Canadian Humanitarian Trust

[Burnaby49]

As always, thank you for that excellent review of the subject area, Burnaby49.

One question: are you aware of criminal proceedings against any of the promoters of these tax evasion schemes?

SMS Möwe

Firstly these were not tax evasion schemes, they were tax avoidance. There is a big distinction since evasion is criminal and avoidance is not. A working definition of tax evasion is:

Deliberate omission of a statutory requirement to reduce or eliminate a tax liability. For example, those participating in tax evasion may under-report taxable receipts or claim expenses that are non-deductible or overstated. Individuals who deliberately conceal income (or businesses that deliberately conceal part of their sales) in order to pay less income tax are engaging in tax evasion. Workers in the underground economy and businesses that fraudulently claim tax refunds are also committing tax evasion.

Tax avoidance can be defined as "The taking of legal actions or omissions with the intent to minimize tax".

The Poriskyites were evading tax because they actively hid, or didn't report, their income from the CRA. They only brought up their claimed beliefs as a defense once they were caught.

These charitable donation schemes were tax avoidance, not evasion. Everything was disclosed by the promoters to the participating taxpayer (whether they read it or not is another issue), property was actually donated, and generally there was at least a semblance of a valuation supporting the claimed value of the donated property. The taxpayers did not hide income, they just claimed excessive deductions based on the schemes but everything was reported to the CRA.

As far as the promoters are concerned I'm not aware of the CRA pursuing any criminal action against them and, as far as I can see, none is applicable. There is no fraud since everything was disclosed. These schemes were not shams, the paperwork and tax planning papers were followed through as written and everything was legally covered including opinion letters from high-powered legal firms. The only recourse against against the promoters that I can see is civil from the taxpayers and that is what they have been pursuing as class-actions. Interestingly enough the focus is in going after the law firms that wrote the opinion letters and the accounting firms that provided valuation opinions. I'm guessing because the promoters have skipped or have no recoverable assets and the law firms are the only deep-pocket stationary targets.

[Burnaby49]

website.

[Hilfskreuzer Möwe]

... As far as the promoters are concerned I'm not aware of the CRA pursuing any criminal action against them and, as far as I can see, none is applicable. There is no fraud since everything was disclosed. These schemes were not shams, the paperwork and tax planning papers were followed through as written and everything was legally covered including opinion letters from high-powered legal firms. The only recourse against against the promoters that I can see is civil from the taxpayers and that is what they have been pursuing as class-actions. Interestingly enough the focus is in going after the law firms that wrote the opinion letters and the accounting firms that provided valuation opinions. I'm guessing because the promoters have skipped or have no recoverable assets and the law firms are the only deep-pocket stationary targets. ...

Thanks again for the further explanation of these schemes and their possible downstream effects. I can't say I would cry a river if the targetted law firms were found liable in tort. That said, the test for negligent legal practice is rather generous (for lawyers). I think Central Trust Co. v. Rafuse, [1986] 2 SCR 147 (http://canlii.ca/t/1ftsl) is still relevant for that standard, "the reasonably competent solicitor, the ordinary competent solicitor and the ordinary prudent solicitor". However, that decision also stresses that expectations vary with the expertise of the lawyer, and so here the law firm would presumably be tested on an expert tax lawyer standard. Where time is available, the competent lawyer is also expected to fully investigate the relevant law and potential issues.

So it occurs to me that given the large sums involved, and the potential catastrophic effects on persons, that an 'ordinary prudent tax expert' would not recommend these schemes as legal without the caveat that the client also seek an advance tax ruling from the CRA, or even better go to the Tax Court of Canada with a reference question.

SMS Möwe

[Burnaby49]

Does anyone have an email or website fot CHT

I was involved in these programs in the CRA and I've followed all of the various appeals to date on similar schemes. In my opinion, based on the cases cited below (read them, particularly Lockie, the most to point with yours) the chances of your case prevailing in Tax Court are nil. The Tax Court has dismissed all of the charity donation schemes it has heard and the Federal Court of Appeal has supported these decisions. So I'd say keep away from CHT, it can't help you and will probably ask for money to pursue a hopeless appeal.

I believe the CRA has (apart from the interest free loan cases such as Maréchaux (Maréchaux v. The Queen 2009 TCC 587 2010 FCA 287) and Kossow (Kossow v. The Queen 2012 TCC 325) offered all donors in these schemes their cash as a settlement. Those that didn't take it and went to court lost. They got their cash from the court, same as they would have had had they accepted CRA's offer but racked up more interest cost to the CRA while it was in process and had to pay their legal fees. A warning, in the most recent case on this issue, similar to yours but software, the taxpayer was denied even his cash (Bandi v The Queen, 2013 TCC 230 ) so maybe the Tax Court is starting to take a harder line.

