Herring v. The Queen

Herring v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2022-03-31
Neutral citation
2022 TCC 41
File numbers
2012-112(IT)G, 2013-3357(IT)G, 2013-3466(IT)G, 2013-4197(IT)G, 2013-4320(IT)G, 2014-361(IT)G, 2014-574(IT)G
Judges and Taxing Officers
Guy R. Smith
Subjects
Income Tax Act
Decision Content
Docket: 2012-112(IT)G
BETWEEN:
DAVID HERRING,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 20, 2019,
October 1, 2, 3, 4, 7, 8, 9, 10, 11, 2019 at Toronto, Ontario and
Oral Submissions made on October 7, 8, 2020 at Ottawa, Canada
Before: The Honourable Justice Guy R. Smith
Appearances:
Counsel for the Appellant:
Terry McCaffrey
Anahita Tajadod
Counsel for the Respondent:
Charles Camirand
Dan Daniels
JUDGMENT
The appeals for the 2002, 2003 and 2005 taxation years are dismissed in accordance with the attached Reasons for Judgment.
There shall be no order as to costs.
Signed at Ottawa, Canada, this 31st day of March 2022.
“Guy R. Smith”
Smith J.
Docket: 2013-4197(IT)G
BETWEEN:
KENNETH L. MILLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 20, 2019,
October 1, 2, 3, 4, 7, 8, 9, 10, 11, 2019 at Toronto, Ontario and
Oral Submissions made on October 7, 8, 2020 at Ottawa, Canada
Before: The Honourable Justice Guy R. Smith
Appearances:
Counsel for the Appellant:
Terry McCaffrey
Anahita Tajadod
Counsel for the Respondent:
Charles Camirand
Dan Daniels
JUDGMENT
The appeals for the 2002, 2003, 2004 and 2005 taxation years are dismissed in accordance with the attached Reasons for Judgment.
There shall be no order as to costs.
Signed at Ottawa, Canada, this 31st day of March 2022.
“Guy R. Smith”
Smith J.
Docket: 2014-361(IT)G
BETWEEN:
GARRY INNANEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 20, 2019,
October 1, 2, 3, 4, 7, 8, 9, 10, 11, 2019 at Toronto, Ontario and
Oral Submissions made on October 7, 8, 2020 at Ottawa, Canada
Before: The Honourable Justice Guy R. Smith
Appearances:
Counsel for the Appellant:
Terry McCaffrey
Anahita Tajadod
Counsel for the Respondent:
Charles Camirand
Dan Daniels
JUDGMENT
The appeals for the 2002, 2003, 2004 and 2005 taxation years are dismissed in accordance with the attached Reasons for Judgment.
There shall be no order as to costs.
Signed at Ottawa, Canada, this 31st day of March 2022.
“Guy R. Smith”
Smith J.
Docket: 2014-574(IT)G
BETWEEN:
SONNY GOLDSTEIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 20, 2019, October 1, 2, 3, 4, 7, 8, 9, 10, 11, 2019 at Toronto, Ontario and Oral Submissions made on October 7, 8, 2020 at Ottawa, Canada
Before: The Honourable Justice Guy R. Smith
Appearances:
Counsel for the Appellant:
Terry McCaffrey Anahita Tajadod
Counsel for the Respondent:
Charles Camirand
Dan Daniels
JUDGMENT
The appeals for the 2003, 2004, 2005 and 2006 taxation years are
dismissed in accordance with the attached Reasons for Judgment.
There shall be no order as to costs.
Signed at Ottawa, Canada, this 31st day of March 2022.
“Guy R. Smith”
Smith J.
Docket: 2013-3357(IT)G
BETWEEN:
THOMAS BREEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 20, 2019, October 1, 2, 3, 4, 7, 8, 9, 10, 11, 2019 at Toronto, Ontario and Oral Submissions made on October 7, 8, 2020 at Ottawa, Canada
Before: The Honourable Justice Guy R. Smith
Appearances:
Counsel for the Appellant:
Terry McCaffrey Anahita Tajadod
Counsel for the Respondent:
Charles Camirand
Dan Daniels
JUDGMENT
The appeals for the 2004, 2005, 2006 and 2007 taxation years are dismissed in accordance with the attached Reasons for Judgment.
There shall be no order as to costs.
