Canadian Humanitarian Trust

Practical and Practice issues for Professionals who practice in the area of taxation. Moral, social and economic issues relating to taxes, including international issues, the U.S. Internal Revenue Code, state tax issues, etc. Not for "tax protestor" issues, which should be posted in the "tax protestor" forum above. The advice or opinion given herein should not be relied on for any purpose whatsoever. Also examines cookie-cutter deals that have no economic substance but exist only to generate losses, as marketed by everybody from solo practitioner tax lawyers to the major accounting firms.
Burnaby49
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Re: Canadian Humanitarian Trust

Postby Burnaby49 » Sat Jan 11, 2014 11:29 pm

notorial dissent wrote: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!!!!


The quick answer is that people are no longer getting suckered into these schemes, or at least these specifically structured schemes. There are similar donation scams still floating around but in much smaller volumes.

What you are reading in my Quatloos postings is largely a culmination of transactions from over a decade ago. Reading the court decisions in the donation scams is like watching a star go super-nova; fascinating but just the record of a long-ago, long expired event. Take Kossow, the case just concluded and cited above. It involved the reassessment of the taxpayer's 2000 to 2003 income tax returns to disallow the claimed deductions. This delay of thirteen years between claiming the deduction and final resolution is by no means unusual. Why so long?

The charitable donation scams really started, tentatively, in the mid-late 1990's. When shyster promoters realized their potential they went nuts and by the early 2000s were being flogged to Ma and Pa taxpayers in huge volumes. They had opinion letters \from legal firms saying it was all ok, the schemes were often incredibly complex (which seemed to confirm legitimacy in taxpayer's eyes) and they offered money for nothing. You pay the promoter $1.00 and you get a guaranteed tax refund of say $1.50. They started hitting the Tax Court in 2004 with Klotz;

http://www.canlii.org/en/ca/tcc/doc/200 ... IzNgAAAAAB

an art donation scheme in which a taxpayer claimed, in his 1999 tax return, a donation amount of $258,000 for art that cost him $75,000.

By that time the CRA was overwhelmed, responding to an unprecedented tidal wave of these schemes, all of which had to be audited. Essentially we were hit by them after they had conned a huge number of taxpayers into participating. I was very deeply involved in this and the review of these schemes, particularly the donation of computer software, took up most of the last five years or so of my CRA career. The whining (sorry, standard complaint) of taxpayers was "if these schemes aren't allowed why didn't the CRA stop me or shut them down". The answer is we couldn't. The CRA only has the power to reassess filed tax returns. We can't go out into the tax marketplace and beat people over the head not to be so damned stupid nor could we shut down tax schemes which, while doomed to failure, were not illegal. So we reassessed masses of filed tax returns.

Use Kossow as an example of the timeline. Her last reassessed return was for the 2003 tax year. She would have filed that in 2004 and, under the rules, the CRA had until 2007 to reassess her. We had a habit of reassessing at the last minute because we tried to get as much information about the schemes as we could before reassessing. There was also the issue of volume. Ms Kossow was one of over 1,500 taxpayers in this scheme with a total of about $200,000,000 in claimed deductions. All had to be reassessed and reviewed. And Kossow was by no means the biggest, either in terms of deductions and participants. Then there were what I call the procedural skirmishing prior to the Tax Court hearing. The taxpayers went to Tax Court and Federal Court of Appeal in 2006, 2008, 2009 and 2010 over pre-trial procedural issues. The case was slated for a Tax Court hearing on September 8, 2008 but was stayed on the taxpayer's request to the Federal Court of Appeal pending some other application she planned to make. In 2009 she filed a motion in the Federal Court of Appeal asking that the already extensive discovery process be extended even longer. In May 2010 she had a hearing at Tax Court where she asked, yet again, for an extension on discovery. Denied. At that hearing the court set the case down for a hearing in January 2011 but it did not get heard until April 2011 with the decision not released until August 2012. Appealed by the taxpayer to the Federal Court of Appeal and heard there October 17, 2013 with decision released December 06, 2013. Note that the Crown had no control over any of this since all of the motions and appeals were by the taxpayer. This type of delay was typical for the large files.

