http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/111221/index.do
Coast Capital Savings Credit Union v. The Queen (August 5, 2015 – 2015 TCC 195, V. Miller J.).
Précis: The taxpayer was the unknowing victim of an RRSP strip scheme. The annuitants set up self-administered RRSPs with the taxpayer and then directed the taxpayer to use the funds in the RRSP to purchase the shares of a Canadian corporation from a third party. The promoters of the scheme then transferred the purchase money offshore into vehicles to which the annuitants had access but, theoretically, in which they had no ownership interest. CRA audited the scheme and assessed the taxpayer for failure to withhold pursuant to subsection 116(5) of the Income Tax Act (the “Act”) because according to CRA the shares were taxable Canadian property and the vendor was a non-resident.
The taxpayer did not learn of the scheme until it read the Minister’s pleadings and through the course of discoveries. It then sought to amend its notice of appeal. CRA consented to some of the amendments but sought to strike paragraphs that argued that the transactions underlying the sale to it were shams concocted by the annuitants and the scheme promoter and should be disregarded for the purposes of the Act. In the alternative the taxpayer argued that the “cost” of the shares it acquired should be reduced to their then fair market value (presumably nil). CRA moved to strike this line of pleading as well.
The Court granted CRA’s motion to strike the contested portions of the proposed amended notice of appeal. The Court held that sham cannot be pleaded in a tax appeal unless the sham is intended to deceive the Minister. Similarly the Court rejected the fair market value argument holding that subsection 116(5) of the Act refers only to the “cost’ of the acquired shares. The Court awarded costs on the motion to CRA.
Decision: The taxpayer appears to have been the victim of a fraud:
[18] The facts which the Respondent doesn’t oppose in the Proposed Pleading and which are assumed to be true for the purposes of this application are the following:
C. The Scheme
20A. Certain persons, whose identities are not all known to Coast Capital, but including Cameron Claridge, Roy Gallant, Sommerville, the Solicitor, Bruce Frommert, Evan Seys and Peter Khean (the “Promoters”), created a scheme designed to purportedly allow for the tax free withdrawal of RRSP or RRIF funds (the “Scheme”).
20B. The Promoters entered into arrangements with the Annuitants to implement the Scheme. The Promoters and the Annuitants deliberately deceived Coast Capital. Coast Capital was not aware of the Scheme. Coast Capital was not a Promoter of the Scheme.
20C. Unbeknownst to Coast Capital, the Scheme involved the purchase of shares of a corporation resident in Canada by a trust governed by an RRSP or RRIF for an amount in excess of the fair market value of the shares by the Annuitants.
20D. As part of the Scheme, the Annuitant:
i) opened up a self-directed RRSP or RRIF with Coast Capital;
ii) if not already in cash, converted part or all of the Annuitant’s pre-existing RRSP or RRIF to cash;
iii) transferred cash into the newly opened self-directed RRSP or RRIF with Coast Capital; and
iv) directed Coast Capital as trustee of the RRSP or RRIF to acquire the Shares for an amount in excess of fair market value;
20E. Unbeknownst to Coast Capital, the Promoters kept a portion of the purchase price of the Shares as fees and transferred the balance of the funds offshore to an international corporation, bank account or other facility to which the Annuitants had access and control, but not direct ownership.
20F. Unbeknownst to Coast Capital, the funds could then be withdrawn by the Annuitants from the international corporation or bank account by Internet banking, the use of an offshore debit or credit card, or some other hard to trace method.
20G. The following types of documents were provided to Coast Capital by the Annuitants, the Solicitor and/or Mr. Khean to cause Coast Capital to acquire shares of a corporation for an amount in excess of fair market value:
i) A letter of direction (“Letter of Direction”) from the Annuitant to Coast Capital directing Coast Capital to transfer funds to the Solicitor in trust for the purchase of shares; and
ii) A letter from the Solicitor and/or Mr. Khean advising that the shares were a qualified investment and suggesting that the shares had a fair market value equal to the purchase price (“Certification Letter”).
20H. The Annuitants and the Promoters knew that the Letter of Direction did not represent the true nature of the Scheme. The true nature of the Scheme was not to purchase the Shares for the stated purchase price, but to purchase the Shares for an amount in excess of the fair market value of the Shares, withdraw the difference between the stated purchase price and the fair market value of the Shares from the Annuitants’ RRSPs or RRIFs, and transfer those funds offshore for the use of the Annuitants.
20I. The Annuitants and the Promoters provided the Letters of Direction and Certification Letters to Coast Capital to cause Coast Capital to provide funds to Mr. Stewart in furtherance of the Scheme.
CRA assessed the taxpayer pursuant to subsection 116(5) of the Act on the basis that the shares were taxable Canadian property which it had purchased from a non-resident without obtaining a clearance certificate or withholding the requisite amount of the purchase price.
