Case Study[1]:Court File Number: 2016-CV-213 OntarioSuperior Court of Justice Jack Busybody andJill Busybody andJust For Laughs Inc.Plaintiffs v. Misty Numbers personally and in her capacity as

Case Study
Court File Number: 2016-CV-213
Ontario
Superior Court of Justice
Jack Busybody
Jill Busybody
Just For Laughs Inc.
Plaintiffs
v.
Misty Numbers
personally and in her capacity as limited liability partner of
Numbers and More LLP
Defendants
FACTS OF THE CASE
Just For Laughs Inc. is an incorporated corporation under the laws of Ontario. It is also a successful and busy retail business owned by Jack and Jill Busybody and operated by them and their son Leroy. Jack and Jill Busybody are the sole directors of the corporation. The company has operated in the Danforth Avenue area of Toronto since 1997, supplying party favours to the local community.
Misty Numbers is a chartered accountant and limited liability partner of Numbers & More LLP, a chartered accountancy firm. Ms. Numbers provided bookkeeping and accounting services for Just For Laughs Inc. from 2002 to 2012. Ms. Numbers and her firm was retained by Just For Laughs Inc. by way of a “review engagement” that was signed in 2002 and not updated. Misty Numbers was not retained to audit the company. In accordance with the review engagement, Misty Numbers prepared the company’s financial statements and corporate tax returns on a yearly basis. The review engagement provided that neither Misty Numbers nor her firm was liable for any errors or omissions in the financial records of Just For Laughs Inc.
The Busybodys had several staff who worked in the store, as well as their son Leroy who supervised the staff when the Busybodys travelled to Mexico for January to March every year to escape the Canadian winter. However, in addition to Leroy, the Busybody’s relied on their staff, some of whom had worked for the company since 1997.
In 2000, Just For Laughs Inc. was audited by the Canada Revenue Agency. It was revealed that the company was not recording and remitting the proper levels of retail sales tax for that year. A notice of assessment was issued, and Canada Revenue Agency found that the company owed $73,071 in unreported sales tax for the year.
After that audit, the Busybodys re-trained their staff in how to record sales tax. It was discovered that when the staff collected a deposit on an order for party favours, they would not charge sales tax on the deposit. When the order was picked up by the customer, sales tax would be charged only on the balance that was owed, rather than on the total order. As part of the training, the Busybodys ensured their staff understood that they must record and charge sales tax on the total amount of the order.
A further spot audit was conducted in 2001 by the Canada Revenue Agency which found that Just for Laughs Inc. was collecting and remitting sales tax properly.
The main contact for Misty Numbers at Just for Laughs was Leroy Busybody, the Busybody’s son who ran the company while his parents were away in Mexico each year. Leroy was never particularly good at math or financial information. He was an introvert who day-dreamed of becoming a murder mystery novelist and moving to a remote village in Mexico. Nevertheless, he was a dutiful son who managed his parents’ party business out of loyalty, and relied on the staff to know how to process orders.
Leroy and Misty became quite good friends often sharing meals together for which Leroy would always pay. Misty and Leroy eventually became romantically involved, but the Busybody’s continued to use Misty’s professional services out of convenience.
Jack and Jill Busybody grew to rely on Leroy managing the financial side of the business, particularly since they were advancing in age and they hoped that Leroy would take over Just For Laughs Inc. when they chose to retire to Mexico permanently. Leroy was not named as a Director for the corporation. The Busybodys had not gotten around to the paperwork to add him as a Director on the corporate records.
Misty Numbers did the monthly book-keeping services for Just For Laughs. She would obtain monthly summaries of financial data from daily cash reports from Leroy Busybody. At month end, they would schedule a dinner date where Leroy would provide the company’s financial records and they would carry on to an evening of dinner and discussing the latest murder mysteries. Ms. Numbers’ staff would post the financial information to the sales journal and general ledger.
Misty would then run the numbers on a monthly basis and do the tax returns on an annual basis. She happily conducted this analysis because of her relationship with Leroy, even though her company had grown to have more lucrative customers. She did notice that Leroy had not been monitoring staff as much as he usually did, but she put her concern aside given that the Busybody’s often trusted their son with the financial details of the company and he was so much fun to hang out with.
When preparing the financial statements for the company, Misty Numbers reviewed whether the sales tax shown on the company’s financial records was the same amount that was remitted to the Ministry of Revenue. She checked to determine if the same amount that was charged to the customer was remitted.
In 2012, the Canada Revenue Agency conducted a multi-year audit of Just for Laughs Inc. and assessed an underpayment of retail sales tax in the amount of $1.7million dollars.
Jack and Jill Busybody were devastated. CRA’s assessment decimated their retirement savings and they had to sell their condo in Mexico in order to pay CRA and pay for their high-priced lawyer.
As a result, the Busybody’s put aside their son’s romantic interest in Misty Numbers. They instructed their lawyer to commence a lawsuit against Misty Numbers and her firm and sue her for professional negligence.
Misty Numbers was surprised to be served with a lawsuit. She felt that she was not retained as a professional but that she was a family friend. Nevertheless, she retained a lawyer to defend her against the Busybodys.
[1]This case study is loosely based on
Bloor Italian Gifts Ltd. v. Dixon
2000 OJ No 1771