While all of these cases were winding their slow way through the system promoters were telling new and old suckers that yes, there had been reassessments but the CRA had not, and would not, win in court. And people bought it. Some were participating in later iterations of the same schemes that they'd already been reassessed for, just doubling down on a losing bet.

Another reason that taxpayers kept buying was that the plans evolved. Initially they were very simplistic, buy something for $1,000 donate it and get a receipt for $3,000 with a piece of paper saying the property was actually worth the $3,000 amount. They failed in court because the judges essentially said "Who cares what is on that paper? You paid $1,000 arm's length and that is, at most, what it is worth". So the legal profession got the bright idea of having only cash donations (called levered donation schemes by the tax community).Can't argue the value of that, right?

Since I've explained them before I'll be brief and simplistic but with a personal anecdote. The legal geniuses though up schemes where taxpayers donated, say, $10,000 but only $3,000 was actually from their own money. The rest was covered a $7,000 interest free very long-term to the taxpayer from a third party. Kossow was one such scheme. Ms. Kossow got (or thought she got) the whole cash amount as a donation, the scheme promoters got her actual personal cash payment. I remember when I read a legal opinion on this type of scheme by one of Canada's largest tax law partnerships. The writer just about peed himself in glee over how airtight it all was. The hook? When the taxpayer signed a contract binding him/her to donate they did not have a contractual right to the loan so, for one moment, they were personally liable for the whole amount. A third party might, or might not, agree to make them an interest free loan. So, legally, the taxpayer had donated straight cash out of his own funds and the opinion actually said the CRA could not deny the donation. It went further and said that the courts could not rule against the taxpayer because they could not legally attach the loan to the donation since there was no contractual right to the loan at the time of the donation. Huh? A court can do what it wants. Takes a lot of hubris to put down on a legal opinion which the court will read a comment that that the court is powerless to rule against the scheme. I was incredulous at the stupidity involved. I figured there was no way the courts would allow such blatant, almost contemptuous manipulation of tax law. I was right.

It ended very badly for taxpayers, far worse than the prior property-in-kind donations. At least with those they got the cash amounts they paid to purchase the donated property. The levered donation taxpayers got nothing, even their own personal cash. In law something is not a gift if the donor gets something back in consideration. If a donation is not, legally a gift, then it cannot be deducted for tax purposes. The Crown argued that the donors under these schemes got valuable consideration back, long term interest-free loans which vitiated the payments as gifts or donations. When the taxpayers lawyers argued that the loan could not be considered as part of the donation scheme because the taxpayers had no legal right to it the court said essentially "so what?". The Tax Court said that everybody in these schemes got a loan and, contract or not, knew they would get one so it had to be included as part of the scheme. As far as value went one court basically said, go to your bank and see if you can get an interest-free twenty-five year loan. So valuable consideration received back, no gift so no donation, and no tax deduction at all. However I'd estimate that the levered donation schemes kept the the charitable donation scams running another five years or so after taxpayers started getting wary about the donation in kind schemes.

This is where we currently stand but no doubt some other big scheme will pop up eventually. I was never concerned about running out of work while at theCRA.

For a current discussion on the legislation just passed to stop all this go to;

http://www.taxtips.ca/personaltax/taxsh ... ations.htm
"Yes Burnaby49, I do in fact believe all process servers are peace officers. I've good reason to believe so." Robert Menard in his May 28, 2015 video "Process Servers".

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notorial dissent
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Re: Canadian Humanitarian Trust

Postby notorial dissent » Sun Jan 12, 2014 4:57 am

OK, thank you. So what we are seeing now is inevitable and end result of the train wreck that started all those years ago. Makes much more sense then.
The fact that you sincerely and wholeheartedly believe that the “Law of Gravity” is unconstitutional and a violation of your sovereign rights, does not absolve you of adherence to it.

