Tax Donation Fallout in VLR - fallout affects accountants, lawyers, charities, and investors
Posted under News | What's New from the Charities Directorate of CRA | Canadian Charity Law | Ethics and Canadian Charities | Avoiding 'Charity' Scams
Here is an article in Valuation Law Review entitled Tax Donation Fallout
“Valuation Law Review Volume 17, Issue 2, copyright by The Canadian Institute of Chartered Business Valuators, http://www.cicbv.ca 277 Wellington St. West, Suite 710, Toronto, ON, M5V 3H2, is reproduced with permission.”
Dennis Turnbull, CBV
Tax Donation Fallout
There have been significant repercussions from the failure of the valuation-based charitable donation tax shelters to have their value claims accepted by the CRA or sustained by the courts. Taxpayers are looking to their advisers and to legal and accounting firms for compensation for their disallowed donations.
There are two non-tax cases reviewed in this edition. In Lemberg et al. v. Perris the plaintiffs were spouses who purchased artwork for donation on the advice of their accountant. They claimed a deduction well in excess of their actual cash price based on appraisal amounts, however the Tax Court allowed them only their cash payment. The plaintiffs later found out that their accountant had received an undisclosed commission for persuading them to become involved in the program and they sued him, and won, for breach of fiduciary duties.
The second case is a decision of the Ontario Superior Court. Innovative Gifting Inc. v. House of the Good Shepherd et al., involving the donation of cash and supposedly valuable shares. The scheme involved a claimed non-resident Swiss philanthropist who would give shares to Canadian donors who would then gift the shares, and cash, to charities. The charities were to issue tax receipts for five or six times the amount of the cash donations based on the promoter’s assurances that the donated shares were worth at least four times the amount of the cash donations. The few shares involved turned out to be worthless. Innovative Gifting brought applications for payment of the unpaid commissions. The charities responded by seeking the return of all commissions paid. The court dismissed Innovative Gifting’s Application and granted the charities’ counter-applications on the basis that the agreements entered into between Innovative Gifting and the charities were void for being contrary to public policy.
Another consequence of the CRA’s disallowance of tax credits for donations made through these tax shelters is the ongoing attempts at class action litigation by taxpayers suing the professional firms that gave the legal opinions in respect to the shelters.
On September 18, 2008, a class action was launched seeking $60,000,000 in damages on behalf of all investors in the Donations Canada Charitable Donation program, a program sold and marketed by Parklane Financial Group Limited. Donors were told that for each $250 cash donation they would receive a $1,000 donation receipt allowing them a tax credit of $464 for a claimed 86% return on their $250 investment. The $750 difference between their cash payment and the amount of the donation receipt was based on a purported assignment of a $750 beneficial interest in a trust to a charity on behalf of the donor. All of the claimed donations made under this program, including the cash portions, were disallowed by the Canada Revenue Agency on the basis that the taxpayers had not made a bona fide gift. The motion for certification of this action as a class proceeding is scheduled to proceed on August 22-25, 2011. On August 10, 2009, the Canada Revenue Agency revoked the charitable status of Funds for Canada Foundation, the charity involved with the Donations Canada program.
One of the defendants in this proposed class action is the national law firm that prepared the legal opinions on the validity of the program under Canadian tax law. The class action Statement of Claim argued that the opinion letters and comfort letters produced by the firm were necessary inducements to the promotion and sale of the gift program, had it not been for these documents the gift program would not have been launched. The opinion letters were designed to induce the proposed class of plaintiffs to invest in the gift program without disclosing all of the material risks involved. It was claimed that the firm issued the opinion and comfort letters without due care and consideration when they knew, or ought to have known, that the contents of these letters were inaccurate, untrue, and deceptive.
On April 15, 2009, another class action lawsuit was launched against a Toronto-based law firm. This was with respect to a legal opinion prepared in support of a timeshare program operated and promoted by the Athletic Trust of Canada. The proposed class action is in respect to participants who received timeshare weeks from the Athletic Trust and donated them, along with a cash donation, to registered Canadian amateur athletic organizations. The participants were issued charitable donation receipts for both their cash contribution and the claimed fair market value of the timeshare units. The CRA disallowed the timeshare portion of the donations. The statement of claim alleged that, among other things, the legal opinions prepared by the firm did not meet the appropriate standard of care and contained various expressed and implied misrepresentations. The law firm is the only defendant in this case.
On January 21, 2010, the Ontario Superior Court of Justice certified a class action lawsuit in respect to damages against the promoters of the Banyan Tree tax donation program. The class action also includes a claim for damages against a national law firm that gave opinion letters stating that the Banyan Tree program complied with applicable Canadian tax rules for charitable donations. The plaintiffs alleged that the legal opinions were a necessary prerequisite for the promotion and sale of the gift program without which the gift program could not have been launched and that the law firm that prepared them intended participants to rely on the accuracy and reliability of the opinions in deciding whether or not to participate in the gift program. The plaintiffs claimed that the law firm owed the donation program participants a duty of care and that it was negligent in the preparation of the opinions.
In allowing the class action certification the court found that the class proceeding might achieve:
“behavior modification by holding corporations and law firms accountable for the promotion of allegedly sham investments and facilitates access to justice for litigants who would not bring individual claims”.
Approximately 3,000 individuals had participated in the Banyan Tree Foundation Gift Program charitable donation arrangement between 2003 and 2007. The promotional and marketing material in support of the program indicated that for each $1,000 donation a participant would contribute only $273 in actual out-of-pocket cash and would receive a charitable donation tax credit of $464 resulting in a net benefit of $191. All of the claimed donations under this plan were disallowed by the Canada Revenue Agency. Effective September 20, 2008, the Canada Revenue Agency revoked the registered charity status of The Banyan Tree Foundation.
The March 15, 2011, edition of the National Post reported yet another class action certification attempt. The proposed class action seeks more than $300 million in damages due to a failed donation tax shelter called “Donation Program for Medical Science and Technology”. The defendants include a national law firm and a national accounting firm. The program, set up by a Toronto-based company called Trinity Capital Corp., was designed to fund charitable donations using long term interest-free debt. Taxpayers would put only a portion of their own money into the scheme, but claim a tax deduction based on the sum of both their own donations plus any borrowed amounts. This is the same scheme litigated at the Tax Court and the Federal Court of Appeal in the test case Maréchaux v. The Queen (reviewed in this issue of the Valuation Law Review). The taxpayers in Maréchaux lost at both levels of court.