$144-million charitable tax scheme class action certified

Ontario Superior Court Justice George Strathy has sent a large class action lawsuit to trial after a charitable tax donation “scheme” cost a retired Ontario staff sergeant more than $20,000 in reassessed taxes and interest.

Michael Cannon, the representative plaintiff in Cannon v. Funds for Canada Foundation, brought the motion for certification of the action as a class proceeding in August 2011 after nearly 10,000 Canadians, including himself, contributed $144 million in total to the Donations for Canada Gift Program between 2005 and 2009.

The brainchild of financial software businessman Edward Furtak, the gift program enlisted a $2,500 donation from donors like Cannon, who would then become part of a private charitable trust he created in Bermuda. This would then lead to acquired units of the trust for $7,500, ultimately resulting in $10,000 remaining in the possession of a charity for a moment before donors received a tax receipt for $2,500 in cash and a $7,5000 donation-in-kind for the trust units.

When the Canada Revenue Agency reassessed the program donations in 2009, the donors were left with a hefty bill ordering them to pay the full deduction plus interest for expecting to receive financial gains from the tax credit.

“When Michael Cannon heard about the Donations for Canada Gift Program — an opportunity to obtain a $10,000 charitable tax credit in return for a $2,500 donation — he thought it was ‘too good to be true,’” writes Strathy in Cannon. “It was. A few years later, his tax returns were reassessed by Canada Revenue Agency and he had to repay his deductions, with interest. The only thing he received for his ‘donation’ was a tax bill.”

Other donors, including teachers, lawyers, and nurses, were required to repay the full deduction plus interest as well, with one person donating $4 million, according to court documents provided in Cannon.

Additional defendants in the case also included a sizable list of Furtak’s corporations and private trusts, directors and trustees of the Funds for Canada Foundation, and Patterson Palmer Law.

Strathy also pointed out the gift program likely had an extensive sales team and written legal opinions in Cannon, as well as a large network of companies, trusts, and significant cash flow provided by Furtak’s trust.

The program also involved legitimate charities, including Biathlon Canada, the Canadian Lacrosse Association and the New Brunswick Foundation for the Arts.

The charities are not facing allegations of wrongdoing in court.

Ultimately, the CRA revoked the charitable status of the program in 2009, declaring it a “scheme.” An audit by the agency revealed it had issued $176.5 million in receipts received through a tax shelter at that time.

“This was not just a victory on procedural grounds authorizing the certification of the class action,” says Samuel Marr, lead counsel for Cannon and partner at Landy Marr Kats LLP. “Faced with two defendants’ motions for summary judgment, Justice Strathy took a hard look at the merits of the case, and determined that it was a meritorious case that should proceed to trial.”

The result, Marr adds, will likely permeate the legal community for some time.

“Behaviour modification is an important goal of the class proceedings legislation,” says Marr. “Law firms, for the protection of themselves and the public would, in my view, be well advised to carefully consider the role which their lawyers play in the marketing of their clients’ products.”

A trial date has not yet been set.

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