Signed at Ottawa, Canada, this 31st day of March 2022.
“Guy R. Smith”
Smith J.
Docket: 2013-4320(IT)G
BETWEEN:
LAURIE COGHLIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 20, 2019, October 1, 2, 3, 4, 7, 8, 9, 10, 11, 2019 at Toronto, Ontario and Oral Submissions made on October 7, 8, 2020 at Ottawa, Canada
Before: The Honourable Justice Guy R. Smith
Appearances:
Counsel for the Appellant:
Terry McCaffrey Anahita Tajadod
Counsel for the Respondent:
Charles Camirand Dan Daniels
JUDGMENT
The appeals for the 2004, 2006 and 2007 taxation years are dismissed in accordance with the attached Reasons for Judgment.
There shall be no order as to costs.
Signed at Ottawa, Canada, this 31st day of March 2022.
“Guy R. Smith”
Smith J.
Docket: 2013-3466(IT)G
BETWEEN:
MARC HALFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 20, 2019, October 1, 2, 3, 4, 7, 8, 9, 10, 11, 2019 at Toronto, Ontario and Oral Submissions made on October 7, 8, 2020 at Ottawa, Canada
Before: The Honourable Justice Guy R. Smith
Appearances:
Counsel for the Appellant:
Terry McCaffrey Anahita Tajadod
Counsel for the Respondent:
Charles Camirand Dan Daniels
JUDGMENT
The appeals for the 2003, 2004, 2005, 2006 and 2007 taxation years are dismissed in accordance with the attached Reasons for Judgment.
There shall be no order as to costs.
Signed at Ottawa, Canada, this 31st day of March 2022.
“Guy R. Smith”
Smith J.
Citation: 2022 TCC 41
Date: 20220431
Docket: 2012-112(IT)G
BETWEEN:
DAVID HERRING,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2013-4197(IT)G
AND BETWEEN:
KENNETH L. MILLEY,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
Docket: 2014-361(IT)G
AND BETWEEN:
GARRY INNANEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2014-574(IT)G
AND BETWEEN:
SONNY GOLDSTEIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2013-3357(IT)G
AND BETWEEN:
THOMAS BREEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2013-4320(IT)G
AND BETWEEN:
LAURIE COGHLIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2013-3466(IT)G
AND BETWEEN:
MARC HALFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Smith J.
I. Overview [i]
[1] David Herring, Kenneth L. Milley, Garry Innanen, Sonny Goldstein, Thomas Breen, Laurie Coghlin and Marc Halford, (the “Appellants”) [ii] participated in a leveraged donation program (the “Program”) through which they made gifts in favour of a registered charity known as Banyan Tree Foundation (“Banyan”) [iii] .
[2] In accordance with the terms of the Program, the Appellants pledged to donate a certain dollar amount (the “Pledged Amount”) consisting of cash from their own resources and a loan from a third party lender. They also paid a security deposit to the lender (the “Security Deposit”) that was to be invested to eventually extinguish the principal amount of the loan, including accrued interest and income taxes that might be owed by donors on the annual investment returns.
[3] For each year in which they participated, the Appellants claimed charitable tax credits for the total Pledged Amount pursuant to subsection 118.1(3) of the Income Tax Act, R.S.C., 1985, c.1 (5th Suppl.) (the “Act”).
[4] The Minister of National Revenue (the “Minister”) reassessed the Appellants to deny the charitable tax credits on the basis that the amounts purportedly donated were not valid gifts under the common law or the Act.
[5] In the context of these appeals, the Appellants acknowledge that the loan proceeds were never advanced by the lender to Banyan. As such, they ask the Court to consider the following issues:
Whether any part of the total donation is a gift under the common law?
Whether the cash gift and Security Deposit or alternatively the cash gift alone, are eligible for a tax credit as split gifts under the common law and in accordance with the bijuralism principle?
For the 2003-2007 taxation years, whether subsections 248(30) – (32) are applicable and if so, what is the eligible amount of the gift that may be claimed pursuant to subsection 248(31) of the Act?
If the Security Deposit is not an eligible amount pursuant to subsection 248(31), are the Appellants entitled to claim a net capital loss pursuant to paragraph 111(1)(b) of the Act?
[6] The Respondent contends that these arguments should be rejected and argues in the alternative, that the Appellants are not entitled to any tax credits because the donation receipts do not contain the prescribed information, contrary to subsection 118.1(2) of the Act.
