongs to a known limited class, the statements were prepared primarily for that class, and there was actual reliance, without the accountant needing to know the individual's identity.
The narrowing Duty confined to a known plaintiff or class where the statements were used for the specific purpose for which they were prepared, so audit reports prepared to help shareholders oversee management do not extend to personal investment decisions.
The securities route Secondary market misrepresentation claims that do not require proof of reliance, and the class action exposure for issuers and auditors that follows.
The claim by the company itself An action advanced through a court appointed receiver in bankruptcy rather than by shareholders or creditors, which sidesteps the duty limitation entirely.
The standard applied to the audit A reasonably competent and cautious accountant as the minimum, with circumstances capable of requiring more than the minimum.
Ordinary against gross negligence A narrow class of foreseeable third parties for ordinary negligence, and a broader group where there is gross negligence or fraud.

expand_more Standard of Care in Tax Advice: The Reasonably Competent Tax Practitioner, Holding Out as a Specialist, and Contributory Negligence

A standard set by what the tax community commonly does, which is not the same as what the client later wishes had been done.

The formulation The standard expected of reasonably competent tax specialists at the time the advice was given, judged on the knowledge then available rather than in hindsight.
The comparator A reasonably competent chartered accountant tax practitioner, measured against the general consensus and understanding in the tax community.
Holding out A member who presents as a specialist is held to a higher professional standard in that area of practice.
Where practitioners get caught Dabbling in unfamiliar territory, with international tax, corporate reorganization plans, and US tax as the recurring exposures.
Not the best available plan The duty is a reasonable result that others would commonly adopt, not an exotic higher risk structure a specialist firm might design after the fact.
The complaint that follows A client who later obtains a more aggressive plan elsewhere and argues the CPA should have implemented it.
Contributory negligence Where both the client and the advisor contributed to the loss, liability is apportioned, which is the practical reason the CPA should be the advisor and not the decision maker.
How claims are usually framed The client made the error, and the claim is pleaded as a failure to warn, to give proper guidance, or as incorrect instructions.
Technical error against interpretation An advisor who took a reasonable position on an uncertain rule on which practitioners might disagree, and who notified the client of the risk, may not be negligent.
Rules of Professional Conduct as evidence Compliance with GAAS, GAAP, and the Rules used to establish whether the reasonably prudent standard was met, which is a question of fact.

expand_more Damages and the Recurring Error List: Section 84.1 Strips, Subsection 15(1) Shareholder Loans, QSBC Failures, Section 85 Rollovers, and CDA Overpayments

What the CPA actually pays when a position fails, which is often not the tax.

What must be proved That the loss resulted from the professional negligence, not merely that the position was reassessed.
The heads of damage Additional tax, interest, penalties, and other losses where a planning transaction changed the client's legal status and economic position.
Interest and penalties Generally the advisor's exposure where the client incurred them unwittingly while following the advice.
Additional tax Often not the advisor's exposure where the legislation was uncertain, the client was informed of the risk, and the client is not otherwise unduly disadvantaged.
Timing errors Where the difference is deferral rather than absolute tax, the damage may be limited to the time value of money.
The remuneration illustration Corporate income bonused to nil, a loss the following year with nothing to carry back against, and whether the remuneration strategy was discussed and documented.
The common error list Surplus stripping under section 84.1, taxable benefits, shareholder remuneration and debit shareholder loan balances under subsection 15(1), a capital gains exemption denied on the QSBC share conditions, late payment of a bonus or of withholding tax, and poor post mortem estate planning.
The rest of the list Late filing, section 85 rollovers, overpaying the capital dividend account particularly on goodwill, eligible against ineligible dividend designations, and recommending tax shelters.
The scale of the exposure Tax related matters as the dominant share of both claims and payouts over a fifteen year period.

expand_more Dealing With a Claim: CPA Ontario Regulation 4-4 Insurance, Notifying the Insurer, Discovery, Mediation, and Solicitor-Client Privilege

The sequence once a claim is served, and the steps that void coverage.

Insurance Minimum professional liability coverage required under CPA Ontario Regulation 4-4, with the minimum scaled to the size of the firm.
The first moves Notify the insurer at the earliest signs of trouble, admit nothing, and make notes early while memory is fresh.
What costs coverage Attempting to fix the problem yourself and involving the insurer afterward.
Independent review An outside expert review of the position, arranged through the insurer and counsel rather than informally.
The pleadings A statement of claim from the client, a statement of defence that may carry a counterclaim against the client or a cross claim against another advisor, and then discovery of documents and evidence.
Ontario procedure Mandatory mediation before trial, a pre-trial conference before a judge, and settlement available at any stage, with most matters resolving before trial.
Trial and appeal Credibility assessed, facts determined, law applied, with appeals available on alleged errors of law and difficult on findings of fact, and the whole process running for years.
What is discoverable All records, notes, sketches, diagrams, time dockets, bills, and engagement letters.
Privilege CPAs and accountants hold none of their own; privilege is the client's right and the client may waive it.
The agency route Privilege may be preserved where the accountant acts as agent of the client for the purpose of obtaining legal advice, with the opinion privileged rather than the underlying documents.
Family law and estate files Heightened risk where the client is deceased and intentions can no longer be clarified, and where disappointed beneficiaries, ex-spouses, multiple families, and unequal treatment drive the litigation.