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Re: Canadian Humanitarian Trust

Postby Burnaby49 » Thu Jan 16, 2014 11:20 pm

An article in Today's Vancouver Sun covers the same ground as some of my prior posts re these charitable donations;

http://www.vancouversun.com/business/yo ... story.html

ND was saying that the scams I've been relating are all ancient history. Thinking it over maybe not. To start with if they were gone then the CRA wouldn't be posting new rules to combat them and Don Cayo wouldn't be currently writing about them. They may have evolved from the structures I've written about to new ones involving offshore trusts that were just starting up when I left the CRA in late 2007.

Very simplistically (the ones I saw were really complex, in my opinion deliberately so to confound the CRA) the property that you donated would not actually be purchased by you so there was no pesky arm's length cost for the courts to attack, it would be given to you free! Let's use ND as a Canadian taxpayer and the property being donated in the scam is licenses for worthless old computer software. If ND bought the software and then donated at a higher claimed value he's SOL because the Tax Court will just use his cost as the value for donation purposes. So instead of buying the software ND gets it as a distribution from a trust. He does this by applying to be a beneficiary of an offshore trust. All that being a beneficiary gets him is licenses for the software, as many as he wants. So ND says "I'd like to be a beneficiary of the TaxScam Trust and I'd like my beneficial interest paid out to me, say 100 software licenses". Bingo, trust gives him the 100 licenses with a piece of paper saying they are worth $1,000 each for a $100,000 value distribution. In Canadian tax law distributions from a trust are tax free to the recipient and, if they are non-cash, the recipient is deemed to have a tax cost of the property equal to it's fair market value.

ND then donates the software licenses to a charity set up for exactly this purposes. It will be shut down as soon as the CRA figures out what is going on but, while it is in operation, donations to it are validly tax deductible. So if ND can defend the $100 per license value he is home free, a $100,000 charitable donation at no cost to him.

"Wait!" you are thinking, "what kind of nonsense is Burnaby49 trying to feed us here, no sleazy promoter would do this without a fat payback". Quite true, the promoters get their money through software licensing fees. Every software license that ND receives from the trust needs a unique password to unlock it and these cost $30 each. So the charity agrees to accept his licenses but only if he donates $30 cash along with each license to access the password. So in the perfect world of the scammers and the participating taxpayers ND gets a $100,000 deductible donation, the scammers get $30,000, and the CRA gets the shaft.

You are going to tell me that this is too stupid to work. What do you know? Some of the best tax minds in Canada thought this up. However, in this case, you'd be right. One, Bandy, has gone to court so far (link below). Just a minor one, taxpayers in the big ones haven't seemed to eager to go to court. Bandy lost very badly. The CRA proved that the whole thing was essentially a sham. The purported software didn't even exist, the promoter made it up. The taxpayer couldn't even prove the trusts existed or that he had legally been given the licenses. The judge got so ticked off he didn't even allow the $30 per license cash amount. I attended the Tax Court hearing. Enjoyed it thoroughly.

http://www.canlii.org/en/ca/tcc/doc/201 ... ZHkAAAAAAQ
"Yes Burnaby49, I do in fact believe all process servers are peace officers. I've good reason to believe so." Robert Menard in his May 28, 2015 video "Process Servers".

https://www.youtube.com/watch?v=XeI-J2PhdGs

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Re: Canadian Humanitarian Trust

Postby notorial dissent » Fri Jan 17, 2014 1:47 pm

I'm not sure what's scarier, the whole idea of this, or the fact that I actually followed Barnaby's explanation. probably helps, in that it is so similar to several variations i have seen over the years, and all with the same unhappy ending. The main reason I had asked about this was that despite the age and whiskers on this particular endeavor, I've seen descendants of it running around fairly recently, in fact some fairly wealthy people, some, not all of whom should have been pretty financially savvy, in my neck of the woods got taken both on a couple Madoff sort of scheme that was being run locally, as well as something of similar bent to this tax scheme. In both instances, I think the loss to the victims was pretty much near all by the time it was uncovered. You know what they say, everything old is new again, and in this particular racket that seems to be a fact. Thanks again for the explanation.
The fact that you sincerely and wholeheartedly believe that the “Law of Gravity” is unconstitutional and a violation of your sovereign rights, does not absolve you of adherence to it.