[7] The Respondent had initially relied on the General Anti-Avoidance Rule pursuant to section 245 of the Act, but chose not to make any written submissions and accordingly, it will not be necessary to address that argument.
[8] For reasons set out below, the Court concludes that the Appellants are not entitled to charitable tax credits for any portion of the alleged gifts, including the cash component and Security Deposit, and that they are not entitled to claim the Security Deposit as a net capital loss. As a result, the appeals must be dismissed.
[9] All references to legislative provisions, are references to the provisions of the Act, including Regulations promulgated under the Act, that relate to the assessments or reassessments and the taxation years in question in this instance.
II. Program and Chronology
[10] The Program was promoted by Promittere Asset Management Limited (“Promittere”) and independent salespeople situated across Canada. Robert J. Thiessen (“Thiessen”) was the principal of both Banyan and Promittere. He held himself out as the president of 1106999 Ontario Limited that later changed its name to Rochester Financial Ltd. (“Rochester” or the “Lender”) that purported to lend money to participants. All of these entities shared the same office space or address.
[11] The Program was promoted as a “Gift Program” intended “to provide gifting to charitable organizations” whose activities included “support programs for the underprivileged, education, athletics and medical research.” The promotional materials listed a number of charities to whom Banyan might make a donation. As will be seen below, the monies collected were purportedly used to purchase annuities in favour of certain recipient charities.
[12] The promotional material set out the pledge procedure. Participants were required to complete a series of documents including a pledge form (“the Pledge Form”) indicating the total amount to be donated, a loan application and power of attorney (the “Loan Application”) and promissory note (the “Promissory Note”), collectively referred to as the program documents (the “Program Documents”).
[13] Participants were required to complete and deliver the Program Documents with a cheque for the cash component payable to Banyan and separate cheque for the Security Deposit payable to the Lender.
[14] The Loan Application provided that if it was not accepted prior to December 31st of the applicable year, the deposits would be “immediately returned without interest or deduction.” If it was accepted, the Lender was “authorized and directed” to advance the loan proceeds directly to Banyan. Participants later received written confirmation of the loan amount and Security Deposit, indicating that it would be invested to extinguish the loan, all accrued interest and any taxes that might be owing by participants on the investment returns.
[15] The 2002 Program was promoted on the basis that participants could make a donation by leveraging cash resources equal to 14.5% of the Pledged Amount with a loan for 85.5% of the remaining balance. The Security Deposit was equal to 8.7% of the Pledged Amount. The loan was for a term of 25 years without payments of principal or interest and was to be extinguished on or prior to maturity based on an assumed investment return of 9.85% per year. The Lender was to report all income earned on the Security Deposit on an annual basis and participants would be reimbursed for any taxes owing on the investment returns.
[16] As a result of amendments to the Act (that will be reviewed below), the Program was modified for the 2003 to 2007 taxation years. The term of the loan was reduced to 10 years with interest at the greater of the rate set out in the Promissory Note and the prescribed interest rate pursuant to subsection 143.2(7) of the Act. The cash component remained the same but the Security Deposit was increased to 14.5% of the Pledged Amount. These percentages varied slightly over the years or from one participant to another. Payments of principal or interest were not required and the loan was expected to be extinguished on or prior to maturity based on an assumed investment return of approximately 35% per year.
[17] From 2002 to 2007, participants were also entitled to advance 100% of the Pledged Amount and within as little as 24 hours, were refunded 85.5% of that amount by way of certified cheque or bank draft. The refunded amount was purportedly converted into a loan once a Promissory Note had been signed and that amount was allegedly advanced by the Lender to Banyan. In these instances, a further payment was also made to the Lender for the Security Deposit.
[18] According to the promotional materials for the 2002 Program, a total cash outlay of about 23.2% (14.5% + 8.7%) of the Pledged Amount would generate a “positive cash position” equal to 100% of the cash outlay, assuming a marginal tax rate of 46.41%. For the 2003-2007 Program, the promotional materials explained that a cash outlay of about 29% (14.5% + 14.5%) of the Pledged Amount would generate a “positive cash position” equal to 60-70% of the cash outlay, again assuming a marginal tax rate of 46.41%.