The link below is to an article by someone who is in no way sympathetic to the CRA and its position but recommends people like yourself settle for the cash and try and get this behind you.

http://volunteerconcerns.blogspot.ca/20 ... ayers.html

Elizabeth M. Russell, et al. v. The Queen
2010 TCC 548

Robert D. G. Lockie v. The Queen
2010 TCC 142

Nguyen v. The Queen
2008 TCC 401

Attorney General of Canada v Nash, Quinn and Tolley
Barbara Quinn v. The Queen, 2004 DTC
3328 (Tax Court of Canada)
A.G. of Canada v. Nash et al. 2005 D.T.C.
5696 (F.C.A.)
Leave to appeal to S.C.C. denied with
costs

Allen Berg v. The Queen
2012 TCC 406

[Burnaby49]

... As far as the promoters are concerned I'm not aware of the CRA pursuing any criminal action against them and, as far as I can see, none is applicable. There is no fraud since everything was disclosed. These schemes were not shams, the paperwork and tax planning papers were followed through as written and everything was legally covered including opinion letters from high-powered legal firms. The only recourse against against the promoters that I can see is civil from the taxpayers and that is what they have been pursuing as class-actions. Interestingly enough the focus is in going after the law firms that wrote the opinion letters and the accounting firms that provided valuation opinions. I'm guessing because the promoters have skipped or have no recoverable assets and the law firms are the only deep-pocket stationary targets. ...

Thanks again for the further explanation of these schemes and their possible downstream effects. I can't say I would cry a river if the targetted law firms were found liable in tort. That said, the test for negligent legal practice is rather generous (for lawyers). I think Central Trust Co. v. Rafuse, [1986] 2 SCR 147 (http://canlii.ca/t/1ftsl) is still relevant for that standard, "the reasonably competent solicitor, the ordinary competent solicitor and the ordinary prudent solicitor". However, that decision also stresses that expectations vary with the expertise of the lawyer, and so here the law firm would presumably be tested on an expert tax lawyer standard. Where time is available, the competent lawyer is also expected to fully investigate the relevant law and potential issues.

So it occurs to me that given the large sums involved, and the potential catastrophic effects on persons, that an 'ordinary prudent tax expert' would not recommend these schemes as legal without the caveat that the client also seek an advance tax ruling from the CRA, or even better go to the Tax Court of Canada with a reference question.

SMS Möwe

Got to run, off to a wedding so a quick response. Firstly one legal firm has coughed up $12,000,000 to settle, I can check later which one.

Secondly the Tax Court does not answer or accept reference questions. It only hears appeals after the taxpayer has already been reassessed. The CRA will not give a Ruling on these because they involve a question of fact as well as law, the value of the donated property. The CRA does not give rulings on fact. They have a specific policy of not giving rulings on any issue where opinion issues, such as valuations or appraisals, forms part of the ruling. They would not give a ruling in any case since these are clearly tax avoidance schemes and the CRA disagreed with the legal opinions in the comfort letters. In any case the average taxpayer doesn't know rulings exists and taxpayers who submit ruling requests have to pay for them, that can get expensive.

[Hilfskreuzer Möwe]

Again, thanks Burnaby49 for that explanation. However, I disagree on one point:

Secondly the Tax Court does not answer or accept reference questions. It only hears appeals after the taxpayer has already been reassessed.

I believe the Tax Court of Canada does accept reference questions. Section 169(1) provides the authority of a taxpayer to appeal a CRA assessment, but ss. 173(1) and 174(1) provides a second method to bring a tax issue, including a purely hypothetical scenario, to that court:

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.):

173. (1) Where the Minister and a taxpayer agree in writing that a question of law, fact or mixed law and fact arising under this Act, in respect of any assessment, proposed assessment, determination or proposed determination, should be determined by the Tax Court of Canada, that question shall be determined by that Court.

...

174. (1) Where the Minister is of the opinion that a question of law, fact or mixed law and fact arising out of one and the same transaction or occurrence or series of transactions or occurrences is common to assessments or proposed assessments in respect of two or more taxpayers, the Minister may apply to the Tax Court of Canada for a determination of the question.

Section 173(2) 'freezes' a related tax dispute during the reference question process. Sections 174(2)-(4) provide a mechanism for potentially affected taxpayers to participate in the reference question process.

The authority for the Tax Court of Canada to answer reference questions is also found in the Tax Court of Canada Act, R.S.C. 1985, c. T‑2, s. 12:

12. (1) The Court has exclusive original jurisdiction to hear and determine references and appeals to the Court on matters arising under... the Income Tax Act ... where references or appeals to the Court are provided for in those Acts.

...

(3) The Court has exclusive original jurisdiction to hear and determine questions referred to it under ... section 173 or 174 of the Income Tax Act.

I don't believe either reference question process is used all that often, but I spotted a few decisions that originate from a s. 173(1) hearing:

• Nova Scotia Power Inc. v. The Queen, 2002 CanLII 906 (TCC): http://canlii.ca/t/1c2t4
  
  Saipem Luxembourg S.A. v. Canada (Customs and Revenue Agency), 2004 FC 113: http://canlii.ca/t/1g9z1
  
  Imperial Oil Limited v. The Queen, 2004 TCC 207: http://canlii.ca/t/1gnhc
  
  236130 British Columbia Ltd. v. The Queen, 2005 TCC 770: http://canlii.ca/t/1m6mv

That said, both Nova Scotia Power and Imperial Oil were appealed to and heard by the Supreme Court of Canada.

