First some background. Here in Canada we have what are called Registered Retirement Savings Plans (RRSPs) that allow people to put money away for their retirement. Taxpayers are allowed to put a certain amount into RRSPs every year based on their income and some other factors. These are not government plans, they are administered by banks and other financial institutions. Individuals who buy into them can, to some extent, control how the money is invested but they can only fully control a plan's investment through what are called self-administered RRSPs. Even with a government pension I have a bunch of the standard RRSPs. I didn't buy them because of retirement concerns but for their tax deferral benefits. The amount you invest can be deducted from your current year's income for tax purposes and any earnings in the RRSP are not taxable until you take the money out. I bought one in 1973 which, compounding for over forty years including the extremely inflationary 70s, has a value of about $15,000. The catch is that when you finally cash them out the proceeds are all immediately taxable. People quite reasonably like the tax deduction part when they invest but hate having to bring the money into income when they take it out.
This, not surprisingly, has encouraged a cottage industry of schemes to get the money out tax free. The federal government has very comprehensive, punitive rules to stop people trying this but scam artists and con men are frequently selling fraudulent plans that they advertise as legit. Often the schemes requires the taxpayer to trust the con artist with the funds which the fools do with depressing frequency only to find their money is permanently gone as soon as the scammer gets control over it. As if that isn't bad enough even if they can prove they were conned and the money stolen this does not change their tax liability for withdrawing the money from the RRSP.
So taxpayers go to the Tax Court of Canada with the plaintive cry that it isn't fair. All the money was stolen but the cruel CRA is demanding they include the full amount of the withdrawal in income anyhow. While this may not be "fair" tax is a cruel world and the assessments are entirely valid based on the provisions of the Income Tax Act . The Tax Court of Canada is not a court of equity, it is required to strictly interpret the Income Tax Act, not give fairness-based relief. So the taxpayers always lose.
A variation is to set up a self-administered plan and cash out your regular plan by transferring the funds to the self-administered one. Then, with the help of a willing con artist, the plan buys shares at much more than their fair market value. Let's say I transfer $100,000 from my regular RRSP to my self-administered RRSP and then spend the whole amount on shares in Scamco Inc. which are only worth, say, $10,000. I pay the scammer the $100,000, my plan gets the shares, and, in a perfect world, the scammer keeps say, a $10,000 commission and the $10,000 actual share value and transfers the remaining $80,000 to an overseas bank account in my name. I've got the $80,000 tax free and I'll pay tax on the $10,000 when I sell the shares. To counter this the Income Tax Act contains rules stipulating that when your RRSP pays more for an investment than its fair market value the excess amount is immediately taxable. In real life the RRSP rules are a lot more complex than my explanation but you get the gist. With that as a background meet our latest sucker, Mr. Edward Baker;
http://www.canlii.org/en/ca/tcc/doc/201 ... jA0AAAAAAE
In 2001 his RRSP purchased shares of Kelso Technologies for $100,000. He was assessed $95,000 on the basis that his RRSP had paid $100,000 for shares worth only, in total, $5,000, a significant gap. Who set up and ran this scheme for our hapless taxpayer? Our old friends Global prosperity.