[19] A summary of these calculations is set out in Schedule “A” attached hereto. There were various iterations of the brochure tailored for different provinces with different tax rates and different charities but I find that these differences were not material and that the Program was basically the same.
[20] The promotional materials for the 2003 Program added that the Lender had “arranged performance insurance to ensure that [the] investment manager’s results [would] repay the loan and interest.” Although the overall evidence on the existence of such an insurance policy is inconclusive, the representation that such insurance was in place continued to appear in the promotional brochures.
[21] The promotional materials for the 2003 Program also referred to a “Tax opinion from Fraser, Milner, Casgrain.” Several of the Appellants testified that they had been informed of such a legal opinion but few had actually seen it.
[22] In fact, several legal opinions had been prepared by Fraser Milner Casgrain LLP (“FMC”). In one version dated September 5, 2003, FMC opined that the loan “will be a full recourse loan” and that the “Lender will acquire an insurance policy (…) that will insure the risk that the security deposit (…) will not be sufficient to repay the loan.” [iv] In another version, also dated September 5, 2003, FMC opined that the “loan will be a limited recourse loan pursuant to which the recourse of the Lender will be limited to the security deposit and all accretions thereto.” [v]
[23] From 2003 to 2005, the Lender provided all Appellants with annual updates on the investment returns of the Security Deposit, initially claiming a substantial yield based on accrued gains of a real estate project and investments managed by a hedge fund. For example, in late 2004 the Lender reported gains of 53.42%, noting that “this was well above the 35% annual return required to retire the loan at the end of the 10-year term.” In 2005, participants were informed that the returns on the 2003 and 2004 Security Deposits were 38.6% and 49.2%, respectively. Appellants who participated in the 2002 Program (Herring, Milley and Innanen) were eventually told that the investment returns on their Security Deposit had generated sufficient returns to extinguish their respective loans.
[24] However, in 2006 the Lender advised participants that one of its investment managers had misappropriated the funds such that there were no capital gains for 2004 and 2005 and that the Security Deposits had been substantially reduced.
[25] Subsequently, each Appellant received an annual statement with an invoice claiming interest on the loan balances with an indication that if payments were not received by the due date, the full amount of the loan would become due. As will be indicated below, the Appellants made interest payments on the 2003 to 2005 loans and received corresponding reductions of the principal purportedly outstanding.
[26] The Appellants were eventually informed of an audit by the Canada Revenue Agency (“CRA”) for the 2003 taxation year and told that they should acknowledge their loan balance since CRA now required recourse debt obligations. They were also informed that making payments towards the loan or acknowledging the outstanding balance would improve their chances of avoiding the payment of taxes and accrued interest owed to the CRA.
[27] In February 2008, the Lender reported to the Appellants that as a result of the fraud, as described above, participants would have to continue making interest payments for the remaining term of the loan with payment of the principal, less the remaining Security Deposit, if any, at the end of the term.
[28] Alternatively, participants were informed that the Lender had agreed to accept an early payout of the loans discounted to 22.5% of the outstanding balance payable in four equal payments over twelve months.
[29] In September 2008, Banyan’s charitable status was revoked.
[30] In 2010, a class-action proceeding was filed on behalf of 2,825 participants in the Program and approved by the Ontario Superior Court of Justice (Robinson v. Rochester et al., 2010 ONSC 463) against Banyan, its promoters, the Lender and FMC. The claim alleged that “there was an express or (…) implied term of the contract that participants would not be at risk to repay the loans obtained from Rochester.” It was alleged that the defendants were negligent in not ensuring that participants “would not be at risk to repay the loan that was obtained in order to facilitate their participation in the program” and that the legal opinions “were necessary and instrumental to marketing the gift program (...)” (paras. 1-2).
[31] A settlement of the class-action proceeding was ultimately reached with FMC and approved by the Ontario Superior Court of Justice (Robinson v. Rochester Financial Limited, 2012 ONSC 911). The settlement amount was $11 million with no admission of liability on the part of FMC. A pro rata payment was to be made to all participants except a small group who chose to opt out.
[32] The court endorsement approving the settlement included a declaration that “the loan agreements and promissory notes executed by class members in connection with the Gift Program are unenforceable by the defendants, their successors and assigns”(para. 15).