expand_more Negligence Is More Than Being Wrong: Duty of Care, the Reasonable Prudent CPA, and the Opinion Given Without Realizing It

Where the second part of the program starts: what actually has to be established before a CPA is liable.

Why this is the exposure Tax advice is the most common reason CPAs are sued.
The four elements on a tax file A duty of care, a breach of that duty, damages, and damages that flow from the breach.
Where the duty comes from Being entrusted to do the work, without any separate assumption of responsibility being required.
The standard What a reasonable prudent CPA would do, meaning a reasonable result that others in the profession would commonly reach.
Not the exotic result There is no obligation to invent a higher risk plan in the normal course of client service.
Compliance work Expected to be correct.
Planning work Expected to produce the intended result, which is a materially different promise.
The unrecognized opinion CPAs frequently give opinions without documenting them, and often without realizing an opinion has been given at all.

expand_more The Risk Spectrum of Opinions: Will, Should, and Balance of Probabilities

Three levels of confidence, and the standard a signed tax return actually asserts.

The will opinion Taken as around a 90% chance of a successful outcome, and rarely given as a formal opinion.
Why it matters anyway True, correct and complete is the standard for a tax return, so a will level assertion is being made on every filing.
The exposure in that CPAs give will opinions without realizing it.
The should opinion The normal standard for a formal opinion, taken as around 70%, not certain but very likely.
What supports it A plain reading of the Income Tax Act, reliance on case law, reliance on CRA views, and reliance on tax literature.
Convergence and divergence An opinion is far stronger where all four sources align, and there is a duty to warn where they diverge.
Balance of probabilities Taken as just over 50%, the threshold to win in tax litigation, and normally accompanied by a warning of the adverse outcome.
Why an even split loses The taxpayer normally carries the burden of disproving the assessment, so a genuine tie goes to CRA.

expand_more Misrepresentation, Gross Negligence, Culpable Conduct, and Tax Evasion: Statute Barred Years, Burden of Proof, and Penalties

Four escalating conduct standards, each with a different party carrying the burden.

Misrepresentation from carelessness, neglect, or wilful default The standard CRA must meet to open a statute barred year, with the taxpayer carrying the burden of proof.
Conduct rather than correctness A return can be wrong without being careless, and an honest error on a carefully prepared and reviewed return may not reopen the year.
Where it does reopen A position taken with no research on a live income against capital question, combined with an omitted disposition.
Gross negligence The conduct level supporting the 50% penalty, beyond ordinary negligence, involving recklessness or indifference as to whether the position is right or wrong and an absence of a reasoned defence, with the burden on CRA.
Culpable conduct The penalty CRA can assess against the tax advisor who knew or should have known the position was wrong, rarely assessed in practice.
Tax evasion Deliberate deception, concealed information, or false statements, normally requiring intent, and prosecuted criminally with the burden on CRA.
The two standards contrasted Beyond a reasonable doubt in the criminal proceeding against the balance of probabilities in the civil one.
The exposure A 200% penalty and possibly imprisonment of up to five years.
Tax avoidance True facts and a technical position that is not how the Income Tax Act is supposed to operate, not defined as such in the legislation, and usually met with a technical defence.
GAAR Applied as misuse of a provision or abuse of the Act read as a whole, alongside the specific anti-avoidance rules.
The undisclosed foreign asset pattern Unreported foreign corporations and accounts, and how the analysis lands on gross negligence, evasion, or culpable conduct on the advisor depending on what the advisor knew and advised.

expand_more The Six CRA Challenges: Technical, Reasonableness, Recharacterization, Valuation, Legal Character, and Sham

Naming the challenge correctly decides the defence, and three of the six are not about the Income Tax Act at all.

