Just a couple of years into his retirement in 2001, Edward Baker ran into an old business client. The chance meeting led him to attend a tax seminar for Canadians being held in Cancun, out of which he struck up correspondence with one of the presenters, a Mr. Claridge. Eventually Mr. Baker allocated $100,000 to an investment for his RRSP.
Almost a decade and a half later, a judge of the Tax Court of Canada expressed his own views on this chance encounter, the investment, and its implications for the RRSP.
Limits to RRSP transactions
RRSPs allow us to save for retirement by placing before-tax dollars in a tax-sheltered environment. The taxpayer only pays tax when funds are withdrawn, whether voluntarily or by operation of law. It is the “operation of law” part that was relevant in this case.
Where RRSP losses result from adverse market experience, that is one thing. It is another matter though, where such losses arise out of suspect transactions, generally regardless of the awareness or intention of the RRSP annuitant.
And as pointed out by the judge, to the extent that there are any losses in an RRSP, all taxpayers share in the losses through forgone tax revenue. To safeguard RRSPs from abuse, where a RRSP trust purchases property for more than it is worth or sells property for less than it is worth, there will be an income inclusion pursuant to ITA section 146(9).
The investment opportunity
Mr. Claridge offered Mr. Baker the opportunity to invest in Kelso Securities, a small public company in the transportation manufacturing field. It appeared to be on the cusp of a breakthrough in rail brake technology. Mr. Baker claims that he spoke with the CEO about the business, and with its lawyer who stated that its shares were RRSP-qualified.
Mr. Baker opened a new self-direct RRSP account, into which he transferred $100,000 from an existing RRSP. With these funds, 5,000 preferred shares (eventually convertible to common shares) were purchased at $20 each. Mr. Baker gave Mr. Claridge full discretion to negotiate the price, agreeing in advance to a $20,000 commission irrespective of the price.
It is not clear whether Mr. Claridge ever received his commission directly. Subsequent to the purchase, he failed to reply to Mr. Baker’s phone or email contact.
An in-credible witness
The judge commented that even a brief internet search would have revealed that over 140,000 of the same class of shares had been issued by the company in the preceding two years at $1 a-piece. One such issuance occurred after Mr. Baker’s purchase.
Meanwhile, the common shares (into which the preferred might eventually be converted) were trading at between $0.07 and $0.11 in the month following Mr. Baker’s purchase.
In addition, a CRA auditor testified that the seminar in question was offered by the Institute of Global Prosperity, an organization that promotes an aggressive anti-tax philosophy. In fact, before paying the $8,000 to attend the Cancun seminar, an attendee would have already had to purchase a six audio disk set for $1,500, casting a doubt on Mr. Baker’s claim to be unaware of the subject matter and tenor of the seminar before arriving.
Inclusion conclusion
The defence contended that Mr. Baker had neither directed nor intended a transaction at less than fair market value. Though acknowledging a line of case reasoning that could support an innocent vicim of fraud, the judge declined this submission.
On the contrary, the judge criticizes Mr. Baker’s lack of due diligence in the affair, concluding that he must have been complicit in the scheme to acquire the Kelso shares at greater than fair market value. He was particularly taken by the fact that Mr. Baker, having apparently lost his entire investment, had made no effort to pursue Mr. Claridge, nor either of the representatives of Kelso.
On the whole, the inference taken by the court was that there must have been a promise of some sort made to Mr. Baker that did not ultimately materialize, suspecting “that someone else made off with the funds.”
It was ruled that s.146(9) applies to the case, bringing into Mr. Baker’s 2001 income the difference between the consideration paid and fair market value, or $95,000.