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.
\u201cThe CRA\u2019s decision is not something done lightly,\u201d says David Thompson, a class-action specialist with Hamilton-based Scarfone Hawkins LLP, <\/b> who filed the suit.
The lawsuit against Banyan and three interlinked Toronto-based financial services companies \u2014 Rochester Financial Ltd., Promittere Capital Group Inc., Promittere Asset Management Ltd. <\/b>\u2014 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<\/b>, 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: \u201cIt would be open for plaintiffs to name their financial advisors [in contingent lawsuits].\u201d
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\u2019s chairman and CEO, says the law firm stands behind its lawyers and the quality of their counsel.
\u201cWe intend to defend this claim vigorously,\u201d he says, \u201cas we have no reason to doubt the validity of the opinions or the advice that is being brought into question.\u201d
Under the terms of the tax scheme, investors borrowed substantial sums of money from Rochester in order to participate in a \u201cgift program\u201d involving donations to Banyan Tree and investments managed by Promittere Capital, a family holding company that owns mutual fund dealer Wealth Advisory Services Ltd. <\/b>
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\u2019s 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 \u201cbeen severely compromised,\u201d 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<\/b>, suggests that such a lawsuit should come as no surprise: \u201cTo 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.\u201d
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 \u201cwill probably proceed to reassess donors to disallow their charitable gift receipt.\u201d The letter advised participants to inform CRA \u201chow you became aware of the Foundation\u2019s donation program. In most cases, donors were informed by their agents or accountants. Please provide the name and address of your agent.\u201d
ADVISORS NOT NAMED \u2014 YET<\/b>
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@\u201cThe context in which most individuals came to participate,\u201d Thompson argues, \u201cmitigates the effect of the argument that people should have known better.\u201d
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 \u201cget competent, independent professional advice from a tax advisor before signing any documents.\u201d
Jamie Golombek, managing director for tax and estate planning with Toronto-based CIBC Private Wealth Management<\/b>, notes that the CRA is waging a \u201cmajor campaign\u201d 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.
\u201cAs a financial advisor,\u201d Golombek suggests, \u201cif a client asks about a particular investment or tax shelter and if you aren\u2019t an expert, tell them to get independent advice.\u201d
Says Aptowitzer: \u201cAs 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.\u201d
Thompson says interest in the case has been strong among people interested in joining the plaintiffs\u2019 class action.
\u201cThis was sophisticated program put together by sophisticated people,\u201d he says, noting that the gift program continued, \u201cwe believe, actively into 2007\u201d 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.
\u201cThis is an ideal case in which, absent the aggregation of claims in a class-action lawsuit, it is unlikely any individual will get redress,\u201d Thompson says. \u201cAlthough the conduct of the defendants dictates the timelines, we plan to move toward certification by the end of the year.\u201d
Adds Aptowitzer: \u201cWhile 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 \u2018caveat emptor.\u2019 Ultimately, that is the question for the courts.\u201d \tIE<\/b>
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