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Re: Canadian Humanitarian Trust

Postby Burnaby49 » Fri Mar 21, 2014 12:36 am

An update on Julie Guindon. She was covered in this discussion as the individual unlucky enough to be the test case for the penalty in 163.2(5) of the Income Tax Act. This penalizes professionals for making false statements in promotion of tax schemes, specifically in this case an art donation scheme. As the Tax Court said;

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.


However she got off at Tax Court. As I said in a posting;

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.


This was reversed at the Federal Court of Appeal making the penalty applicable. However I said in the posting that;

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.


Today the Supreme court of Canada granted her Leave to Appeal. So we'll get their take on penalizing facilitators of shady tax schemes. This penalty is important to the CRA, if the Supreme Court finds it can't be applied the promoters in these schemes will get off with no legal repercussions.
"Yes Burnaby49, I do in fact believe all process servers are peace officers. I've good reason to believe so." Robert Menard in his May 28, 2015 video "Process Servers".

https://www.youtube.com/watch?v=XeI-J2PhdGs

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Re: Canadian Humanitarian Trust

Postby Hilfskreuzer Möwe » Fri Mar 21, 2014 4:35 am

Fascinating that the SCC granted leave! And we still have Rothstein J. on the panel ... oh this could be a goldmine for policy commentary.

I think Burnaby49 would agree with me that Justice Rothstein is one of the most perceptive tax-oriented judges we have had in that body in a long, long time. An extremely practical judge, and one who writes unusually detailed and systematic decisions. Rothstein had previously served at the Federal Court of Appeal, and as that is the penultimate appeal court for tax matters in Canada Rothstein is very familiar with that legal domain.

I can hardly wait to see the televised hearings!

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That’s you and your crew, Mr. Hilfskreuzer. You’re just like a vampire, you must feel quite good about while the blood is dripping down from your lips onto the page or the typing, uhm keyboard there... [http://www.youtube.com/watch?v=YNMoUnUiDqg at 11:25]

Burnaby49
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Re: Canadian Humanitarian Trust

Postby Burnaby49 » Fri Mar 21, 2014 4:54 am

In my opinion Justice Rothstein is the most capable of our Supremes, at least in tax. I also have a high opinion of Nadon (again a Federal Court of Appeal background). We'll find out his fate tomorrow.

For you non-Canadians Nadon was appointed to the Supreme Court of Canada but his appointment was blocked by Quebec. The province of Quebec is entitled to have three of the Justices from Quebec (which Nandon is) but they felt he wasn't Québécois enough because his background is Federal Court rather than a Quebec provincial court. So the Quebec provincial government objected to his appointment. Harper, our Prime Minister, referred the issue to the Supreme Court for resolution and the judgment is to be released tomorrow. See links below;

http://www.cbc.ca/news/politics/it-s-qu ... -1.2579365

http://www.ctvnews.ca/canada/supreme-co ... -1.1738520
"Yes Burnaby49, I do in fact believe all process servers are peace officers. I've good reason to believe so." Robert Menard in his May 28, 2015 video "Process Servers".

https://www.youtube.com/watch?v=XeI-J2PhdGs

Burnaby49
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Re: Canadian Humanitarian Trust

Postby Burnaby49 » Fri Mar 21, 2014 5:21 pm

Nadon gets rejected by the Supreme Court;

http://www.cbc.ca/news/politics/marc-na ... -1.2581388
"Yes Burnaby49, I do in fact believe all process servers are peace officers. I've good reason to believe so." Robert Menard in his May 28, 2015 video "Process Servers".

https://www.youtube.com/watch?v=XeI-J2PhdGs


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