The Canada Revenue Agency has revoked the charitable status of Toronto-based Banyan Tree Foundation, promoters of a tax-shelter program at the centre of a $50-million class-action lawsuit filed this past February.

“The CRA’s decision is not something done lightly,” says David Thompson, a class-action specialist with Hamilton-based Scarfone Hawkins LLP, who filed the suit.

The lawsuit against Banyan and three interlinked Toronto-based financial services companies — Rochester Financial Ltd., Promittere Capital Group Inc., Promittere Asset Management Ltd. — claims that as many as 3,000 investors unwittingly participated in a fraudulent tax credit scheme, often on the advice of their financial advisors.

Fraser Milner Casgrain LLP, a Toronto-based law firm that issued opinion letters used by the two Promittere companies and Banyan to encourage investors to participate in the scheme, is also named in the lawsuit.

Although no financial advi-sors are named in the lawsuit, Thompson says: “It would be open for plaintiffs to name their financial advisors [in contingent lawsuits].”

The allegations outlined in a statement of claim filed with the Ontario Superior Court of Justice by Thompson on behalf of plaintiffs Kathryn and Rick Robinson of Oakville, Ont., have not been substantiated in court. Thompson says the case aims to ensure that plaintiffs recoup the amounts paid in security deposits, disallowed tax credits and interest payable on the taxes owing as a result of CRA reassessments.

Calls to Banyan, Promittere Capital and Promittere Asset Management were all directed to Robert Theissen, president of all three firms, who did not respond.

Michel Brunet, Fraser Milner’s chairman and CEO, says the law firm stands behind its lawyers and the quality of their counsel.

“We intend to defend this claim vigorously,” he says, “as we have no reason to doubt the validity of the opinions or the advice that is being brought into question.”

Under the terms of the tax scheme, investors borrowed substantial sums of money from Rochester in order to participate in a “gift program” involving donations to Banyan Tree and investments managed by Promittere Capital, a family holding company that owns mutual fund dealer Wealth Advisory Services Ltd.

Portions of the loans issued to investors by Rochester were remitted to Promittere as investment deposits pledged toward generating sufficient income to repay the loans. Participants matched their investment deposits with security deposits from personal funds.

The balance of the loans were donated to Banyan Tree. The foundation, in turn, provided donations in the form of annuities to a wide variety of charitable organizations, including the Arthritis Society of Canada and the Girl Guides of Canada, according to Banyan Tree’s Web site.

The foundation claims to have received cash donations of more than $136 million and in-kind donations of more than $67 million since 2002.

Participants were issued certificates for tax credits for the years 2003 through 2007.

The CRA began warning participants in 2006 that the tax credits would probably be disallowed, and that participants faced interest penalties on their reassessed taxes.

The security deposits paid by participants in the gift program have also “been severely compromised,” according to the statement of claim filed against the promoters.

While describing the case as the first in which Canadian investors have sued promoters of a failed tax credit scheme, Adam Aptowitzer, a tax expert with Ottawa-based Drache LLP, suggests that such a lawsuit should come as no surprise: “To many in the industry, [launching such a] class-action suit was only a matter of time. Many people believe these tax-shelter programs to be, at best, aggressive and, at worst, fraudulent.”

Thompson believes that financial advisors across the country played a key role in advising clients to participate in the scheme.

In a March 2007 letter, Banyan Tree warned participants who were issued tax receipts for the 2004 tax year that the CRA “will probably proceed to reassess donors to disallow their charitable gift receipt.” The letter advised participants to inform CRA “how you became aware of the Foundation’s donation program. In most cases, donors were informed by their agents or accountants. Please provide the name and address of your agent.”

ADVISORS NOT NAMED — YET

Thompson says the involvement of financial advisors will probably deter arguments that the plaintiffs were victims of their own lack of diligence, and should have known that the CRA was likely to disallow the tax credits.

@page_break@“The context in which most individuals came to participate,” Thompson argues, “mitigates the effect of the argument that people should have known better.”

The CRA has issued public warnings about donation-based tax credit schemes since 1998. Starting in 2000, the agency warned would-be participants in such schemes to “get competent, independent professional advice from a tax advisor before signing any documents.”

Jamie Golombek, managing director for tax and estate planning with Toronto-based CIBC Private Wealth Management, notes that the CRA is waging a “major campaign” against tax-credit schemes, and suggests that the class-action lawsuit against the promoters of the Banyan Tree gift program should be viewed as significant by financial advisors.

“As a financial advisor,” Golombek suggests, “if a client asks about a particular investment or tax shelter and if you aren’t an expert, tell them to get independent advice.”

Says Aptowitzer: “As the CRA has no authority to go after the promoters, it falls to the participants of the program to try to exact some measure of compensation in order to make themselves whole again.”

Thompson says interest in the case has been strong among people interested in joining the plaintiffs’ class action.

“This was sophisticated program put together by sophisticated people,” he says, noting that the gift program continued, “we believe, actively into 2007” despite the warnings from the CRA starting many years earlier.

Noting that Ontario courts have recently displayed a shift toward certifying class-action cases, Thompson says, he considers prospects for this case to be strong because there are several people affected.

“This is an ideal case in which, absent the aggregation of claims in a class-action lawsuit, it is unlikely any individual will get redress,” Thompson says. “Although the conduct of the defendants dictates the timelines, we plan to move toward certification by the end of the year.”

Adds Aptowitzer: “While one feels for these participants and it is not unlikely that the layman was led astray by sophisticated tax promoters, one has to wonder how this balances with the old maxim of ‘caveat emptor.’ Ultimately, that is the question for the courts.” IE