Bermuda Trust Named In Lawsuit
An Ontario Superior Court judge has certified a massive class-action lawsuit over a “scheme” involving a Bermuda trust which resulted in thousands of Canadians submitting inflated charitable donation receipts that the Ottawa taxman refused to accept.
“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,” wrote Mr. Justice George Strathy.
“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.”
Canada’s “National Post” newspaper reported today [Jan. 23] that Mr. Cannon, a retired police officer who donated more than $20,000, is the representative plaintiff for the class, which includes nearly 10,000 Canadians from every province and territory except the Northwest Territories, who contributed a total of $144-million to the plan. “They came from all walks of life: teachers, lawyers, nurses, administrators, presidents and police officers,” the judge wrote. One person donated $4-million. More than 700 people donated more than $100,000 each.
Calling it a “scheme” that serves only to enrich a private tax shelter, the CRA decided these donors lacked “donative intent,” meaning that the supposed gift did not cost them anything because they expected to be enriched by a far larger tax credit. As a result, they were required to repay the full deduction, plus interest.
The gift programme was the idea of Edward Furtak, a businessman the judge described as a “puppet master” who licenses financial software through a trust in Bermuda.
Bermuda resident Mr. Furtak was originally a defendant in this lawsuit, but settled with Mr. Cannon “in exchange for information and some degree of co-operation.”
The other defendants include Mr. Furtak’s corporations and private trusts — some of them registered in Bermuda — along with the directors and trustees of the Funds for Canada Foundation. A prominent Nova Scotia law firm was also named in the suit.
Mr. Furtak, a Canadian citizen, heads Trafalgar Trading Group and is president of Bermuda’s Conexys Corporation Limited, formerly FaxForward International Ltd. Conexys was
established to develop fax technology that it intended to market to corporations in Bermuda and Canada.
The judge wrote that for the programme to work, it needed donors “who were willing to buy into the concept,” and for that it needed both a sales team and a written legal opinion that the gift program would survive a challenge by the CRA.
It also needed a network of companies, trusts and agreements to process the flow of funds, and significant cash flow, which Mr. Furtak’s Bermuda trust provided.
And it needed legitimate charities “that were in need of cash and were prepared to give back 99 percent of the money donated to them to Furtak’s companies in return for the promise of a future income stream from the use of [Mr. Furtak's] software programme.”
Initially, in 2005, these included Biathlon Canada, Canadian Lacrosse Association, Little League Baseball Canada, and amateur associations for football, wrestling and bowling. The next year the Scarboro Foreign Missions and the New Brunswick Foundation for the Arts participated.
No wrongdoing is alleged on the part of the charities.
When a donor gave $2,500, he would also become the beneficiary of a private charitable trust created by Mr. Furtak, which would then “prime the pump,” as the judge put it, by acquiring units of this trust for $7,500. The ultimate result would be that $10,000 would remain in the possession of a charity for a “scintilla juris,” a legal term meaning a mere instant, and the donor received two tax reciepts: one for $2,500 in cash, and one for a $7,500 donation-in-kind, for the trust units.
In the eyes of the taxman, the judge wrote, this “was nothing more than a scheme, in which the funds of ‘donors’ like Mr. Cannon flowed through a giant circle into the pockets of the promoters.”
When the CRA revoked the charitable status of the Funds for Canada Foundation in 2009, saying it operated for the private benefit of tax-shelter operators, an audit revealed it had issued nearly $176.5-million in receipts for cash received through a tax shelter.
“The charity, in turn, paid over $14.2-million to the tax-shelter promoter as fundraising fees and directed $160.8 million to an offshore investment vehicle,” according to a CRA statement. “Our audit findings indicate that 79.05% of the funds directed to the offshore investment vehicle were eventually returned to the original lender of the funds. The charity retained a meagre 1% of the total tax-receipted amounts for use in its own programs.”
No trial date has been set.
