A bunch of Canadian taxpayers bought in to a yacht rental scheme. The promoter claimed he was going to build a number of luxury yachts and lease them out. The taxpayers bought units in individual yachts and got hefty up-front deductions. Actually, from what I can see, a fairly sophisticated crowd who put up cash of about $90,000,000. The scheme was heavily promoted by lawyers and accountants who got a cut for touting it;
The idea was that investors would put cash in the scheme which would, at least initially, result in deductible losses greatly in excess of the taxpayers cash outlays as the business got off the ground. Unfortunately (for the taxpayers, not the CRA) it was all ponzi scheme with no yachts or any legitimate attempt to start a rental business. While there was some business-like activity it was just window dressing to entice new suckers and lull the existing ones. The investors merrily claimed business losses based on a bunch of cooked-up costs until the CRA started looking into it in 1986 and started a criminal investigation. The CRA disallowed all claimed loses on the basis that there was no business and therefore no business losses.[6] The luxury yacht Limited Partnerships were promoted by various accountants, lawyers, and others, as tax shelters to their higher income-earning clients. The promoters received a commission for each investor that subscribed. The promoters heavily emphasized the tax advantages offered by the investment, which was the focus of much of the promotional material provided to potential investors. The tax attractions included the flow-through of losses from the substantial expenses incurred during the start-up phase before any revenue was generated, as well as the ability to claim depreciation on each yacht.
I make no claim to a working knowledge of American tax law but I believe you can claim tax deductions for fraud losses. However fraud losses are not deductible in Canada so when taxpayers are scammed they sometimes try and get the CRA or the Tax Court to agree their losses are actually business losses. If the CRA agrees then they at least get something. I covered this issue in a prior discussion thread where a lawyer sent money to Nigeria to get his hands on untold riches in an assassinated businessman's estate;
viewtopic.php?f=2&t=8320
So that is what approximately 300 of the 600 investors in this scam tried to do but the Tax Court didn't buy it. The court reviewed the whole sad history and concluded that there was never any actual business activity, it was all scam.
[352] The business indicia that the Appellants refer to are simply the window-dressing necessary to perpetuate the fraud from beginning to end on everyone that Mr. Bellfield came into contact with. There is no evidence that supports the intention to carry on any activity for profit as required by the Supreme Court of Canada decision in Stewart. This is not a case similar to the Tax Court decisions referred to previously in Johnston v. Canada,44 and Agnew v. The Queen,45 in which sufficient genuine business activities were undertaken. This is a case more akin to Vankeerk. In Vankeerk, a Statement of Agreed Facts established the fraudulent nature of the scheme and the fact that the Limited Partnerships were not genuine. In this case, the fraudulent nature of the entire scheme is established by the facts set out in the many examples of misrepresentations above.
Apart from the indignities of being defrauded the taxpayers were unhappy that the CRA wasn't nice to them. Those damn innuendos, very hurtful![363] The evidence of misrepresentations presented at trial was enough to convince me of all of the foregoing. In fact, the volume of evidence is so overwhelming, voluminous, and uncontradicted, that when one looks at the evidence in its totality, one cannot come to any other conclusion other than that this was a fraud from beginning to end perpetrated by the mastermind Mr. Bellfield. He showed no mercy in terms of duping the public, the investors, the CRA, his own staff, and others, in his attempts to further his own personal interests and those of his family members. There was no genuine business carried on and I therefore conclude that the Appellants did not have a source of income from which they could deduct expenses or losses.
Apparently the taxpayers blamed the CRA for their losses because the scheme collapsed as a result of the CRA investigating it;[343] The Appellants throughout the trial made numerous suggestions or innuendos about a variety of aggressive or inappropriate behaviour by members of the CRA. My task is not to assess the conduct of the CRA, but rather to determine whether or not the expenses claimed in these appeals are legitimate. This is not a criminal prosecution. As stated in Ereiser v. Canada:43
This is a very long and convoluted decision, I've only skimmed it. I'll leave it with one last quote referring to the Tax Court's explanation of why it all took so long;[344] As I stated, the entire Ponzi-like scheme was set to collapse eventually. The conduct or intervention of the CRA did not turn this Ponzi-like scheme, a fraud from beginning to end, into a genuine business. All the intervention did was instigate the lifting of the veil to reveal the prevalent nature of the fraud.
[13] These appeals have a lengthy procedural history. Notices of Assessment and/or Reassessment were first issued in 1989 and/or 1990. Notices of Objection were filed in those same years. The appeals were held in abeyance for many years pending negotiations between the litigants and the final outcome of Mr. Bellfield and Mr. Minchella's trials and appeals in the criminal process. The criminal matters ultimately came to a close in 2004. A number of Motions came before the Tax Court of Canada regarding these appeals and caused further delays.
[14] The taking of evidence began on December 6, 2010 under the General Procedure Rule 119 over twenty years after the first Notices of Assessment were issued. The trial proper began on January 11, 2012, and in total, over 62 days of evidence was given with some 34 witnesses plus some 23 Agreed Statements of Facts. The hearing of the evidence occurred over an extended period to facilitate availability of witnesses and to allow for a better organization and presentation of evidence by both. As an aside, counsel for both parties worked together most impressively and cooperatively in most instances to put evidence presented before the Court that included tens of thousands of pages of multiple volumes of exhibits that by my count has accumulated to the point of filling over 100 bankers boxes.
http://decision.tcc-cci.gc.ca/site/tcc- ... 6/index.do