The taxpayer did not learn of the full scope of the Scheme until it read CRA’s pleadings and discoveries had been conducted. The taxpayer then sought to amend its notice of appeal to include the following provisions, which were disputed by CRA:
[19] The paragraphs in the Proposed Pleadings which the Respondent seeks to strike are the following:
I. OVERVIEW
4A. The Appellant further says that the Appellant’s clients, the annuitants under the RRSP’s (the “Annuitants”), and the vendors of the shares and their agents, deliberately misrepresented the true nature of the transactions relied on by the Minister in the documents supplied to Coast Capital and that the transactions were a sham.
V. ISSUES TO BE DECIDED
23. (b) whether the transactions relied on by the Minister were a sham.
(f) whether the cost of the Shares to Coast Capital for the purposes of subsection 116(5) was not the same amount as was assessed by the Minister.
VII. REASONS COAST CAPITAL RELIES UPON
28A. Second, the transactions were a sham.
30A. Fifth, if this Honourable Court finds that Coast Capital is personally liable as the purchaser under subsection 116(5) of the Act, which is not admitted and is specifically denied, Coast Capital did not acquire the shares at a cost amount equal to the amount assessed.
B. The Transactions were a Sham
33A. The documents provided to Coast Capital and the other acts of the Annuitants and the Promoters were intended by the Annuitants and the Promoters to give the appearance to Coast Capital of creating the legal rights and obligations of a share transfer transaction at the stated purchase price, but the true intention of the transaction was to transfer the difference between the fair market value of the Shares and the stated purchase price from the Annuitants’ RRSP or RRIF offshore for the benefit and use of the Annuitants. The Annuitants and the Promoters deliberately set out to misrepresent the actual state of affairs to Coast Capital and to intentionally deceive Coast Capital.
E. Coast Capital Did Not Acquire the Shares at a Cost Amount Equal to the Amount Assessed
37A. If this Honourable Court finds that Coast Capital is personally liable as the purchaser under subsection 116(5) of the Act, which is not admitted and is specifically denied, it is respectfully submitted that Coast Capital’s cost amount of the Shares is not as assessed by the Minister and the amount assessed under subsection 116(5) of the Act is incorrect. The cost amount of the Shares to Coast Capital is equal to the fair market value of the Shares at the time of the respective transaction.
The Court held that the taxpayer was not permitted to plead “sham”:
[26] I have also inferred from the Bonavia decision [of the Federal Court of Appeal] that the taxpayer, whose appeal is before the court, must have been a party to the “sham”.
[27] Moreover, in my analysis, the facts as pled by the Applicant in its Proposed Pleadings do not support a finding that the Applicant was the victim of a “sham”. Rather, it appears to me that, as in Bonavia, the Applicant was the victim of fraudulent misrepresentation. In the Proposed Pleadings, the Applicant plead that the Annuitants and the Promoters deliberately set out to misrepresent the transactions to the Applicant. This pleading does not demonstrate that there was a “sham”. There are no facts plead which would demonstrate that the legal rights and obligations created between the Annuitants and the Promoters were other than they intended. It is clear that both the Annuitants and the Promoters intended the purchase price for the shares be the stated purchase price. They set up a plan to withdraw the funds from the Annuitants’ RRSPs so that the Promoters received their fees and the Annuitants received a withdrawal of funds from their RRSPs. They misled the Applicant with respect to the value of the shares purchased by the RRSPs but this is not a “sham” It is fraud.
[28] Based on my conclusions, it is “plain and obvious” that the Applicant’s “sham argument” does not disclose a cause of action. Paragraphs 4A, 23(b), 28A and 33A shall be struck from the Proposed Pleadings.
Similarly the Court rejected the proposed amendments directed to the fair market value of the shares:
[31] It is clear that the tax under paragraph 116(5)(c) is assessed on “the cost to the purchaser”. There is no mention in paragraph 116(5)(c) of the fair market value of the property purchased. The words used in the sentence and the sentence itself are not ambiguous. The plain-meaning of the word “cost” in this section means the price that the taxpayer gave up in order to get the property: The Queen v Stirling, [1985] 1 FC 342 (FCA).
[32] It is my opinion that the Applicant’s alternative argument also does not disclose a cause of action. Paragraphs 23(f), 30A and 37A shall be struck from the Proposed Pleadings.
As a result the disputed paragraphs were struck and costs were awarded to the Crown:
THIS COURT ORDERS that:
1. Paragraphs 4A, 23(b), 23(f), 28A, 30A, 33A and 37A of the proposed Amended Notice of Appeal do not disclose a cause of action and they are to be struck.
2. The Appellant can file the Amended Notice of Appeal once the paragraphs listed above have been struck.
3. The Respondent is entitled to have further discovery on the additional allegations of fact pled in the Amended Notice of Appeal.
4. The Respondent can file an Amended Reply to address the new allegations of fact in the Amended Notice of Appeal.
5. The Respondent is entitled to its costs for this motion.