SMS Möwe

[wserra]

One question: are you aware of criminal proceedings against any of the promoters of these tax evasion schemes?

I am not aware of any prosecutions, either of charities or of individuals, for this exact type of fraud - reporting deductions of more than the actual value of the donated materials to the "charity" at the time and place of the use of the materials. Perhaps someone else is. I phrase the question carefully because I am aware of prosecutions in similar but arguably aggravated situations.

For one example, a few years ago a group led by a lawyer devised a scheme by which investors would buy equity in a partnership which bought cemetery plots and then donated them to charities. The donations were valued at several times more than their cost to the partnership, and the partners took deductions at the inflated prices. U.S. law at the time required that any property valued for deduction purposes at more than its cost must be held for at least a year before sale, and these guys did things like backdate deeds to make it appear that was the case. Indicted, convicted, long sentences affirmed by the Fourth Circuit. Forging documents is obviously an aggravating factor.

Another example: various ultra-Orthodox rabbis and others who reported contributions in large amounts, and who later kicked-back as much of 90% of the reported contributions. United States v. Weisz et al., 06-cr-775 (CACD). I suppose one could picture fraudulent kickbacks as an aggravating factor as well.

Without those aggravating factors, I think it would be difficult to prove intent beyond a reasonable doubt.

[Burnaby49]

Mowe is right (as always) but not in the context of his original comment. He said:

So it occurs to me that given the large sums involved, and the potential catastrophic effects on persons, that an 'ordinary prudent tax expert' would not recommend these schemes as legal without the caveat that the client also seek an advance tax ruling from the CRA, or even better go to the Tax Court of Canada with a reference question.

Sections 173 and 174 of the Income Tax Act allow for joint applications of the CRA and taxpayers or for the CRA alone to apply. These sections do not give taxpayers or an "ordinary prudent tax expert" the right to apply without CRA concurrence. All three of the cases cited (Saipem was a Federal Court of Canada application under 231.6(4)) were joint applications. Also all three were in the context of actual current tax disputes, not potential future reassessments relating to the CRA's response to a proposed tax scheme. I'm not aware of any legislation allowing taxpayers to unilaterally put reference questions to the Tax Court nor am I aware of this ever having been done.

I'd say there is absolutely no possibility that the CRA would agree to a joint application to Tax Court regarding proposed schemes, such as the charity scams, which were clearly being done to give taxpayers a bigger refund than their actual out of pocket costs.

[Burnaby49]

One question: are you aware of criminal proceedings against any of the promoters of these tax evasion schemes?

For one example, a few years ago a group led by a lawyer devised a scheme by which investors would buy equity in a partnership which bought cemetery plots and then donated them to charities. The donations were valued at several times more than their cost to the partnership, and the partners took deductions at the inflated prices. U.S. law at the time required that any property valued for deduction purposes at more than its cost must be held for at least a year before sale, and these guys did things like backdate deeds to make it appear that was the case. Indicted, convicted, long sentences affirmed by the Fourth Circuit. Forging documents is obviously an aggravating factor.

Another example: various ultra-Orthodox rabbis and others who reported contributions in large amounts, and who later kicked-back as much of 90% of the reported contributions. United States v. Weisz et al., 06-cr-775 (CACD). I suppose one could picture fraudulent kickbacks as an aggravating factor as well.

Without those aggravating factors, I think it would be difficult to prove intent beyond a reasonable doubt.

We had pretty much identical schemes here in Canada. Berg, one of the cases I cited in a previous post (Allen Berg v. The Queen 2012 TCC 406) was a scheme where a promoter bought up a bunch of time-shares in a failed project in the Caribbean and then flogged them off to taxpayers in a donation scheme where they donated the units to a charity at a much higher claimed value than their actual cost to the taxpayer. We also had an equivalent ultra-orthodox kickback scheme where a rabbi was writing tax receipts for about ten times as much as the actual donation or alternatively writing a receipt for the actual donation and returning 90%. I can't give a reference because I've forgotten the case names but there were a bunch of appeals by purported donors who claimed that while everybody else may have had kickbacks they didn't. The Tax Court dismissed all of the appeals.

[Hilfskreuzer Möwe]

Burnaby49, perhaps I am missing something obvious, but what would be the policy basis for the CRA to avoid using a TCC reference question to evaluate the operation of a hypothetical tax avoidance scheme? It seems to me a reference question approach could provide a significant tactical advantage.

First, the CRA's potential negative consequences are minimized. If the TCC says the scheme does not have the intended effect, then that would presumably shut down application of the concept before it even reaches the public. If the TCC confirms the tax avoidance scheme does work, and this occurs prior to the scheme being 'put on the market', then the CRA has a window to go to Parliament and have the Income Tax Act amended to 'plug the loophole', if indeed that is the appropriate response.

