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Securing Your Tax Practice - Engagement Letter

From tax expert Gerry Vittoratos
October 11, 2017

Securing your tax practice is a crucial component of your business. An engagement letter is one such tool that allows you to protect your business. In this instalment, we will see what should be included in a proper engagement letter.

Why Engagement Letters Are So Important to Your Practice

Whether you work at a firm, or you are a sole practitioner, an engagement letter is a critical part of your interactions with the client. It establishes your relationship with your client, and lists all the terms of that relationship. It helps reduce the misunderstandings you might encounter later with your clients, and of course, helps protect your bottom line.

Inclusions in the Engagement Letter

While there is no “perfect” engagement letter, below is a list of items you should include to make it as effective as possible.

Clearly State How Your Fees Are Determined

The engagement letter should clearly indicate how the fees you charge are determined.  Also, it should stipulate how any additional fees are determined if they are required.

State the Period Covered

The letter should clearly state the duration of your engagement, and should not pertain to an ongoing engagement. This can become important in the case where conditions change over the years for your client (expansion for example), and the scope of the services you currently provide does not encompass their current reality.

Lay Out the Client’s Responsibilities Vis-à-Vis Information Supplied

Identify what the client is to provide you concerning the preparation of their tax return. This can be done through an organizer or questionnaire (such as the pro forma questionnaire within DT Max) provided to the client.

Services Will Be Based on Records Provided by the Client

You should include in the engagement letter that the tax return will be based on the information provided by the client. In addition, the records they provide you will be accepted at face value, and the accuracy of the information provided is the client’s responsibility.

Acknowledgement by the Client

Any engagement letter you draft must require an acknowledgement by your client that he or she has read, understood, and agreed with the terms of the letter. It is good practice to have your client sign the engagement letter before any works begins on his/her tax return.

Scope of an Engagement Letter - Jurisprudence

Although the engagement letter provides a level of protection for the tax preparer, it is not all-encompassing. An engagement letter does not protect you from the consequences from unethical behaviour on your part. Below is an interesting jurisprudence on this.

Strother v 3464920 Canada Inc. 2007 SCC 24

In this case, Strother was a lawyer for the Law firm Davis & Company. Monarch Company (film production) retained Davis as their law firm with respect to tax shelter planning. After a ministry of finance announcement, Strother had advised Monarch that tax shelters were no longer viable. Monarch followed Strother’s advice and started winding down their tax shelters. In the meantime, a former employee of Monarch approached Strother to enact a tax planning strategy with tax shelters; if the plan was successful, Strother’s reward would be shares in a new company created by the former employee. The strategy was ultimately successful. Upon hearing of this, Monarch sued Strother and Davis & Company for breach of fiduciary duty.

The Supreme Court, in a close decision, sided with Monarch, finding that Strother failed to provide proper legal advice. Although this type of provision is not usually written in engagement letters, Strother was no less responsible to advise Monarch that a tax shelter scheme was available and would be effective. What this decision shows is that the responsibility of the provider of the services is not limited to what is literally indicated on the engagement letter. There are certain norms and expectations that the provider of services is responsible for, even if these norms are not indicated in the letter.

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