III. Testimony of the Appellants
[33] Although participants in the Program resided in several different provinces, the Appellants herein resided in either Manitoba or Ontario. They were all informed of the Program directly or indirectly through their respective financial advisor. All of the Appellants expressed the view that the Program was attractive because they could “give more” to charities or enhance their gift-giving to charitable organizations by leveraging existing cash resources using debt financing.
[34] The Appellants testified that they believed the loan was genuine because it might have to be reimbursed if the investment returns from the Security Deposit were ultimately insufficient. In fact, interest payments were made by the Appellants on the 2003, 2004 and 2005 loans. All Appellants received T3 slips for the investment returns on the Security Deposit as well as a cheque, sometimes referred to as “Tax Relief Cheques” to pay taxes at an assumed personal marginal tax rate of 35%. As of 2008, these amounts were withheld by the Lender, allegedly to cover the legal costs associated with the defence of the ongoing CRA audit.
[35] In 2009, the Lender offered to settle the loans discounted to 22.5% of the outstanding balance, an offer that was accepted by some Appellants. Subject to those payments, none of the Appellants paid the loans on the due date.
[36] The Appellants eventually realized that their loans were not bona fides because the loan proceeds had never been advanced to Banyan. They all received their pro rata share of the settlement proceeds from the class-action proceeding.
[37] Schedule “B” attached hereto sets out the Pledged Amount for each Appellant including the cash component and Security Deposit as well as the percentage of the cash and Security Deposit in relation to the alleged donation.
[38] What follows is a summary of each Appellant’s testimony.
Marc Halford (1st witness)
[39] Mr. Halford was a resident of Manitoba where he completed a university degree in Industrial Engineering. He admitted that he “dabbled in the stock market” with a group of acquaintances to learn and “have a little bit of fun in the markets.”
[40] Personally, he used the services of a financial adviser known as Robert Eger to address his insurance needs and provide investment information. As he made more money, he sought assistance to donate to charities in a “more organized and more substantial amount.” In 2003, Mr. Eger introduced him to the Banyan Tree Foundation.
[41] Mr. Halford was provided with some “literature” that he reviewed but the Program was basically explained to him “verbally” by Mr. Eger. He recognized the written “executive summary” for “2004 Gift Program” when presented to him. There was a list of registered charities who could receive donations from Banyan, some of which he recognized. He understood that the Program would allow him to “maximize” his charitable donations. He explained that the growth of the Security Deposit would “hopefully” ensure the loan was entirely paid before the end of term.
[42] Mr. Halford was informed of certain legal opinions but he did not consult them as they were explained to him by Mr. Eger “in laymen’s terms.” He stated that he did not rely on them prior to participating. He understood the Program to be a “legitimate system that had worked in 2002” and that “there were no issues with it, or with the taxation department.”
[43] He participated in the Program and pledged the sums of $26,000, $30,000, $32,000 and $41,000 in each of 2003, 2004, 2005 and 2007, respectively. Certain amounts were claimed in 2006 as a carry forward from previous years.
[44] Mr. Halford explained that if the investment returns from the Security Deposit were insufficient to pay the interest on the loans, he would be required to make those payments within 30 days from the calendar year end. If the loans were not extinguished prior to the expiry of the 10-year term, he understood that either it would be extended or he would personally have to repay them.
[45] When asked if anyone had ever told him he was “not responsible for paying back the loan,” he insisted, “that was never discussed.” When asked if he had heard of “performance insurance” for the Security Deposit, Mr. Halford responded “absolutely not” and that Mr. Eger had informed him that insurance had only been in place in 2002 but not the ensuing years. When asked if he had participated in the class-action suit, he indicated that on Mr. Eger’s advice, he had “opted out.”
[46] As an aside, Mr. Halford explained that he was initially impressed with the exceptional investment returns on the Security Deposits as reported by the Lender and arranged for a meeting with Mr. Eger and his investment acquaintances to pool money that would be invested through a new corporation using the same investment advisers as Banyan in a program known as Promittere S&P 500 Limited managed by G.H. Lewis & Associates (“G.H. Lewis”). Mr. Halford personally invested $35,000 in 2004 and another $20,000 in 2005. He described this as a “contingency plan” in case he had to repay the loans incurred in connection with the Program. When asked why he had not diversified by using another manager, he referred to the “fabulous returns” reported by the Lender.