Second, it seems to me that evaluating tax avoidance strategies 'in advance' would simplify the assessment and audit process, and minimize appeals and litigation. The TCC would work out the rules, and then the CRA and taxpayers would apply those in subsequent tax periods.

Also, I do not think the CRA has total control of the s. 173 reference question process. I am fairly certain that a decision by the CRA to refuse to advance a s. 173 reference request to the TCC would be a decision subject to judicial review. I think that point is clear from Canada v. Addison & Leyen Ltd., 2007 SCC 33, [2007] 2 SCR 793 (http://canlii.ca/t/1s1q4) at paras. 7-8:

7 The issue in this appeal is whether judicial review under s. 18.5 of the Federal Courts Act, R.S.C. 1985, c. F-7, is available to challenge the exercise of the Minister’s discretion to assess a taxpayer under s. 160 ITA. What the case actually turns on, however, is the interpretation of s. 160.

8 We need not engage in a lengthy theoretical discussion on whether s. 18.5 can be used to review the exercise of ministerial discretion. It is not disputed that the Minister belongs to the class of persons and entities that fall within the Federal Court’s jurisdiction under s. 18.5. Judicial review is available, provided the matter is not otherwise appealable. It is also available to control abuses of power, including abusive delay. Fact-specific remedies may be crafted to address the wrongs or problems raised by a particular case.

If so, then we end up in a very interesting situation. Presumably, a tax avoidance scheme promoter could go to the CRA, propose a reference question under s. 173, but if that was refused, then the promoter could launch a judicial review to the Federal Court of that decision.

I have no idea how that would play out! Presumably the question would be whether the CRA's decision was reasonable (no, we're not going to talk about Dunsmuir!) and it seems then that we're back to the policy questions that open this message.

Thoughts?

SMS Möwe

[Burnaby49]

Burnaby49, perhaps I am missing something obvious, but what would be the policy basis for the CRA to avoid using a TCC reference question to evaluate the operation of a hypothetical tax avoidance scheme? It seems to me a reference question approach could provide a significant tactical advantage.

First, the CRA's potential negative consequences are minimized. If the TCC says the scheme does not have the intended effect, then that would presumably shut down application of the concept before it even reaches the public. If the TCC confirms the tax avoidance scheme does work, and this occurs prior to the scheme being 'put on the market', then the CRA has a window to go to Parliament and have the Income Tax Act amended to 'plug the loophole', if indeed that is the appropriate response.

Second, it seems to me that evaluating tax avoidance strategies 'in advance' would simplify the assessment and audit process, and minimize appeals and litigation. The TCC would work out the rules, and then the CRA and taxpayers would apply those in subsequent tax periods.

Also, I do not think the CRA has total control of the s. 173 reference question process. I am fairly certain that a decision by the CRA to refuse to advance a s. 173 reference request to the TCC would be a decision subject to judicial review. I think that point is clear from Canada v. Addison & Leyen Ltd., 2007 SCC 33, [2007] 2 SCR 793 (http://canlii.ca/t/1s1q4) at paras. 7-8:

7 The issue in this appeal is whether judicial review under s. 18.5 of the Federal Courts Act, R.S.C. 1985, c. F-7, is available to challenge the exercise of the Minister’s discretion to assess a taxpayer under s. 160 ITA. What the case actually turns on, however, is the interpretation of s. 160.

8 We need not engage in a lengthy theoretical discussion on whether s. 18.5 can be used to review the exercise of ministerial discretion. It is not disputed that the Minister belongs to the class of persons and entities that fall within the Federal Court’s jurisdiction under s. 18.5. Judicial review is available, provided the matter is not otherwise appealable. It is also available to control abuses of power, including abusive delay. Fact-specific remedies may be crafted to address the wrongs or problems raised by a particular case.

If so, then we end up in a very interesting situation. Presumably, a tax avoidance scheme promoter could go to the CRA, propose a reference question under s. 173, but if that was refused, then the promoter could launch a judicial review to the Federal Court of that decision.

I have no idea how that would play out! Presumably the question would be whether the CRA's decision was reasonable (no, we're not going to talk about Dunsmuir!) and it seems then that we're back to the policy questions that open this message.

Thoughts?

SMS Möwe

[Burnaby49]

To show you how fast proposed ammendments to the Canadian Income Tax Act can be implimented the proposed legislation mentioned above was passed into law by parliament through Bill C-48 two months ago, nine years after it was initially proposed. What can I say, stuff happens. How the government handled the situation evoked a lot of criticism from tax specialists. The government said that when the law was finally passed it would be retroactive back to 2002 and that is what they did over ten years later. So for the last decade tax practitioners have had to work on the basis that a non-existant law might eventually affect their client's tax planning.

