Tax lawyer's advice key when entering into tax-based deals

A recent case that has left thousands of unsuspecting taxpayers facing steep penalties after they became involved in a questionable tax scheme highlights the importance of consulting a tax lawyer before entering into any kind of tax-based investment, says Toronto tax litigation lawyer David J. Rotfleisch.

CTV’s W5 reports that as many as 1,800 Canadians were sold a program by a company called Fiscal Arbitrators for the 2009 tax year, promising large refunds as “their taxes could be structured so that they could claim huge business losses.”

However, unbeknownst to many participants in the program, the Canada Revenue Agency (CRA) had begun a criminal investigation into the business tax scheme, says the report. The CRA issued a tax alert on the scheme three weeks after the 2009 filing deadline.

Rotfleisch, founding lawyer at Rotfleisch & Samulovitch Professional Corporation, a boutique tax and business law firm specializing in tax dispute resolution, acts for a number of clients who were involved with Fiscal Arbitrators. Many, he says, are facing gross negligence penalties of 50 per cent. As W5 reports, several cases have already been heard before the Tax Court of Canada, with one recent decision upholding the gross negligence penalties.

Traditionally, says Rotfleisch, the CRA and the courts have taken the knowledge and sophistication of taxpayers into account, but have not done so in this case.

“This is the disturbing part of these cases. As the article points out, the CRA did not warn taxpayers until after the 2009 filing deadline and in many cases the participants are completely unsophisticated. So, someone on a car assembly line was introduced to the deal and brought his friends in. None of them had any legal advice,” he says.

“Even if it had been posted, it’s not necessarily easy for a tax layman to find a CRA alert,” he adds.

Ultimately, says Rotfleisch, taxpayers should never enter into a tax-based deal without first seeking independent tax advice.

“Taxpayers should seek advice from a tax lawyer before going into any tax-based investment. If you are already invested and have not yet been audited by the CRA, have the transaction reviewed by a tax litigation lawyer. If you have already been audited, then retain a tax lawyer to make the best deal possible.”

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