Law Times

Law Times • November 1, 2010 T Fraser offers rare kudos for tax agency The he notion of the tax- man being audited by the upright and rigor- ous Auditor General Sheila Fraser is enough to warm the heart of every tax lawyer in the country. That's a little of your own medicine, dear taxman, which is exactly what Fraser adminis- tered this year. Every year, she audits a few government departments and agencies. This year, the Depart- ment of National Defence was one of those selected. She really slammed the big boys in uni- form. They paid the price. It was big news. What was less publicized was the audit Fraser did at the Can- ada Revenue Agency, the body that watches over charitable do- nations and investigates those pesky tax shelters. A surprise was Fraser's con- clusion that the people respon- sible for charitable status issues are doing a good job. That says something. Fraser doesn't toss compliments around lightly. But they're not doing too well, it seems. In fact, the tax people, ac- cording to Fraser, give all sorts of warnings — nice little educa- tion letters, as they call them — before going the next step with compliance warnings or the fi- nal option of revoking a chari- table status number outright for organizations not playing by the rules. Gone are the days when, just before tax time, a parishioner would show up at church to see Father Flanagan and get a tax receipt for the dimes put in the collection plate over the past year. "Now how much of a receipt would you be asking for this year?" the priest would ask. The times have changed. Since 1967, all charitable donations, religious or secular, have to be duly registered with the CRA. Every year, it accepts about $2.4 billion in charitable dona- tion tax receipts. But over the past seven years, it has rejected a total of about $2 billion in do- nation claims. The agency checks out both the charities that receive the donations and the people who make them in exchange for tax receipts. There are about 85,000 charities registered in Canada. They do important work in our society that governments would otherwise have to do. That's why the government gives up revenue each year to encourage them. The problem is that some charities aren't what they seem, especially those running tax shelter "gifting arrangements." People can buy things, such as a nice painting or land, and give them to a registered char- ity. Under the scheme, they get a charitable tax credit for an amount larger than what they Hill By Richard Cleroux originally paid for the painting or the land. It's simple. You buy a paint- ing for $1,200, get a favourable assessment from an art apprais- er, give away the work to a reg- istered charity, and in return re- ceive a tax credit valued at two or three times what the painting cost in the first place. Many law firms like to buy paintings for their office walls. It refreshes the law office and gives a certain class to the firm. Some paintings could end up as charitable donations or they could stay on the wall as noth- ing more than a business tax deduction. Fraser likes the way the tax people have been checking up on tax shelters since 2003. There have been some real "winners," she noted. Fraser cites a really bad gift- ing arrangements case — a reg- istered charity that did no char- itable work at all except to hand out $18,000 to participants in the scheme while cranking out $6.7 million in tax receipts. It lost its charitable tax number. In the end, taxpayers were the real winners. The CRA wrote about this king of the bogus tax shelters in a news release issued on Nov. 17, 2008, but Canadian tax law prevents it from naming names. Fraser noted that tax shelter gifting arrangements require the attention the CRA is giv- ing the issue. As of last Janu- ary, 172,300 Canadians were involved in tax shelter gifting arrangements and made more than $5 billion in donations. That's a lot of taxes that didn't go to the federal treasury. Since 2003, the revenue peo- ple have reassessed the claims of 69,000 participants involved in tax shelters and rejected $2 billion worth. That's a lot of money that went back into the public treasury. As well, 11 "abusive" tax shelters lost their tax numbers. According to Fraser, the message seems to be getting through. The number of active tax shelter gifting arrangements is declining year after year. But she added: "Some tax- payers will continue to buy into an arrangement that is too good to be true" despite all of the warnings from the CRA. Her message, of course, comes through clearly that the tax people are doing a good job of going after our money. In a way, that's too bad. LT Richard Cleroux is a freelance reporter and columnist on Parlia- ment Hill. His e-mail address is richardcleroux@rogers.com. www.lawtimesnews.com COMMENT Small Claims Court a defendant's paradise? BY JORDAN FARKAS For Law Times on the increase in the claims limit to $25,000 from $10,000, what slipped under the radar were the various rule changes. Perhaps the most significant rule modifi- T cation