This actually had significance in a very large tax donation scheme. The legislation will allow the cash component of the donation even if the rest is disallowed. There was a large number of taxpayers reassessed under one of these schemes, the previously mentioned ParkLane Charitable Donation Program, and their entire claimed donation was disallowed, including the cash. The appeal to the Tax Court has been sitting for years waiting for the legislation to pass because, retroactively, it would at least allow them the cash even if they lost the non-cash component in court. The Crown made a motion to the Tax Court to get it done with regardless of what the proposed legislation said and the Tax Court agreed to finally hear it. The taxpayers appealed to the Federal Court of Appeal which reversed the Tax Court decision and told them to hold off on the hearing until Bill C-48 was actually passed. So that case can finally have its day in court.

This excerpt from the Tax Court motion decision gives the extent of the scheme. Scale it up by a factor of ten to reflect the difference between the US and Canadian populations and you have the equivalent of a five billion dollar tax dodge if taking place in the states:

[3] According to information provided by the respondent, approximately 18,000 taxpayers participated in this or similar programs and 8,000 have been reassessed to date. It is estimated that the total donations are approximately $500,000,000.

[4] This is a lead case for nine appeals which have been filed to date, which are under case management by the Chief Justice. Although the outcome in this appeal is not binding on others, the other appeals have been held in abeyance pending this case. It would appear that thousands of other taxpayers are waiting in the wings.

2012 TCC 264

2012 FCA 330

[ronricha]

I would like to know if there are any class action law suits against Canadian Humanitarian Trust or World Health Initiatives ( which is there new name) or the lawyers that agreed to the lagality of this.

Any info would be helpful. It does not seem likely that the tax court will allow any contibution greater than the cash portion of the investment.

[Burnaby49]

I would like to know if there are any class action law suits against Canadian Humanitarian Trust or World Health Initiatives ( which is there new name) or the lawyers that agreed to the lagality of this.

Any info would be helpful. It does not seem likely that the tax court will allow any contibution greater than the cash portion of the investment.

I've been following these donation cases (not as a participant, these schemes were so stupid and so open to attack by CRA that I assumed, when they initially came out, that they would fail) but I am not aware that CHT or WHI have had class actions certified. Unlikely and if not by now too late. I suggest you are overstating your chances in Tax Court when you say that "it does not seem likely" that the court will allow you any deduction in excess of your cash amount. In my opinion you have no chance at all of getting more than cash. The jurisprudence to date has been consistant that the courts will allow, at most, the cash component of the donation. Even that is not guaranteed, in some very significant cases the Tax Court has denied the entire donation claims. However now that Bill C-48 has been passed you should be entitled to the cash as a matter of law making going to court for it pointless.

The significant cases are:

Robert D. G. Lockie v. The Queen 2010 TCC 142

Maréchaux v. The Queen 2009 TCC 587, 2010 FCA 287

Kathryn Kossow v. The Queen 2012 TCC 325

Barbara Quinn v. The Queen, 2004 DTC 3328 (Tax Court of Canada)
A.G. of Canada v. Nash et al. 2005 D.T.C. 5696 (F.C.A.)
Leave to appeal to S.C.C. denied with costs

Allen Berg v. The Queen 2012 TCC 406

[Burnaby49]

As always, thank you for that excellent review of the subject area, Burnaby49.

One question: are you aware of criminal proceedings against any of the promoters of these tax evasion schemes?

SMS Möwe

I just realized, well after Mowe asked, that I have an answer to this although not directly to point. As I pointed out in a prior posting these schemes are not criminal because there is no tax evasion, just tax avoidance which is civil. However there is a civil law which does go after parties involved in these schemes, Subsection 163.2(4) of the Canadian Income Tax Act which reads:

Subsection 163.2(4) Every person who makes or furnishes, participates in the making of or causes another person to make or furnish a statement that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by another person (in subsections (6) and (15) referred to as the “other person”) for a purpose of this Act is liable to a penalty in respect of the false statement.

The penalty is in 163.2(5) and is the lesser of (a) $100,000 plus the person’s gross compensation in relation to the statement, and (b) the penalty hypothetically payable by the taxpayer to which the statement relates, usually 50% of the amount of tax sought to be avoided.

As vague as this sounds it was specifically written as a response to these charity schemes and aimed at the professionals, accountants, lawyers, valuators, and appraisers who were involved in them.

A lawyer, Julie Guindon, was unlucky enough to turn into the test case for the applicability of this law. The first paragraph of the Tax Court decision (linked below) gives the gist of the issue:

[1] The participants in a donation program (the “Program”) were to acquire timeshare units as beneficiaries of a trust for a fraction of their value and donate them to a charity in exchange for tax receipts for the actual value of the units. No donation ever took place as the timeshare units never existed and no trust was settled. The Minister of National Revenue (the “Minister”), on the basis that the Appellant made, participated in, assented to or acquiesced in the making of 135 tax receipts that she knew, or would reasonably be expected to have known, constituted false statements that could be used by the participants to claim an unwarranted tax credit under the Income Tax Act (the “Act”), assessed against the Appellant on August 1, 2008 penalties under section 163.2 of the Act in the amount of $546,747 in respect of false statements made in the context of that donation program. The Appellant appealed the assessment.

