As readers of this newsletter well know, the clear message from the courts lately has been “Woe unto you taxpayers who participate in retail tax shelters or other tax-driven schemes!” The Federal Court of Appeal has reiterated that message in Nunn v. The Queen, 2006 FCA 403 (decision not yet available online).
In Nunn v. The Queen, 2005 TCC 806, Justice Campbell tried to help out a taxpayer who had lost money through an RRSP scheme. The CRA reassessed the taxpayer to add insult to injury. Justice Campbell decided that the reassessment should be overturned because the scheme was a sham and the taxpayer had not received any benefit.
The Federal Court of Appeal allowed the Crown’s appeal. In the scheme, the taxpayer’s RRSP acquired shares of a corporation. The taxpayer would then receive a loan in respect of the investment. In fact, the entire scheme was fraudulent, and the taxpayer never received his loan. Moreover, the shares acquired by his RRSP were likely worthless.
The Income Tax Act provides that, where a taxpayer’s RRSP acquires a non-qualified benefit, the fair market value of the investment must be included in the income of the taxpayer. Justice Campbell reasoned that, because the scheme was a sham and a fraud, the taxpayer’s RRSP could not have acquired a non-qualified investment because the RRSP could not have acquired the shares.
Mr. Justice Malone was having none of it:
20 […] Under the present scheme, Mr. Nunn agreed to transfer his RRSP to Planification Plus with the intent of reinvesting it. This indeed occurred. Under his authorization, Maritime Life transferred his RRSP to Planification Plus, the new trustee, which then purchased shares in Jovalguy and issued a share certificate.
21 While the Judge found that Mr. Nunn took reasonable steps to ascertain that the investment was legitimate, the fact that the shares were worthless does not in and of itself constitute a sham. But for the Quebec Securities Commission raid, Mr. Nunn would have received the loan that he negotiated. Had the Judge applied the proper definition of sham to the facts before her, she would have had to conclude that there was no sham, and accordingly, the Judge erred in law by concluding that a sham existed. At best, the respondent could have argued that he was defrauded but that too is of no assistance.
22 By purchasing the shares in a non-qualified investment, subsection 146(1) was automatically triggered. Undoubtedly, this result is harsh but it would be unfair to exempt a taxpayer from his or her tax obligation on the basis of mistake or fraud: Vankerk v. R., [2006 FCA 96], at paragraph 3. Put simply, other Canadian taxpayers should not have to bear the financial burden which arises from unfortunate circumstances such as those that exist here.
The only bright spot for the taxpayer is that the Federal Court of Appeal remitted the matter back to Justice Campbell to determine the fair market value of the shares in question. It would appear that if she concludes that the shares had no value, then the taxpayer might be relieved of having to pay tax as well as losing the funds in his RRSP.
