Sham Doctrine as Taxpayer Defence
Coast Capital Savings Credit Union v The Queen, 2016 FCA 181
One issue in this appeal (from 2015 TCC 195) to the Federal Court of Appeal was whether a taxpayer could employ the sham doctrine as a defence to an assessment by the Minister.
Cost Capital, a BC credit union, was the trustee of a number of trusts that were self-directed RRSPs or RRIFs.
The Minister asserted that Cost Capital, as trustee, used funds to purchase taxable Canadian Property from non-residents, did not take any steps to verify the residency of the vendor, and therefore was liable under subsection 116(5) of the Income Tax Act.
Cost Capital took the position that it was not the purchaser of the shares (argument foreclosed by Olympia Trust Company v. Canada, 2015 FCA 279), that it did not acquire taxable Canadian property from non-residents, and did not appreciate it was dealing with a non-resident when purchasing the shares.
In defence, Cost Capital, who was not involved in the scheme nor had knowledge of its fraudulent nature, but claims to have been misled as to the true nature of the scheme, asked the TCC to recharacterize the transaction as it was a sham.
The TCC held that a sham can only be found in the tax context when the Minister, not a taxpayer, is deceived as to the true nature of the transaction (2529-1915 Québec Inc. v. Canada, 2008 FCA 398; Bonavia v. Canada, 2010 FCA 129); that the taxpayer whose appeal was before the TCC had to be a party to the sham; and there was no evidence that Cost Capital’s legal rights and obligations created were other than intended (the funds were used to purchase the shares in question).
The Federal Court of Appeal expressed considerable doubt about the possibility that anyone other than the Minister can plead the sham doctrine (para 21), but did not need to address this or whether the taxpayer must necessarily be a party to the sham for the doctrine to be invoked (para 22), as in this case the taxpayer’s legal rights and obligations were none other than those intended (para 22).
Here, Cost Capital, as trustee, used trust funds to purchase shares of a Canadian Controlled Corporation that were taxable Canadian property from a non-resident person but did not withhold 25% of the purchase price as required. Under subsection 116(5), the purchaser is liable for the 25% that would have been withheld. The Taxpayer was being assessed “for its purchase of the shares from a non-resident and not for its mistaken belief as to how much they were worth or for what happened, unbeknownst to it, after the shares were purchased” (para 24). Thus, deception as to the value of the shares or the ultimate destination of the funds are irrelevant to the issues. The Taxpayer acquired the shares for the agreed-upon purchase price, intended to release funds from a trust fund, and received the shares acquired – they “intended exactly what occurred” (para 25).
A Taxpayer is not relieved of their tax obligations where it makes a mistake or is the victim of fraud (Vankerk v. Canada, 2006 FCA 96 at para. 3).
For more on tax consequences of victims of fraud see HERE.
Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3
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