The agreed statment of facts gives the background:

2. The appellant is a lawyer practising in Ontario since 1991.

3. While she did some real estate law when she first started her practice, the appellant’s main fields of practice were and remain family law and wills/estates law.

4. Aside from the legal opinion involved in this appeal, the appellant has not practiced nor does she have any expertise in income tax law.

5. Starting in May 2001, the appellant had various meetings with Lee Goudie, the representative of Tropical Development Ltd. (“TDL”), a company incorporated and established under the laws of Turks and Caicos Islands, and Richard St-Denis and Glen Ploughman, representatives of KGR Tax Services Ltd. (“KGR”). Goodie [sic], St-Denis and Ploughman are referred to collectively in this document as the “Principals”.

8. The appellant was asked by the Principals to prepare a legal opinion (by reviewing a similar opinion on a different program) on a program involving a tax reduction through a leveraged donation structure which was called The Global Trust Charitable Donation Program (the “Program”).

19. From 1999 to 2004, the appellant was also the President of Les Guides Franco-Canadiennes District d’Ottawa (the “Charity”), a charity registered under the Income Tax Act.

21. In October 2001, St-Denis and Ploughman discussed formally with the appellant their desire to involve the Charity as the potential recipient of the donated VOWs.

23. On November 21, 2001, TDL launched the Program involving the Charity.

24. No other charities were involved in the Program.

25. On November 22, 2001, the Charity entered into an agreement with TDL to engage the services of TDL to market and sell all donated VOWs on behalf of the Charity for cash proceeds. The Charity was to receive a minimum return of $500 per unit sold.

27. Prior to signing charitable donation tax receipts, the representatives of the Charity, including the appellant, were informed verbally by the Principals that the VOWs had been properly created and that the documentation effecting a gift of the VOWs from the ostensible donors to the Charity had been completed. In fact, no such documentation ever existed.

42. On March 17, 2002, the appellant met with St-Denis and Ploughman. The appellant was advised that the legal title deeds to the timeshares had not been finalized. Consequently, the purported Settlor had not acquired the deeds to the VOWs of the property held by TDL.

43. As of March 17, 2002, the appellant knew with certainty that no transfer of deeds had taken place on December 31, 2001 from the participants in the Program to the Charity as the participants did not have legal title of [sic] the VOWs.

So she was reassessed under 163.2 for making false statments. She appealed to the Tax Court of Canada and won because of the inability of the Tax Court judge to understand basic law. He decided the 163.2 civil penalty was actually a disguised criminal offense and therefore Ms. Guidon's Charter rights had been violated by proceeding through the Tax Court rather than through a full-blown criminal charge. He did concede that if the penalty had actually been civil she was clearly guilty.

[102] The evidence submitted and the facts established by the Minister conclusively demonstrate the Appellant’s culpable conduct.

[105] The Appellant wrote and endorsed a legal opinion regarding the Program, an opinion which she knew would be part of a promotional package intended for potential participants in the Program. Her legal opinion clearly states that she reviewed the principal documents relating to the Program when these documents had in fact never been provided to her. She knew, therefore, that her legal opinion was flawed and misleading.

[108] Her conduct is indicative either of complete disregard of the law and whether it was complied with or not or of wilful blindness. The Appellant should have refrained from involving the Charity and signing the tax receipts until she had either reviewed the documents herself or had another professional approve the Program’s activities. When the Appellant issued the tax receipts, she could have reasonably been expected to know that those receipts were tainted by an omission, namely, that no professional had ever verified the legal basis of the Program.

[109] The Appellant cannot agree to endorse a legal opinion and then justify her wrongful conduct by saying she did not have the necessary knowledge — either of tax law or of foreign law — to write that opinion.

[110] Moreover, the Appellant’s conduct after the tax receipts were signed negatively affects her credibility and reflects badly on her character. When the Appellant was informed, after the tax receipts had been issued, that the legal titles were not in order, she co‑signed a letter informing the participants of the situation. At that point, the Appellant knew she could not rely on the Principals — the same individuals who had never provided her with the documents she was supposed to review and the same individuals she had trusted in signing the tax receipts. Yet when Ploughman sent out a letter, days before the end of the fiscal year, stating that all was in order and that the participants could submit their receipts, the Appellant blindly relied on him again, without asking any further questions.

112] For these reasons, the Appellant’s culpable conduct leads me to conclude that she would reasonably be expected to have known that the tax receipts were false statements. The penalty would therefore be applicable if that penalty were a civil one.

http://decision.tcc-cci.gc.ca/site/tcc- ... gAAAAAAAAE

The Crown appealed this decision to the Federal Court of Appeals and easily won there:

http://decisions.fca-caf.gc.ca/site/fca ... gAAAAAAAAE

[25] In her memorandum of fact and law filed in this Court, Ms. Guindon submitted that, once section 163.2 of the Income Tax Act is regarded as an offence provision, subsection 34(2) of the Interpretation Act, R.S.C. 1985 c. I-21 kicks in. That subsection requires that Criminal Code procedures be followed instead of Income Tax Act procedures. In her view, then, finding section 163.2 is an offence under section 11 of the Charter does not make any procedures in the Income Tax Act invalid, inoperative, or inapplicable.