Technical challenge Based on the provisions themselves, an anti-avoidance rule, or GAAR.
What it looks like A bonus denied for not being paid within 180 days, golf club dues, CCA claimed so as to create a rental loss, and a capital gains exemption claimed where the shares were not held for 24 months.
Reasonableness challenge The amount is not reasonable, or was not laid out to earn income.
What it looks like Salary to children set too high, an interest rate on a related party loan above a reasonable rate, and TOSI applying to an amount above the reasonable return.
Recharacterization challenge The amount is something other than what it was reported as, a capital gain that is really income, or a consulting fee that is really employment income.
Valuation challenge The value used is too high or too low.
What it looks like A stock option denied the 50% deduction because the strike price was above fair market value at grant, a property sold to a related person well below market treated as a partial appropriation, and preferred shares issued on an estate freeze at too low a value.
Legal character challenge The arrangement is not legally valid or effective, is void, or did not occur.
What it looks like A trust deed signed months after the date it bears, with the transaction carried out in between so the trust did not exist at the time, and shares issued but never paid for so a dividend on them may be an appropriation.
Sham challenge Legal relationships that do not reflect the true underlying substance, entered into with intent to create a false impression.
What it looks like A note given on a sale into a spousal trust where the trust never had the means to repay it in full and everyone involved knew that, which puts the whole arrangement at risk rather than just the note.

expand_more Minimizing Tax Risk: Engagement Letters, Limitation of Liability Wording, Second Opinions, Client Representations, and the Documentation Dilemma

Twelve measures, and the one that has no clean answer.

Position Do not be overly aggressive, and do what others in the profession do.
Support Back positions with research and document the research at the time, not after a query arrives.
Scope Do not go beyond your expertise, and do not allow client pressure to move the position.
Expectations Do not over-promise and then be forced to deliver, and communicate realistically at the outset.
Identify the risk areas Trusts named specifically, managed with strategic and conservative action and a plan B.
Terms An engagement letter that sets out specific terms and expectations and limits liability.
Verification A second opinion, and a client representation or acknowledgement of the facts relied on.
The limitation of liability clause Sample wording capping liability at a multiple of the professional fees for the engagement and any derivative or subsequent engagement, excluding punitive, exemplary and like damages however caused, and confining reliance to the client alone.
Documenting the departure Recording the reasons where the client departs from the recommendation, and the client's concurrence that the facts are accurate and complete.
The dilemma Documenting the risk protects the CPA and simultaneously builds a roadmap for CRA, across working papers and particularly the tax provision, memos, letters, and emails to the client.
The two imperfect answers Not putting it in writing leaves no evidence the client was notified, and routing it through legal counsel adds cost that is often impractical.

expand_more Risk Evaluation and Adverse Outcomes: Likelihood Against Severity, and Why the Client's Exposure and the CPA's Exposure Are Not the Same

The distinction that changes which positions are worth taking and which distributions are worth making.

The measure The risk of the outcome multiplied by the result of the outcome, rather than either considered on its own.
Tolerable combinations A low risk with a very adverse outcome, and a high risk with a modest outcome.
The combination to refuse High risk paired with a severe outcome.
The distinction usually missed An adverse outcome to the client is a different thing from an adverse outcome to the CPA arising from the advice given.
Where the client bears it A gain on land reassessed from capital to income roughly doubles the client's tax, while the CPA's exposure may be limited to interest.
Where the advice creates the loss A capital dividend paid out on the strength of a gain that is later reassessed, exposing the corporation to Part III tax at 60% or an election to treat the amount as a taxable dividend, possibly eligible if a late designation is accepted.
Why that one is different The client did not need the funds, so the distribution itself created the exposure, and the CPA should have advised caution.
Where the client ends up no worse off A note reassessed as a taxable dividend under section 84.1, leaving the client in the position they would have been in had a dividend simply been taken, with the CPA responsible for interest rather than the tax.
The practical filter Before advising a distribution or an irreversible step, ask what the reassessment costs the client and what it costs the firm.

expand_more The Code of Professional Conduct Applied to Trust Engagements: The Five Principles and the Range of CPA Roles

Where the third part of the program starts: the size of the role determines the size of the problem.

The framework The provincial Code of Professional Conduct, running to nearly 200 pages, covering what a member should and should not do and what happens if they do not.
The five principles applied to trust work Professional behaviour, integrity and due care, objectivity, professional competence, and confidentiality.
The advisory role Recommending an inter vivos trust for tax planning, estate planning, asset protection, family law matters, probate, or other purposes.
The design role Developing the design, including who serves in what role, the terms, and the tax status, reviewing the deed, and explaining the arrangement to the parties.
The compliance role Preparing the trust return and the financial statements, and giving tax planning advice on the trust.
The investment and distribution role Advising on investments, on distributions, and on valuation issues.
The fiduciary role Acting as trustee, acting as advisor to the trustees, and advising beneficiaries.
Why the roles are listed separately A CPA gets trapped in a dispute in proportion to the role taken, so the greater the role, the bigger the problem.

expand_more What Goes Wrong With Trusts: Subsection 75(2), Section 74.4, Subsection 56(4.1), Defective Terms, Unsuitable Trustees, and Litigious Beneficiaries

Five failure categories, each with the mechanism and the consequence set out separately.