[47] In November 2006, Mr. Halford was informed by the Lender and Promittere that the investment returns previously reported had been “fabricated” and the Security Deposits substantially reduced. He was called upon to make interest payments on the 2003, 2004 and 2005 loans in the amounts of $1,012.05, $1,167.75 and $820.80, respectively. He paid those amounts. The investments with G.H. Lewis were also eventually subject to “embezzlement and misappropriation”, as described by Mr. Halford, and an action was allegedly commenced against the investment advisers to reclaim the loss. Mr. Halford made a further donation to Banyan in 2007, believing that a new investment manager had been appointed.
[48] Under cross-examination, Mr. Halford admitted that his past charitable donations had been quite modest in comparison with the $110,000 he had donated to Banyan. He indicated that he initially thought the loans were genuine legal obligations but admitted he had not paid them when they became due, despite the statement in the Promissory Note that the amounts would be due “without the necessity of demand.” He acknowledged that the interest payments noted above had actually reduced the principal amount of the loans by a substantial amount but could not explain this. He again professed not to be aware of the status of the loans, suggesting they were still potentially outstanding. He also initially denied having participated in the class-action proceeding but finally admitted, when confronted with certain documents indicating the contrary, that he had not opted out and had received his pro rata share of the settlement funds.
[49] Mr. Halford acknowledged that the promotional materials referred to a legal opinion but denied that Mr. Eger had ever explained it to him. With respect to the performance insurance, he acknowledged that it was mentioned in the promotional material but indicated that it was only available for the 2002 Program. When confronted with 2003 brochure indicating there was performance insurance, he suggested it was likely a printing error.
[50] Despite the losses suffered, Mr. Halford made another donation in 2007 but could not explain why he had remitted only one cheque to Banyan and none to the Lender as a Security Deposit for that taxation year.
[51] Mr. Halford also acknowledged that he had previously applied for a mortgage and line of credit from a banking institution where he had authorized a credit check but that no such document had been requested by the Lender in this instance for any of the loans. He also admitted that the Lender had offered to reduce the principal amount of the loans in 2006 as an incentive to make the interest payments referenced above.
[52] Finally, Mr. Halford acknowledged that participation in the Program provided him with a tax credit equal to about 46.41% of the total cash and loan components, and that this would give rise to a “positive cash position”, although he could not recall if that was exactly how it had been explained to him.
Garry Innanen (2nd witness)
[53] Mr. Innanen was an information management consultant who had completed a bachelor’s degree in Earth Sciences and Masters of Business Administration. He resided in Ontario during the relevant period. Over the years, he used the services of several investment advisors including Doug Lawson who introduced him to the Program in 2003. He met Thiessen because Mr. Lawson shared office space and recalled seeing several plaques behind the reception desk thanking Banyan for their charitable donations.
[54] Prior to 2002, he and his spouse had donated to numerous charitable causes and volunteered to collect donations door-to-door. He felt that Banyan would allow him to support more charities than he could have with his “limited cash means.”
[55] Mr. Lawson provided him with some “literature” describing the Program which he read. He was able to distinguish between the 2002 promotional materials and the revised Program materials in 2003. He recalled that FMC “gave an opinion in 2002 and again in 2003” indicating that Banyan “was a bona fide structure.” He decided to participate in the program because he knew and trusted Mr. Lawson, because it seemed “logical” and because he recognized some of the charities. He also explained that he had started a business in 2002 and the “ability to obtain leverage” was enticing to him.
[56] He pledged to donate the sums of $15,000, $20,000, $20,000 and $25,000 in each of 2002, 2003, 2004 and 2005, respectively. He completed the Program Documents every year, received the tax receipts and claimed them accordingly.
[57] When asked if anyone had ever told him he would not be responsible for the loans, he answered that he “had never been told that.” He also indicated that the Security Deposits were “to be used to build up funds to pay off the loans” but that this was “never guaranteed” and that if the returns were inadequate, he would have “to make up the shortfall.” He acknowledged that the marketing materials referred to “some sort of performance insurance” but that he had never seen the policy.
[58] In November 2006, he was called upon to make interest payments of $773.54, $509.35 and $641.25 on the 2003, 2004 and 2005 loans. Since he had knowledge of the concerns with the investment manager’s performance and possible misappropriation of funds, he took steps to limit his potential losses by investing in fixed income and conservative mutual funds in 2006 and 2007.