[26] I disagree. This submission overlooks the language of subsection 34(2), which imposes the procedures of the Criminal Code to any offence, “except to the extent that [another] enactment otherwise provides.” The Income Tax Act otherwise provides. It provides for the assessment of a penalty under section 163.2, a reconsideration procedure and an appeal to the Tax Court.

[27] Therefore, I conclude that in these circumstances, Ms. Guindon was seeking the invalidity, inoperability or inapplicability of sections of the Income Tax Act. A notice of constitutional question had to be served.

[28] The failure to serve a notice of constitutional question took away the Tax Court’s jurisdiction to consider whether section 163.2 of the Act creates a criminal offence, triggering Ms. Guindon’s section 11 rights.

She recently made Leave to Appeal to the Supreme Court of Canada. Very unlikely they will grant leave but a very interesting case if they do.

[Hilfskreuzer Möwe]

Subsection 163.2(4) Every person who makes or furnishes, participates in the making of or causes another person to make or furnish a statement that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by another person (in subsections (6) and (15) referred to as the “other person”) for a purpose of this Act is liable to a penalty in respect of the false statement.

The penalty is in 163.2(5) and is the lesser of (a) $100,000 plus the person’s gross compensation in relation to the statement, and (b) the penalty hypothetically payable by the taxpayer to which the statement relates, usually 50% of the amount of tax sought to be avoided.

This is nice. This is very nice. A very clever hook by the legislative draftsperson involved. I was not at all aware of this provision, or the related jurisprudence.

Yes, this gives me ideas for potential applications in other non-criminal penalty contexts.

As always, very appreciated Burnaby49.

SMS Möwe

[Burnaby49]

You're welcome. I also admire the devious way the legislation makes the punishment fit the crime. The more the adviser got or the taxpayers claimed the higher the penalty. I particularly like the way that the legislation crafts one part of the penalty calculation on "the penalty hypothetically payable by the taxpayer to which the statement relates" rather than any actual imposed penalties.

This section was enacted as a response to the various acts of professional misconduct done by advisers and promoters of the charitable donation schemes and is deliberately punitive. It is one of the very few (perhaps the only, I do not know of another) civil penalty section in the Income Tax Act not imposed on the taxpayer getting the benefit but on a third party advising or guiding the taxpayer. Given the punitive nature of the section and the open-ended aspect of the financial penalty the government did not want the CRA hounding people who made honest mistakes hence the term "culpable conduct" that got the Tax Court judge's knickers in a twist. The judge interpreted that to mean criminal but it was just a way to crank up the normal taxpayer penalty term "gross negligence" to a higher non-criminal standard to address the plaintive cries of the professional organizations (accountants and lawyers) that their members would be financially ruined by honest mistakes.

If there is a prior appeal case on this issue I'm not aware of it, Guindon may be the first but I stand to be corrected. Keep in mind when the CRA penalizes someone under this section and an appeal is risky it is best just to pay up and keep quiet since the assessment itself, based on evidence of unethical conduct, might well get the individual in trouble with his own professional organization. Pay the fine and keep your mouth shut and nobody will know since assessments and penalties under the Act are confidential. So there may be other professionals penalized under this section that chose not to appeal.

[Burnaby49]

The latest from the Canada Revenue Agency regarding how much chance taxpayers have of getting an allowable deduction from these charitable donation scams. Some of key sentences;

For the 2013 tax year, the Canada Revenue Agency (CRA) will not assess taxes owed or provide a refund to taxpayers who claim a tax credit under a gifting tax shelter scheme until the CRA has audited the tax shelter.

This means that if you make any donation claim in respect to a gifting scheme the CRA will sit on your return until they get around to doing a full audit of the shelter you participated in. I worked in this area and, in my experience, an audit of one of these shelters generally took at least a couple of years. So this means you sit around waiting for your refund for years then you get it denied when the shelter audit is finished (as the newsletter states, no audited gifting shelter has ever been accepted by the CRA). This freeze is for the entire tax return, not just the donation claim. This doesn't stop them coming after you for taxes owing however.

The new legislation, introduced in Economic Action Plan 2013, affects taxpayers who have been denied, in whole or in part, a tax credit for donations made under a gifting tax shelter and who have filed an objection to this decision with the CRA or appealed it to the Tax Court of Canada. The new legislation allows the CRA to collect 50% of the amount in dispute or to withhold 50% of the refund of an amount in dispute, when these amounts are related to a gifting tax shelter.

This is a very unusual provision. In Canada if you appeal a reassessment there is a freeze on the taxes owing on the appealed item until after the appeal is finalized. This provision specifically exempts (at least partly) gifting tax shelters from this freeze. The potential for abuse is obvious. We have one tax shelter with over half a billion dollars in claimed deductions still under appeal almost a decade after the taxpayers were reassessed. Between getting to Tax Court and the Federal Court of Appeal, and taxpayer's delaying actions, the gifting tax shelters can easily take ten years to resolve. At least now taxpayers have to cough up some of the taxes owing.