He testified at Tax Court that he was vacationing in Mexico and, just by chance, wandered into an investment seminar in respect to good solid investments for Canadians. Fired up by the opportunity he paid $20 each for Kelso shares that had just been purchased by the vendor for about $1 each. He paid for the shares from money in his RRSP. Once he did so, to his distress, he found the CRA making unpleasant noises about a big reassessment. He appealed the assessment, not on the basis of value, but on equity, that he had no intention of screwing the government, he thought it was a real investment so the section of the Income Tax Act nailing him, a so-called tax avoidance section, wasn't applicable. The Crown countered with the argument that his intentions were irrelevant since the clear wording of the Act made him taxable regardless of why he made the investment. The judge weighed the pros and cons of the two positions but said the taxpayer's testimony about his intentions were irrelevant because the judge didn't give any weight to the taxpayer's credibility so the Act applied. The judge found these points of the taxpayer's testimony somewhat questionable;
So tough luck taxpayer, sue Global Prosperity if you have a complaint about your treatment but you're stuck with the tax;[39] The Appellant's counsel also insists that the Appellant's evidence contradicts these assumptions such that the Minister bears the burden of showing that they are true. For the reasons outlined below, I attach no weight to the Appellant's evidence. Therefore, the assumptions stand. In any event, I believe that the evidence shows, on a balance of probabilities, that the Appellant acted in a complicit manner in giving his approval to the transaction because he was led to believe he would receive a collateral benefit. Therefore, I can decide this appeal without choosing between the two interpretations of subsection 146(9) of the Act presented by the parties.
[45] In cross-examination it was shown that the Appellant registered for the Cancun seminars as part of a seminar vacation package which cost approximately $8,000. The Appellant omitted this fact in direct examination. It is difficult to imagine that the Appellant did not consult a description of the program before booking his trip. It is improbable that the Appellant did not know the subject matter of the lectures prior to registering for the seminar.
[46] The CRA auditor testified that he learned that the Cancun seminar attended by the Appellant was sponsored by an organization known as the Institute of Global Prosperity ("Global Prosperity"). This organization promotes an aggressive anti-tax philosophy through audio and in-person seminars, the latter typically held in offshore locations. According to the witness, Global Prosperity requires its clients to purchase the audio seminar package as a precondition to attendance at an offshore conference. The cost is approximately $1,500 for six audio disks. The CRA auditor testified that he listened extensively to the audio seminars and prepared a written summary of the highlights of the seminars. His written summary was presented as part of the Appellant's read-in evidence. On page 1 of his report, he summarizes his findings as follows:21
The gist of the Global Prosperity Level 1 education audio tape set is to convince the listener that income tax legislation in Canada and the U.S.A. is not constitutional (it has never been passed into law) and thus the payment of income tax is voluntary. It encouraged listeners to discard their social insurance or social security numbers, driver's licenses, and government-issued currency, to become detached from all government programs including RRSP's and health care, and to move title to their worldly possessions to offshore trusts. These offshore trusts should not be registered in their own names, but registered to IGP personnel with an agency agreement in place allowing the individual to use the property they purchased. As the only "business" of the trust is to protect the personal assets of the individual, the individual can now claim personal living expenses as business expenses, or so they claim. The tape package insists that the supply of money in Canada and the U.S.A. is controlled by the so-called "international banking-cartel" rather than the Bank or Canada or Federal Reserve.
[47] In light of the above, I believe that the Appellant was well aware of the subject matter of the seminars when he signed up for the seminar, but chose to downplay this fact in order to conceal the reason for the purchase of Kelso Securities by the RRSP.
[48] The Appellant's description of the circumstances surrounding the purchase of the Kelso Securities is also suspect. Apparently, Mr. Claridge recommended the investment because Kelso was on the cusp of developing new brake technology for use in the rail transportation industry. This appealed to the Appellant and prompted him to undertake research on Kelso on the Internet. He claims that he spoke with the CEO of the company on the commercial prospects of the new brake system.
[49] Satisfied with this limited due diligence, the Appellant committed $100,000 to the transaction. The Appellant claims he did not set the price range for the transaction. The Appellant testified that his only instructions to Mr. Claridge were to purchase as many shares as possible, claiming that he left all price negotiations to Mr. Claridge.
[50] The Appellant also acknowledged that he had agreed to pay Mr. Claridge $20,000 for his investment advice and believed that this amount would be paid out of the $100,000 to be used for the share purchase. The Appellant claims that it was unclear how exactly this would be done. At the very least, this admission shows that the Appellant knew that the RRSP was paying more than fair market value for the shares. The Appellant offered no reasonable explanation as to why he was willing to pay such a high fee to Mr. Claridge.
