Business taxes Ontario, it can get complicated! It’s a familiar refrain. If it sounds too good to be true, it probably is. Five long years later, one group of Canadian investors discovered avoiding this tax scheme would have been a time and money saver.
Even senior tax lawyers and financial advisors got caught up in the fray.
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A $6,700 interest penalty
The class action lawsuit against ParkLane Financial Group Limited of Toronto and others dates back to 2012. By that time, Canada Revenue Agency (CRA) had disqualified more than $4.5 billion in donations to the ParkLane Donations for Canada Charitable Gift Program by over 130,000 taxpayers. Their grief started when their accompanying tax deductions were reassessed by CRA.
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To understand their plight, we need only look to representative plaintiff Toronto police officer Michael Cannon. Cannon, who represented an estimated 9,926 plaintiffs, gave $22,500 in cash and $67,500 in “donations-in-kind” to ParkLane. CRA denied the entire amount. That disqualification left Cannon owing not only unpaid taxes, but $6,703.76 in interest. The other class members had similar fates. All told, they invested approximately $144 million.
It fell to Cannon to seek the Ontario Superior Court of Justice’s (ONSC) approval to certify a class action to recover the donors’ losses. (Certifying a class action ensures only those cases with a prospect of success go to trial.)
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Finding the puppet master
As Cannon told the court, he was a reasonably sophisticated investor. He had been advised to donate by his professional counsel and tax advisor. Like others, he expected to qualify for $10,000 in tax deductions for every $2,500 donated.
The “puppet master”, as the court deemed him, of the scheme was Edward Furtak, developer of a global index mutual fund and president and CEO of the Trafalgar Group of Companies. The fund purportedly made its profits by trading futures contracts. Furtak licensed the software the fund used to make money to charities, drawing a group of well-meaning non-profits into the alleged fraud.
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Comfort letters misled investors
Nova Scotia tax lawyer Edwin Harris, a veteran of the federal Tax Court of Canada, was among those entwined in the convoluted tax shelter. Harris wrote tax opinions and “comfort letters” for ParkLane’s promotional materials, reassuring investors the scheme would pass CRA scrutiny. Armed with these, ParkLane marketed the tax shelter to financial planners, described as ParkLane distributors.
Ontario investor Fern Delarosbil summed up their experience for the Globe and Mail (Aug. 23, 2011): “It’s not like we were buying this from a stranger at the doorstep.”
As the court put it:
“There are certainly arguments to be made that the Distributors were a cog in the machinery of the Gift Program and that they were recruited because they had a stable of well-heeled clients who would be interested in contributing to the Gift Program as a way of reducing their taxes.”
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In fact, very little of donors’ money went to any charities. Instead, it was diverted to ventures Furtak owned, including Bermuda Longtail Trust and the Funds For Canada Foundation. As CRA reported when it revoked the foundation’s charitable status in 2009, of nearly $176.5 million, less than one per cent went to charity.
CRA described it this way:
“Through a series of transactions and directions signed by all parties involved, these funds followed a circular flow and ended up back in the hands of the promoters.”
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Charities lost out
Back to the charities ensnared in ParkLane’s web. Mostly small, little known organizations. they agreed to give ParkLane 99 per cent of the donations directed to them. In exchange, the charities would receivea “steady stream” of future income for over 20 years. The income came from profits from the futures contracts profits, raised through Furtak’s software. Donors wrote a $2,500 cheque or pledge to participating charities. Furtak inflated those donations with $7,500 of charitable trust units from his own company to convince CRA the scheme was real. Donors, in turn, received a receipt for their $2,500 in cash and for making a $7,500 “donation-in-kind” (Furtak’s trust units).
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What donors didn’t realize was that most of the $10,000 was flowing out of the charities’ hands almost as quickly as donors could write a cheque or make a pledge. Charities received only $100 for every $10,000 “donation”. The future income stream was speculative and unguaranteed. Needless to say, the returns were negligible, $6 million on $144 million in donations between 2006 and 2012. The charities’ agreements with Furtak’s companies denied them any right to the principle.
Advantages of settling late
Awash in allegations of fraudulent and negligent misreprentation and failure to exercise a duty of care, the class action was certified to go to trial in 2012. Five years in, the plaintiffs received a late stage settlement offer of $17.5 million, plus accrued interest and legal fees. The agreement followed a $28.2 million settlement by other defendants.
Weighing the risks and rewards involved, the plaintiffs decided against a full trial for at least three reasons:
- It helped that the CRA agreed to accept the $2,500 cash donations as a charitable credit. That reduced the plaintiffs’ losses from over $138.5 million to $60 million. Minus the $28.2 million settlement, their losses totalled about $32 million.
- Many of the defendants were based in Bermuda. Since class actions don’t exist in Bermuda, enforcing a Canadian court judgment would be a problem.
- And, a defendant threatened to otherwise continue the costly litigation.
ONSC agreed with the class. The $17.5 million settlement, over half of the outstanding $32 million, was fair, reasonable and in the plaintiffs’ best interests, the judge ruled. Class members concurred.
$5.8 million in legal fees
That left the legal fees. The class’ lawyers received court approval for a 33 per cent contingency fee (over $5.8 million), the highest award available. As the judge remarked:
“It is only through a robust contingency compensation system that class counsel will be appropriately rewarded for the wins and losses over many files and many years of litigation and that the class action will continue to remain viable as a meaningful vehicle for access to justice.”
Cannon himself was awarded a $50,000 honorarium for his extraordinary efforts as representative plaintiff. Not the least of his burden was the notariety he earned by putting his name on the class action. Fortunately, his perseverance paid off.
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