was to disallow alternative service of a plaintiff's claim by regular mail and instead obligate service by registered mail or courier, both with veri- fied receipt of the defen- dant. In my opinion, this rule has turned the Small Claims Court into a de- fendant's paradise for a number of reasons. As a result of the changes, defendants are evading service and getting away with it. I have seen evasion of service increase significantly since the new rules took effect. Whereas in the past plaintiffs could swear an affidavit of service proving a claim was served by mail, they must now obtain the defendants' verified signature. This means that even if their spouse signs for the registered delivery of the claim, defendants won't have to defend and can now ensure they avoid signing for unanticipated registered mail. In fact, I had one such case in which my cli- ent served a defendant by registered mail and, because the defendant's wife signed for it and thereby tipped him off, my client had to obtain the services of a process server. In response, increased service costs are dis- couraging plaintiffs. Because of the difficul- ties with serving a defendant, I know of many potential plaintiffs who are discouraged from starting a lawsuit because of the costs they now face. While I believe process servers play a vital role in litigation when necessary, it's unfair to burden plaintiffs with the added cost of hav- ing to hire one. Of course, it's a burden that didn't exist prior to January. Moreover, in cases where professional pro- cess servers can't effect service, plaintiffs have to worry about spending additional legal fees on motions for substituted service. In fact, one Small Claims Court clerk verified this concern by confirming that, to her knowledge, there has been a sharp increase in motions for substituted service since the rule changes this year. In addition, plaintiffs are in the dark as to what constitutes proper service. In the past, Web Correspondence OTHER FACTORS AT PLAY The last Calgary election was October 2007. Required ID was Alberta government-issued photo ID only. I sued alleging over 60,000 people had been disenfranchised. As a direct result of my lawsuit and lobbying, over 1,400 mail-in ballots were counted this time (they were not available in 2007) and some 32 types of ID were accepted. You tell me which issue was more important: an "exciting" candidate or the ability of the people on the fringe to vote for him? Comment on lawtimesnews.com by Lawrence A. Oshanek about "Time to consider municipal election reform." his year brought sweeping changes to Ontario's Small Claims Court. While virtually all of the discussion centred they could serve defendants at their place of business as their last known address. But now, according to the rules of the Small Claims Court, one may only serve a claim by regis- tered mail or courier at the defendant's resi- dence. But what happens if you only know where the defendant works? A conversation with one Small Claims Speaker's Corner Court staffer revealed that many clerks would accept registered mail or courier to a defen- dant's business. When I asked how this can be as it's contrary to the rules, the clerk had no answer for me. When I asked if this means that some clerks will allow such service while others won't, the clerk answered in the affirmative. Apparently, service of a claim by registered mail or courier has now become a guessing game as to whether or not the court will accept it. Finally, defendants can still set aside default judgments with ease. With increased strict- ness on serving claims, one would think that at least the deputy judges have gotten tougher on defendants who attempt to set aside de- fault judgments by alleging that the claims never got to their attention. Unfortunately, that hasn't been the case. In my experience, defendants are just as likely to succeed in a motion to set aside a default judgment as they were prior to the rule changes. At the same time, despite plaintiffs' increased service costs, I haven't noticed any increase in the amount of costs awarded to plaintiffs even in cases in which defendants succeed in having the de- fault judgment set aside. It's difficult to understand why the govern- ment revoked the rule allowing service by regu- lar mail. It's possible the change was a result of the common occurrence of defendants claim- ing they never received a copy of the claim. But is the answer to make things more dif- ficult for the plaintiff who is trying to get access to justice? There were other options available to the court, such as allowing service by e-mail or fax. As it stands, it appears that the decision to revoke service by regular mail is a mistake that has undermined access to justice, an ideal the court is so rigorously trying to achieve. LT Jordan Farkas is an Ontario litigation lawyer and litigation solutions consultant. He is founder of mrsmallclaimscourt.ca, lawyerletter.ca, and canadianlegaloutsourcing.ca. PAGE 7

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