[59] During cross-examinations, Mr. Innanen explained that Mr. Lawson had “agreed to promote” the Program but admitted he was also a director of Banyan and that he was aware of this. He explained that the Program provided “additional leverage” for his charitable giving but would not have considered a bank loan for such a purpose. He acknowledged that he would “potentially” be entitled to a tax credit of 46.4% of the total donation amount and that this “wasn’t a major factor, but it was a factor.” He indicated that he was not concerned about the investment returns required to extinguish the loans. He made no efforts to obtain a copy of the performance insurance policy because he accepted that in a “worst-case scenario”, he might have to pay off the balance of the loan. He indicated that he had paid interest on the loans in 2006 but also acknowledged that the Lender had indicated that if he failed to do so, the loan would go into default. The notice from the Lender indicated that it would use “all available means to recover funds owed on the defaulted loans.” He acknowledged that he might have discussed this with Mr. Lawson.
[60] When asked about the status of his loans, he suggested they were “in abeyance” because the “organizations no longer existed” but he had not seen anything to suggest they were “extinguished.” He did not attempt to repay the loans and only admitted that they were in fact “unenforceable” when confronted with a copy of the class-action settlement order.
Laurie Coghlin (3rd witness)
[61] Mr. Coghlin was a resident of Manitoba. He completed a bachelor's degree in Electrical Engineering and, prior to his retirement, was co-owner of a sales agency. He had limited investment experience and used the services of Robert Eger who provided him with investment advice and informed him of the Program.
[62] He had no specific recollection of the promotional materials but was certain he had seen them and that they had been explained to him by Mr. Eger. He could not recall if performance insurance had ever been discussed. When asked if there was a legal opinion, he recalled being told there was one and assumed it was a “reasonable opinion,” otherwise he would not have “invested” in the Program.
[63] He agreed to participate explaining that “it was a way you could make a larger donation by using the arrangement.” He pledged to donate the sums of $65,000, $20,000 and $30,000 in each of 2004, 2006 and 2007, respectively. Other amounts were pledged in 2003 and 2005 but claimed by his spouse. He agreed to participate in 2007 even though he knew, and the Pledge Form expressly stated that the past tax credits and Program were “under review” by CRA.
[64] Mr. Coghlin admitted that he did not have copies of the 2004 and 2006 loan documents explaining that he had either not been given copies or they had been misplaced. With respect to the Security Deposit, he explained that it would be used “to start an investment vehicle which would hopefully (…)” extinguish the loan. He understood that he might have to pay interest or principal on the loan if things did not work out. In 2006, he received invoices for interest on his 2004 and 2006 loans. His spouse received similar invoices in connection with her loans. Prior to paying those amounts, he called Mr. Eger to enquire if they were “legitimate invoices” and whether he had to pay them. He professed to have no knowledge of the current status of the loans or his Security Deposit. He could not recall if performance insurance had ever been discussed.
[65] Under cross-examination, Mr. Coghlin indicated that Mr. Eger had introduced him to Banyan and to “other investments.” He knew that Banyan was a tax shelter that would reduce taxes payable. He admitted to donating $23,180 to another tax shelter in 2003 known as “Canadian Gift Initiatives” that involved the donation of pharmaceutical products he had never taken possession of.
[66] With respect to the loan documents for 2007, he acknowledged that it contained a proviso that the donation amount would be held “for a period of not less than 10 years.” He could not explain why it was not distributed to other charities, as promoted. He could not recall discussing this with Mr. Eger.
[67] He admitted that he was familiar with lending products such as mortgages and credit cards and the requirement to repay principal and interest. He acknowledged that there was no credit check and that his spouse was not required to co-sign any of his loans in this instance. He acknowledged that he had not taken steps to repay the loans when they became due. He admitted that the donation made to Banyan in 2004 exceeded his employment income and that he did not meet the definition of an “accredited investor” with assets exceeding $1 million, as warranted in the loan documents. He could not explain why the interest payments made on the loans also reduced the principal owed.
[68] Although he testified that he was not aware of the status of his loans, he acknowledged his response to undertakings that the class-action proceeding had led to a declaration that all loans were “unenforceable.” He also could not recall having received his share of the settlement funds from the class-action proceeding.
