Link: Case Summary Document
Citation:  ONSC 399 (Ontario Superior Court of Justice, Strathy J.)
This Canadian case dealt with a gift program for charity (the gift program), Donations for Canada, which was allegedly a scam. The present hearing was an application for certification of the class action by plaintiffs, and an application by two defendants for summary judgment. Grounds for certification were found to be established and summary judgment was dismissed so the case continues.
The selling point of the gift program was that a tax deduction of $10,000 could be obtained for a ‘donation’ of $2,500 to charity. Around $144 million had been invested in the gift program in total. The Canada Revenue Agency (CRA) took the view that the gift program was nothing more than a fraudulent scheme, in which the funds of ‘donors’ flowed ultimately into the pockets of the promoters of the scheme. The CRA said that donors involved in the gift program lacked ‘donative intent’ because there was no element of impoverishment in the so-called charitable donation. Rather, the donor expected to be enriched by receiving a tax credit well in excess of his or her donation. Thus, the ‘donation’ could not be characterised as a gift, and there was no allowable tax deduction for tax purposes. The full amount deducted had to be repaid to the CRA with interest.
Charities were involved in the gift program. In return for participating in the gift program, the charities involved received 1% of the total money donated and the promoters’ promise of a 20-year income stream from an investment that the promoters would make, using a fraction of the gift program donations. The Funds for Canada Foundation (FFC Foundation) was established in the second year of operation of the gift program as an umbrella organisation to receive donations and to disburse them to qualified charities.
Cannon was the representative in a class action (the class comprised 9,926 persons) against the gift program. His Honour certified the action as a class action at this hearing, and dismissed certain applications for summary judgement.
His Honour traced the history of the gift program, saying in this respect (at –):
The Gift Program was the brainchild of Edward Furtak (‘Furtak’), a developer of software and a sometime promoter of tax avoidance schemes, who is the President and CEO of the Trafalgar Group of Companies. Furtak had developed a computer program called the Trafalgar Global Index Futures Program (the ‘Software Program’ or ‘Global Index Futures Program’), which purportedly had a methodology for making money from the trading of S & P futures contracts by predicting short-term movements in the financial markets. Furtak established a trust in Bermuda, called the ‘Bermuda Longtail Trust’ (the ‘Bermuda Trust’), for the benefit of himself and his family and he granted the Bermuda Trust the right to license the Software Program to third parties. The Software Program was in turn licensed by the Bermuda Trust to a Bermuda company owned by Furtak called Trafalgar Trading Limited (‘TTL’). Most of the cash donated to charities by participants in the Gift Program found its way into the pockets of Furtak’s companies and the Bermuda Trust. The donations made by participants were super-sized by the very temporary injection of funds from the Bermuda Trust, which flowed briefly into the charities.
Most of these funds were immediately returned to the Bermuda Trust, by way of the licensing agreement between the charities and TTL for the use of the Software Program. The super-sizing made the taxpayer’s donation appear to be much larger than it was in fact, thus justifying the enhanced charitable tax credit each taxpayer was to receive.
His Honour identified that there were six requirements for the gift program to work as a scheme:
- Taxpayers willing to invest a minimum of $10,000 as ‘donations’ in the scheme (there were several very large participants, with the largest sum invested being $4 million);
- Charities willing to give back 99% of the moneys they received from the gift program, in return for a flow of income from the use of the software program;
- A network of companies and trusts to deal with the circulatory flow of money;
- Legal opinion that backed the gift program as legitimate;
- A sales force to ‘sell’ the gift program (these were referred to as distributors);
- A supply of short-term cash to artificially inflate the donations so that they appeared to be legitimate (this was supplied by the various Bermuda companies and trusts).
The gift program scheme worked as follows (for an alleged $10,000 ‘donation’):
- The taxpayer donated $2,500 to a legitimate charity by cheque or pledge.
- At the same time, the donor applied to become a beneficiary of the Donations Canada Financial Trust (the Trust). The Trust was established as a private charitable trust.
