Noose tightens around donation tax schemes

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In the latest blow to "donation tax shelters," an Ontario Superior Court judge has kept alive a $300-million proposed class action that targets the promoters of one such failed scheme as well as the lawyers and accountants who gave it their seal of approval.

In a decision released last week, Mr. Justice George Strathy of the Ontario Superior Court said a full trial is required in a lawsuit launched against Toronto-based Trinity Capital Corp. The suit also blames major law firm Fraser Milner Casgrain LLP and accountancy firm BDO Dunwoody LLP for endorsing the tax shelter.

The case was launched by Pickering, Ont., taxpayer Marc Charette, who funnelled more than $1-million, much of it borrowed, into the failed scheme a decade ago. He ended up on the hook for thousands of dollars in unpaid taxes and interest after the Canada Revenue Agency reassessed his returns. The allegations in Mr. Charette's lawsuit have not been proved.

It's the latest in a series of lawsuits grinding their way through the courts over this kind of tax shelter.

The Canada Revenue Agency has been warning against such schemes for years and has vowed to audit all who participate in one. It has also launched criminal investigations into seven promoters, whom it would not name.

Essentially, these complex tax shelters, usually involving offshore entities and opaque structures, offer participants inflated receipts for charitable donations.

Tens of thousands of Canadians have signed up for similar schemes over the past decade. Often the charities receive only a tiny fraction of the funds donated. The CRA says 47 organizations that participated have been stripped of their charitable status. And the CRA has forced taxpayers who participated to hand over back taxes and penalties of more than $5-billion.

It's a mess that has also stained a number of high-profile law firms, who faced allegations of giving negligent advice for approving the tax shelters, and in some cases allowing their green light to be used in promotional material.

"It's really quite an incredible story, and how big firms got caught up in it, and why, I don't know the answer to that," said Toronto lawyer Joe Groia, who is acting for Mr. Charette along with Jay Strosberg of Sutts Strosberg in Windsor, Ont.

Earlier this year, Fraser Milner Casgrain (FMC) and other defendants settled another charity tax-shelter class-action case for $11-million, without acknowledging any wrongdoing.

Toronto-based Cassels Brock & Blackwell has also faced litigation for advice it gave in connection with a similar tax shelter, although that case was tossed out and is now on appeal. In another case, certified as a class action earlier this year, Nova Scotia lawyer Edwin Harris, of McInnes Cooper, faces similar allegations of negligence.

In the Trinity Capital case, which involves FMC and Graham Turner, a former tax lawyer with the firm, donations were leveraged with loans. In 2002, Mr. Charette put $320,000 of his own money into FMC's accounts, and borrowed the rest to reach $1-million, for which he was given a charitable tax receipt. He also paid $170,000 in insurance policy fees and a security deposit.

Two years later, after agreeing to assign the insurance policy to one of the promoters' companies and waiving his right to his security deposit, he no longer had to repay the loan, according to his statement of claim.

Mr. Charette, who through his lawyer declined to speak with The Globe and Mail, had also participated in the scheme in 2003, borrowing the bulk of a $100,000 donation. In his affidavit, he says he would never have participated without the apparent endorsements of BDO and FMC.

Mr. Strosberg said that 10 years ago, when his client invested in the tax shelter, they were much more common: "Nobody likes to pay tax. There were billions of dollars worth of leveraged donation going on at this time."

In his decision on the case, Judge Strathy concludes the dispute was too complex for a quick ruling and warns that FMC could face a future finding of "conflict of interest" if the lawsuit goes to trial.

At issue is the law firm's move to allegedly act for the participants in the scheme facing tax trouble, such as Mr. Charette, as well as the scheme's promoters. According to court documents, in a letter sent out to participants facing audits from the CRA, the promoters of the scheme said FMC had assured them the government's case was "weak."

In an e-mailed statement, FMC said it could not comment in detail on the case but that it would "firmly stand behind our lawyers and the quality of their counsel" and "vigorously defend this claim."

A lawyer for BDO said they were defending themselves against the allegations.

It seems such schemes are on the wane. According to CRA figures obtained by Toronto charity lawyer Mark Blumberg, about $300-million went into so-called "abusive" donation tax shelter schemes last year, involving about 9,000 taxpayers, down from the peak in 2006 of $1.6-billion.

Mr. Blumberg thinks the sooner such schemes wither away, the better. And he said endorsements from lawyers with prominent law firms carry more weight with taxpayers than an obscure tax lawyer: "There should be a review of whether this sort of behaviour is appropriate for lawyers to be involved in."