Thomas Breen (4th witness)
[69] Mr. Breen had completed a business diploma and was a Certified General Accountant. He was retired but had been Deputy Registrar of Credit Unions for the province of Manitoba. He was informed of the Program by Robert Eger.
[70] He pledged the sums of $30,000, $35,000, $25,000 and $15,000 in each of 2004, 2005, 2006 and 2007, respectively. On December 19, 2006, he made interest payments of $769.50 and $897.75 on the 2004 and 2005 loans, respectively.
[71] He had limited investment experience. He dabbled in penny stocks and relied on Mr. Eger for insurance products. Banyan was explained to him as a “charitable donation gift-giving program” with a loan component that would provide leverage and allow him to increase the amount he could donate with the added tax benefit. He acknowledged reviewing the brochure and recognized at least four charities with ties to Manitoba. He heard there was a legal opinion indicating that the Program “was according to the Revenue Canada legislation” but had not seen it. Mr. Eger had apparently seen it and made enquiries, essentially doing some “due diligence.” He felt comfortable with this.
[72] He understood that the Security Deposit would be managed by a hedge fund but had no information on their activities. Mr. Breen indicated he was attracted by the high returns promised on the Security Deposits and that a 35% return was consistent with his expectations. If the returns were insufficient, he understood that he might “potentially” have to repay the loans or cover the shortfalls but made no contingency plans to deal with this. He did not have copies of the loan documents for 2004 and 2005 and had no explanation for this. He received T3 slips for the investment returns on the Security Deposit that were reported for tax purposes.
[73] In cross-examinations, Mr. Breen indicated that he participated again in 2007 despite his knowledge of the fraud by the investment managers and the ongoing CRA audit but did not pay a Security Deposit to the Lender for that year. Apart from the payment of interest that also reduced the principal balance of his loans, he admitted that he did not question how the Lender could discount the loans to 22.5% of the balance outstanding. In 2007, Mr. Breen signed loan acknowledgments in favour of the Lender confirming a loan balance outstanding as of January 1, 2007, of $22,828.50 and $27,680.62 for the 2004 and 2005 loans, respectively, but these amounts were never paid.
[74] Mr. Breen indicated that he had previously donated to a charity known as ‘All Charities’, an umbrella organization similar to the ‘United Way’, but admitted he would never have considered borrowing money to donate to that charity and had never discussed this possibility with Mr. Eger. Prior to his involvement with Banyan, he had never participated in a leveraged donation program or tax shelter. His knowledge of those products came from Mr. Eger. He understood that by pledging to donate to Banyan, he would be entitled to tax credits exceeding his overall cash outlay. He admitted that he did not meet the definition of an ‘accredited investor’ but that he had signed the loan documents indicating that he met the definition, and did so at the urging of Mr. Eger.
[75] Mr. Breen acknowledged that he participated in the class-action proceeding and accepted his pro rata share of the settlement funds. He agreed that the initial notice to him indicated that the proposed settlement would include a declaration that the loans with the Lender were “void and unenforceable” although that was later changed to merely “unenforceable.”
[76] In re-examination, Mr. Breen indicated that he was not surprised that the Lender had not requested credit checks because in his experience in dealing with credit unions, for example, they were not standard practice.
Kenneth L. Milley (5th witness)
[77] Mr. Milley was a retired school teacher who resided in Ontario. He had limited investment experience. Over the years, he made donations to numerous charities. He was introduced to Banyan by Horst Janusch, an investment advisor who worked with his wife. He also discussed it with another investment advisor.
[78] He reviewed the “literature” that described the Program and listed charities that he recognized and had donated to in the past. He recalled that there was a legal opinion and this “bolstered his confidence” in the Program. He suggested there was no performance insurance, but that in hindsight, had there been some, he “likely would have taken it.”
[79] He explained that the Security Deposit was to be invested and used to pay the interest on the loans and reduce the principal outstanding. He was not aware who managed the investments and was not particularly concerned about this. He understood that if there was a shortfall, he would be responsible.
[80] He pledged to donate the sums of $29,000, $20,000, $15,000 and $15,000 in 2002, 2003, 2004 and 2005, respectively. He explained that his loan balance for 2002 was extinguished sometime in 2008 as a result the growth of his deposit. He paid interest on the loans for each of the 2003, 2004 and 2005 taxation years, in the amounts of $778.5