Law Times

Law Times • June 1, 2015 Page 7 www.lawtimesnews.com MORE DETAILS NEEDED ON INSURANCE INDUSTRY NUMBERS As a law clerk working in the personal injury field, I find several things interesting about comments by the Insur- ance Bureau of Canada in your recent article (see "Auto insurance rancour heats up," April 20) when it came to the focus on lawyers' fees and the insurance industry's profit margin. First, the insurance bureau says $500 million was col- lected from injury claimants from their insurance settle- ments in 2013. What isn't clear is whether that amount includes the fees paid to the insurance company's lawyer for defending the claims, special award costs, bad-faith claims or just plaintiff lawyers' fees. Do these numbers include disbursements insurers pay for because of their requests for records to support the claim? Hundreds of thousands of dollars are spent on ob- taining records at the request of the insurer. In some cases where the injuries are well established, the cost of obtaining updated records is completely unnecessary. Over the last 15 years, there have been several cases that have granted plaintiffs special awards or bad-faith damages on claims where the insurance company un- necessarily withheld benefits payable to clients it insured and was penalized by an arbitrator or judge accordingly. Are these awards, interest, and costs included in the amount stated by the insurance bureau? If so, what is the breakdown of these amounts versus lawyers' fees for the work that has been done on the claims? Second, the salaries insurance company executives are earning are rarely publicized. Do these numbers not factor into the high insurance premiums in Ontario? Are these amounts part of the costs reported by the insurance industry? Third, lawyers' fees haven't gone up in the last 10 years. It's true that lawyers are heavily regulated with re- spect to the amounts they are allowed to charge clients. It's also true that should clients have an issue with the fees charged to them, they can file for an assessment with the court. The numbers quoted by the insurance bureau may in fact be correct, but there are questions about them that should be addressed before concluding that lawyers' fees are to blame. Is the insurance industry taking the posi- tion that it has lost profits because it has to pay these fees? Members of the public have a right to know the cost ratio versus the profit margin when they're paying premiums but not receiving the benefits they expect. AMBER REVILL, Dundas, Ont. PROCEDURES TO BLAME FOR FAMILY LAW COSTS The article by Yamri Taddese (see "Cases involving $2M in fees show how family law costs can spiral," May 11) on family court costs is instructive but not for the reasons so many of the commentators quoted seem to be indicating. The fact that lawyers can run up $1 million in costs arguing about sleepover arrangements shows only what most of us have known for years: the courts are becoming more and more the playground of the rich. Despite many statements from the judiciary and the Law Society of Upper Canada about providing legal service for those of limited means, the legal system (especially in civil and family law) continues to focus on the needs of the rich and powerful. And every time there are revisions to the rules of court, you can be sure that it is to make life more complicated for lawyers and litigants while giving more power to court clerks. A simple example is the requirement for financial state- ments in support matters. Prior to the so-called support guidelines, the financial statement for support matters was a simple three-page document. At that time, judges paid at- tention to income, expenses, and taxes. Financial statements for support are now approximately 10 pages and growing. Since the support guidelines have been introduced, judges pay no attention to anything other than gross income. So the guidelines are now the law in practice, yet liti- gants are forced to fill up a form with ignored numbers. So lawyers get blamed for requesting information that most often will not inf luence the case and having to charge fees for completing a 10-page form where only one item matters. LEROY CROSS, Toronto COMMENT tax implications of crowdfunding a work in progress By linSey rainS and ryan PrendergaSt For Law Times C rowdfunding is a relatively new phe- nomenon where individuals or groups raise money to fund projects or ventures, typically through the Internet, of a for-profit or not-for-profit nature. Individual contributions are usually small and come from a large number of people. Crowdfunding web sites such as Indiegogo, FundRazr, and Kickstart- er began appearing in the late 2000s and have grown in popularity since that time. The Canada Revenue Agency characterizes its understanding of the phe- nomenon of crowdfunding as "a way of raising funds for a broad range of purposes, using the Internet, where conventional forms of raising funds might not be possible." Uses of crowdfunding have ranged from helping individuals with education or funeral arrangements to holding a potato salad-themed festival. While crowd- funding offers developers or charitable causes a means of directly accessing funding from supporters, which may have advantages over traditional approaches and offer a more direct relationship with them, the tax implications of such arrangements are a growing area of focus. Recently, the CRA explained its current ap- proach to and the potential income tax implications of crowdfunding in its response to a taxpayer request. Given the variety of uses of crowdfunding, it's not surprising that the CRA's response indicated that it must assess the tax consequences of money raised through a particular crowdfunding campaign on a case-by-case basis. Depending on the specific facts and circumstances of each arrangement, it may classify the funds involved as loans, capital contributions, gifts or income. For example, a business may use crowdfund- ing as a method of raising funds for the development of a new product or an individual or charity may use it to raise funds for a particular cause. Although the CRA provided a broad position in relation to crowdfunding, it did specifically note that "where funds are received by a taxpayer as a result of a crowdfunding arrangement for the development of a new product and that taxpayer carries on a business or profession, CRA generally considers such funds to be taxable income . . . unless it can be shown that the crowdfunding arrangement otherwise clearly rep- resents a loan, capital contribution or other form of equity." Further, if the CRA does consider the funds to be tax- able income, its response suggests taxpayers could deduct "any reasonable costs incurred" with regard to the crowd- funding arrangement. Such a clarification is important since the growing popularity of different crowdfunding web sites means that the ease of entry to such arrange- ments may be changing given the importance of making potential supporters aware of a product or project early in a campaign through social media or other means. The CRA also noted that crowdfunding may have issues related to securities where it includes raising equity. In such circumstances, the CRA has indicated it will evaluate the tax consequences of such arrangements once securities regulators make changes to existing securities regulations to address this new approach. As such, crowdfunding campaigns may often have issues beyond those related to taxation. The CRA's response also refers to several para- graphs of its income tax folio first published on Dec. 9, 2014, that deals with lottery winnings, miscellaneous re- ceipts, and income and losses from crime and addresses the tax treatment of gifts and voluntary payments. These paragraphs clarify the CRA's position that gifts are not taxable to the recipient so long as there is a voluntary transfer of property "without consideration and which cannot be attributed to an income-earning source." Although both the income tax folio and the CRA's response are silent on the issue of crowdfunding by charities, presumably funds raised this way could be treated as gifts and therefore be non-taxable as long as they are made in accordance with its gifting, fundrais- ing, related business, and receipting policies. As such, a number of issues may arise in crowdfunding situations such as whether the funds go to an individual or an- other third party rather than directly to the charity or whether the money raised may be directed for the bene- fit of a particular person. These issues may affect wheth- er donors can receive a tax credit and there may be an impact on the determination of such a credit if the sup- porters receive any type or reward or other advantage in making a gift. In this regard, while a case-by-case ap- proach may be sufficient for the time being, these areas will be expanded upon as the CRA continues to review the tax consequences of crowdfunding. LT uRyan Prendergast and Linsey Rains are associates at Carters PC practising charities and not-for-profit law. u SPEAKER'S CORNER u LETTERS TO THE EDITOR encourages readers to send us letters, but will edit them for space, taste, and libel consideration. Please provide your name, address and contact number and send all letters to: L Law Times, 2075 Kennedy Rd. Toronto, ON • M1T 3V4 E-mail: glenn.kauth@thomsonreuters.com

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