- The Trust then made an investment in a sub-trust, and received two units in the sub-trust. Parklane Financial Group Limited (Parklane) was appointed by each donor to hold the sub-trust units and to donate them to the charities on the donors’ behalf.
- The donor was issued ‘a confirmation of issuance of the discretionary interest’ in two sub-trust units, having an ostensible value of $7,500, in return for his or her cheque or pledge. The donor then donated the two sub-trust units to the charity he or she had chosen.
- The charity then held two things from the donor: $2,500 in cash and a piece of paper representing two sub-trust units, purported to be worth $7,500.
- The charity was now required to redeem the two sub-trust units, in order to obtain the extra $7,500 in cash. To provide the funds to make the redemption, the Bermuda Trust indirectly acquired the sub-trust units, through Donations Canada Trust, for $7,500. The charity was now apparently holding a total of $10,000 ($2,500 + $7,500) in cash.
- In return for his or her total donations, the donor would receive two charitable donation receipts, a cash receipt for $2,500 and a donation-in-kind receipt for $7,500, the stated value of the sub-trust units. The donor would submit the charitable receipts along with his or her tax return.
- The charity remained in possession of the $10,000 in cash for a very short time. From a $10,000 ‘donation’ only $100 would actually be received by the charity. The rest of the money went to the promoters of the gift program. Even worse, where the FFC Foundation received the ‘donations’ on behalf of the charities involved, the FFC Foundation retained a further 25% of the 1% to be received by the charity.
- The 99% of ‘donations’ which flowed back to the promoters were supposed to be invested for the charities using the software program developed by the promoters. A leveraged cash and margin trading facility was established on behalf of the charity, using the charity’s cash. The charity was to receive a future income stream from use of the software program, which by the very nature of a margin trading facility, was speculative at best. This was based on 60% of the monthly profits generated by its investment for a period of twenty years. The promoters were to receive 20% of the monthly profits, with the remaining 20% to be re-invested in the trading facility. The charity was never to receive a return of its principal.
His Honour found that there was a sufficient common class to proceed with the class action. This was the class of persons who were participants (as Canadian residents) in the gift program between 2005 and 2009. His Honour certified the class action with causes of action against some or all of the defendants on the grounds of negligence, negligent misrepresentation, fraud and fraudulent misrepresentation, conspiracy, various breaches of the Consumer Protection Act 2002 (Canada), breach of contract, and unjust enrichment and constructive trust. Some of the matters were inadequately pleaded, but His Honour took the view that this was a matter for the trial judge. His Honour dismissed applications for summary dismissal of the action by two defendants.
The case may be viewed at: http://www.canlii.org/en/on/onsc/doc/2012/2012onsc399/2012onsc399.html
Implications of this case
This case is yet to be decided or settled. On its face, the gift program seemed to present many problems. As His Honour pointed out (at ):
First, there is no conclusive evidence that the sub-trust units donated by the donor had any significant intrinsic value and certainly no evidence that they had the value of $7,500 that was assigned to them. Second, there is no evidence that the right to the future income stream represented by the royalty agreement was commensurate with the consideration paid by the charity. Third, while there is some evidence that a few charities have obtained some returns for their ‘investments’, the evidence does not show whether the ‘software licensing fee’ paid by the charity to [the promoters] represented the fair market value of the future investment stream. This is particularly troubling considering that the charity did not retain its capital. There is evidence that the returns generated by [the promoters] for the charities have been meager.
However, as His Honour remarked, these are issues to be decided at trial.
On the same issue, the Charities Commission of England and Wales has published a new strategy in 2012 for charities to deal with fraud, financial crime and financial abuse. The National Fraud Authority in the UK has found that charities estimate they lose 1.7% of their annual income to fraud, equal to £1.1 billion of the sector’s income for 2010–11. The most common types of fraud were cited as payment fraud, fraud by employees or volunteers and cyber fraud: http://www.charitycommission.gov.uk/RSS/News/pr_NFA_response.aspx.