Attribution created by the structure Subsection 75(2) and the income attribution rules, triggered by how the trust was set up rather than by anything done later.
What attribution costs The income splitting benefit, the multiplication of the capital gains exemption, and the rollout to beneficiaries, which matters most as the 21 year mark approaches.
The foreign tax consequence No foreign tax credits where there is foreign tax and attribution applies.
The other two provisions Imputation of income under section 74.4, and attribution through an interest free loan under subsection 56(4.1).
Inappropriate trust terms Errors in the deed, or instructions and design that do not match what was intended.
What that produces A class of beneficiaries too limited or too wide, named beneficiaries where a class was needed, a parent who over-freezes, a spouse excluded, and income against capital beneficiary restrictions.
Inappropriate trustees Trustees who are unsuitable, a design that itself creates attribution, and no provision for replacement.
What that produces Trustees who do not act in the way imagined, act in self interest, or do not carry out their duties, with the trust treated as a sham in the extreme case.
Inappropriate action by trustees or advisors Income not made paid or payable at year end, payments that do not follow the income, notes payable left undocumented, no resolutions or records, distributions driven by tax minimization with the financial implications ignored, and investment losses.
Litigious beneficiaries One beneficiary disadvantaged over another, discretion exercised arbitrarily or not in good faith, a spouse contesting on marriage breakdown, missing documentation and records, a beneficiary not kept informed, and a failure to diversify the investments.
Execution failures Settlement property that cannot be shown to have existed at the time of settlement, trustees who do not possess the trust property, fiduciary duties delegated or abandoned to another person who is the true client, and a settlor who never intended to create a trust and simply signed the papers.

expand_more Who Is the Client, Conflicts of Interest, Disclosure, Sham Indicators, and Acting as Trustee

Six questions to work through before taking on or continuing a trust engagement.

Competence The level of knowledge actually held, whether the CPA is qualified to give the advice, whether the advice is really legal advice, what advice was in fact given, and whether it was appropriate.
Who is the client The settlor, the trustees, the trust itself, or the beneficiaries, all or some of them.
The practical reality The CPA very often advises everyone in the structure at once, which is where the conflict originates.
Conflicts of interest Income against capital beneficiaries, one beneficiary against another including a spouse, trustees acting in self interest or failing their fiduciary duties, the trust, and the settlor.
The rule that resolves many of them Trustees act in the best interests of the beneficiaries in carrying out their duties, not in the best interests of the settlor, unless the deed directs otherwise.
Disclosure Who has a right to information, who should provide it, to whom it should be provided, what information, and what state the records are in.
Sham indicators Trust terms ignored, payments to others without support, lack of documentation, round robin trips, arbitrary allocations of income for tax purposes without payment, and no intent to create a trust.
Acting as trustee Respect for the office, duties carried out professionally and competently, good faith, and conflicts of interest.
What compliance with the framework buys Protection against inappropriate actions and errors, against litigation if the arrangement is challenged, and against discipline if a complaint is made.
The summary position Be prudent, professional, and competent, avoid conflicts, stay within your area of expertise, consult where needed, and document what you do.

Learn Directly from Tax Experts

Michael Cadesky

FCPA, FCA, FTIHK, CTA, TEP (Emeritus)

Managing partner at Cadesky Tax, practising since 1980 and a Fellow of CPA Ontario. Past governor of the Canadian Tax Foundation, past chair of STEP Canada and STEP Worldwide, and past chair of the CPA Canada Tax Committee for Small and Medium-Sized Enterprises. Co-author of 11 books on tax subjects.

Nancy Yan

CPA, CA, TEP

Practising in taxation since 2000, specializing in Canadian and international tax including estate and succession planning, immigration and emigration planning, cross-border transactions, and international business structuring. Nancy presents to various organizations on tax, estate, succession, and the purchase and sale of a business, and is a board member of Partners for Planning, a not-for-profit offering practical strategies, creative tools, and sustainable solutions for families and caregivers of persons with disability.

Frequently Asked Questions

Can I start right away? expand_more

Yes. All three parts were recorded live and are available on demand. Register and begin immediately at your own pace.

Does this course qualify as professional ethics CPD? expand_more

Yes. You will receive a verifiable CPD certificate for 3.0 hours of instructional learning that qualifies as Professional Ethics for CPAs.

What is included with registration? expand_more

The full presentation for all three parts and the slides, with one year of access from your date of registration.

What are the three parts? expand_more

Accountants' Liability, Measuring Risk in Tax Practice, and Ethics, Trusts and CPAs. Each part stands on its own, and together they cover professional conduct, negligence and standard of care, opinion levels, CRA challenge types, and trust engagements.

Who is this course for? expand_more

CPAs and tax professionals in public practice, anyone signing tax returns or giving planning advice, and CPAs acting as trustee, advising trustees, or preparing trust returns.

Is there a cost to register? expand_more

Registration is $150 CAD, a one-time payment with no subscription required.

$150CAD

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layers Three-Part Program

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