The CRA continues to alert taxpayers that if they receive a charitable donation receipt for an amount higher than the value of property donated, the receipt is not valid and can't be used to claim a tax credit.

That sentence kept me in full employment for years because it was my job, as a CRA employee, to place a fair market value on these donated properties. There was not a single occasion where I agreed with the claimed value of the donated property.

CRA NEWSWIREOttawa, January 10, 2014

CANADA REVENUE AGENCY CONTINUES ITS ADMINISTRATIVE PROCEDURES FOR GIFTING TAX SHELTER SCHEMES

For the 2013 tax year, the Canada Revenue Agency (CRA) will not assess taxes owed or provide a refund to taxpayers who claim a tax credit under a gifting tax shelter scheme until the CRA has audited the tax shelter. However, if a taxpayer makes a claim under a gifting tax shelter scheme, the taxpayer can have his or her tax return assessed before the related tax shelter has been audited if they agree to remove the claim from their return. This procedure remains unchanged from the 2012 tax year.

The CRA continues to alert taxpayers that if they receive a charitable donation receipt for an amount higher than the value of property donated, the receipt is not valid and can't be used to claim a tax credit. The CRA is auditing all such gifting tax shelter schemes, and to date, none has been found to comply with Canadian tax law.

The new legislation, introduced in Economic Action Plan 2013, affects taxpayers who have been denied, in whole or in part, a tax credit for donations made under a gifting tax shelter and who have filed an objection to this decision with the CRA or appealed it to the Tax Court of Canada. The new legislation allows the CRA to collect 50% of the amount in dispute or to withhold 50% of the refund of an amount in dispute, when these amounts are related to a gifting tax shelter. The CRA strongly encourages taxpayers to get advice from an independent tax professional before engaging in a tax shelter. To make sure the advice is independent, a tax professional should not be linked in any way to the tax shelter or the promoter of the tax shelter.

Quick facts

· The CRA has denied more than $5.9 billion in donation claims and reassessed over 182,000 taxpayers who participated in these gifting tax shelters.

· The CRA has revoked the charitable status of 47 charitable organizations that participated in gifting tax shelters.

· The CRA has assessed $137 million in third-party penalties against the promoters and tax preparers involved.

· The CRA will also be administering new legislation for the 2013 tax year, which affects taxes in dispute related to gifting tax shelters.

Associated Links

· Tax shelters (Canada Revenue Agency)

ContactsJulie Carmichael
Director of Communications
Office of the Minister of National Revenue
613-995-2960

Noël Carisse
Media Relations
Canada Revenue Agency
613-952-9184

[Burnaby49]

A couple of follow-up points;

In a prior post I discussed Kossow, a donation case involving the donation of bronze sculptures purchased arm's length for $6,000,000 and valued, for donation purposes, at $109,000,000. Taxpayers lost at Tax Court;

http://www.canlii.org/en/ca/tcc/doc/201 ... MyNQAAAAAB

Recently the Federal Court of Appeal heard Ms. Kossow's appeal from the Tax Court decision and, not unexpectedly, told her to get lost;

http://www.canlii.org/en/ca/fca/doc/201 ... jgzAAAAAAE

You will note in my last post, where I copied the CRA bulletin, that it stated;

Quick facts

· The CRA has denied more than $5.9 billion in donation claims and reassessed over 182,000 taxpayers who participated in these gifting tax shelters.

· The CRA has revoked the charitable status of 47 charitable organizations that participated in gifting tax shelters.

· The CRA has assessed $137 million in third-party penalties against the promoters and tax preparers involved.

· The CRA will also be administering new legislation for the 2013 tax year, which affects taxes in dispute related to gifting tax shelters.

I'm assuming the $137 million in third-party penalties (penalties applied against parties other than the actual taxpayers who claimed the charitable donations) were levied through the application of the Subsection 163.2 penalties that Mowe found to be a "clever hook". When I retired from the CRA in 2007 the CRA was just starting to apply this penalty. It appears they have gone into overdrive with it. I'm glad to see it but I note they talk about total penalties assessed without mentioning how much has actually been collected.

[notorial dissent]

I know this is probably a dumb question, or at least a response to a really dumb situation, but why, if CRA has uniformly rejected these types of transactions, and I would think by now it would be fairly widely known, why are your taxpayers still either indulging in it or falling for it, whichever it is. I mean, me being me, I would sort of assume/expect that anyone who had that kind of money to throw around/give away, would have to have at some point some gotten competent tax advice, am I confused here, yet, that doesn't seem to be the case judging by the number of cases we seem to be discussing. I know a lot of it is the good old trying to get something for nothing or get away with something, but some where along the way you'd think.

I know this is sort of the pot calling the kettle griege, as since we certainly have enough of our won home grown varieties, but still!!!!