Two former Toronto Maple Leafs stars and local Barrie icons are among a cadre of wealthy Canadians accused by federal tax officials of trying to avoid paying taxes by creating artificial losses in their income statements.
The Canadian Revenue Agency (CRA) has zeroed in on those who it says are participating in a “straddle loss” strategy. Since 2010 it has reassessed the tax returns of more than 150 taxpayers involving more than $600 million in federal taxes.
And it accuses Barrie’s Shayne Corson and his brother-in-law, Darcy Tucker, who have been active in community events in Corson’s hometown, of trying to avoid paying their fair share.
The CRA challenged their claims that they lost millions in investments after both their tax submissions were reassessed. The hockey stars then appealed the results of those reassessments to the federal tax court.
“We view these types of transactions as offensive; it is effectively wealthy taxpayers creating artificial losses to reduce the amount of tax payable,” said Ted Gallivan, assistant commissioner of the Compliance Programs Branch at the Canada Revenue Agency via email.
BUSINESS LOSSES
Corson was denied business losses in 2000, 2001 and 2002, totalling $7.6 million. In court filings of his appeal of the CRA’s denial of the losses claimed, he said he was doing business “as a trader in foreign currency futures contracts” and entering into a client agreement with Union Cal Limited, a London, England-based foreign currency brokerage firm.
That agreement led to foreign exchange futures transactions through which Corson reported that he lost $2.1 million in 2000, $2.6 million in 2001 and $2.9 million in 2002.
“The applicant is a sophisticated businessman and investor and was always fully aware that in investing in foreign currency futures entailed substantial risk and that if he were successful, he would generate taxable income and that if he were unsuccessful, he would incur losses,” reads Corson’s appeal filed with the tax court, denying that they were sham investments and that they were “legally effective.”
In subsequent years, Corson reported taxable gains in foreign currency transactions.
In his appeal, he asked that those tax years be reassessed and that the government pay interest on a future refund.
In its response, the government insists the trades never occurred.
“This claim involves a tax loss creation scheme that used the appearance of such trading to generate a tax deferral and permanent cash savings. The documents associated with this scheme involved a tax sham,” read the filings with the tax court.
Corson’s loss, it adds, was not not part of business in pursuit of profit but rather an unregistered tax shelter.
And in asserting that “the operation and management of the account is indicative that the transactions were not bona fide,” the government said the transactions were much more than what would have been allowed given the cash deposited in the account. It also indicated that there was a shortfall in Corson’s account with Unioncal but there were no attempts to cover the shortfalls.
The tax court said the UK company listed as a broker was actually just a tax shelter designed to create losses and result in tax returns, not a business venture. And it alleges that all dealings with UnionCAL were shams.
Corson’s lawyer said because the case remains before the courts, it would be inappropriate for him to comment. But in answering to the government’s response, he insists the trades did occur and denies the government’s allegations and that there was no sham.
“The appellant intends to demolish the respondent's assumptions” that don’t reflect the true facts, Corson’s lawyer indicates in the filings.
WITHDRAWN
Tucker’s tax troubles mirror Corson’s but while Corson’s case remains before the court, Tucker abandoned his appeal.
Tucker also initiated an appeal of the CRA’s reassessment in 2015 which disallowed his claimed losses of $1,018,686 and $1,144,626 respectively in 2001 and 2002 for a series of foreign currency trades with IFX Markets Ltd.
He indicated in subsequent years, from 2004 to 2008, he earned a profit from his trading activities.
The CRA said the trades were a sham and not legally effective and nothing more than a tax shelter.
“The legal relationship between the appellant and IFX as documented in the relevant contracts and agreements was binding and was not a façade to disguise a different type of legal relationship,” contested Tucker in court documents. “Therefore, given the absence of any deceit, the arrangement between the appellant and IFX was not a sham.”
He further insisted that the claims were legal and weren’t tax shelters.
In its response, the CRA said Tucker earned $1,674,714 in 2001 and claimed a loss of $1,018,686 through foreign currency option trading through UnionCal Limited or IFX Markets Ltd.
Further, the CRA added, the following year Tucker earned $2,234,448, claiming a loss of $1,144,626. During a reassessment, the government denied those claims and Tucker appealed before the tax court.
The following year Tucker withdrew his appeal and just weeks ago, on Sept. 29, the tax court finally closed his file.
STRADDLE LOSS
According to information provided by the CRA, a 'straddle loss' is a complicated structure involving a sort of push-and-pull of investments in which a loss on one is offset by a gain on the other.
Some taxpayers repeat that process, entering into similar contracts every year so that the gain is always offset by a new loss. The CRA said recent files also involve an exit strategy plan to permanently avoid tax on the gain of the straddle.
“The contracts that generate a loss are closed out in one year, while the gain contracts are closed out in the following year,” explained Gallivan in the email. “The net effect is to push taxes back one year and take advantage of the deferral.
“We don’t shy away from these complex issues or testing our position in court.”
The CRA is also actively trying to close any perceived loopholes “in any legislation that tax scheme promoters exploit” to help taxpayers skirt paying taxes by working with the departments of finance and justice, he added.