[51] Assuming that the Appellant carried out Internet research on Kelso, I find it difficult to believe that he would not have found Kelso's financial information, including the reports of its private placement of the Kelso Securities. These securities were identical to those purchased by the Appellant at a price of $20.00 each. I find it equally improbable that the Appellant would have committed a substantial part of his RRSP savings to the purchase of securities of a small public company at an early stage of its development without providing Mr. Claridge with instructions on price.
[52] I note that the Appellant emphasized that his formal education ended after high school. However, I also note that he owned a printing business which he ran for 35 years until his retirement, when he turned the printing business over to his son. He acknowledged that he had 10 employees at that time. It is likely that the Appellant became a fairly astute business person through building and running his own business for many years.
[53] After listening to the Appellant in direct evidence, I was struck by the fact that he did not acknowledge or suggest that he may have been tricked by Mr. Claridge in overpaying for the Kelso Securities. There is also no allegation of fraud or deceit in the Appellant's Notice of Appeal. Moreover, it is notable that he brought no action or made no complaint against either Mr. Claridge or Mr. Stewart, the lawyer who provided him with a comfort letter regarding the eligibility and fair market value of the Kelso Securities. The only grievance that the Appellant alluded to in his examination in chief was that he became unhappy with Mr. Claridge's services because he was not returning his calls following the completion of the transaction.
[54] All of the above undermines the Appellant's credibility and leads me to believe that he was less than forthright in his description of the circumstances leading up to and surrounding the purchase of the Kelso Securities. The conclusion I draw is that the Appellant was complicit in the undertaking to acquire the Kelso Securities at a price greater than fair market value. I infer that this was done because the Appellant was promised by Mr. Claridge that he would gain access to the funds paid for the Kelso Securities minus Mr. Claridge's fee and the actual value of the securities. Something went wrong with the scheme, prompting the Appellant to move the balance of his RRSP funds to RBC in Toronto. I suspect that someone else made off with the funds.
[57] The limited information which the Appellant claims he consulted suggests that he was either wilfully blind or was not at all interested in the price paid for the Kelso Securities because he expected a collateral benefit. It is equally improbable that the Appellant would have left all price negotiations up to Mr. Claridge without providing him with any guidelines with regard thereto At the very least, the evidence shows that the Appellant, and by extension, his RRSP trust, did not act in a manner consistent with the behaviour of an arm's length purchaser.
[58] It is important to note that the Minister will rarely have access to direct evidence that contradicts a taxpayer's declaration of his state of mind in authorizing a transaction. It is equally hard for the Minister to trace funds once they have been moved offshore. The Appellant offered no reasonable explanation as to why he authorized the purchase. In this case, I can rely on the Minister's assumption because the Appellant failed to establish on a prima facie basis that the Minister's assumptions are wrong. I can also infer from the overall evidence that Mr. Claridge must have promoted the purchase of the Kelso Securities for the purpose outlined in the Minister's assumptions and that the Appellant approved of this strategy. This inference is consistent with the types of strategies promoted by Global Prosperity through its audio and offshore seminars.
[59] In conclusion, and as to the first issue, the facts demonstrate that the Appellant purchased the Kelso Securities for an amount significantly in excess of fair market value. I find that the Appellant caused the RRSP Account to purchase the Kelso Securities, which collectively had a fair market value of no more than $5,000. Those same Kelso Securities had been purchased three months earlier for an issue price of $1.00 per share. Around the time of that purchase, common shares of Kelso were trading on the open market for between $0.07 and $0.11. Less than a month after the Appellant purchased the Kelso Securities, similar Class "A" Preferred Shares were issued in a private placement for a price of $1.00 per share.
[62] For all of these reasons, the appeal is dismissed with costs to the Respondent.
Signed at Ottawa, Canada, this 24th day of June 2014.
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