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Income tax — corporation was bare trustee

My clients were three unrelated individuals, in different cities in Ontario, who had been investors in a real estate venture along with two other persons. The real estate was owned by a nominee corporation. A Revenue Canada auditor audited one of the other persons (who had managed the project), and concluded, without ever talking to my clients, that they had deliberately misrepresented the corporation's losses as being their own losses. He wrote to each of my clients, proposing to reassess for hundreds of thousands of dollars of losses (each) and to apply penalties for misrepresentation.

I gathered all the evidence and wrote back to the auditor with a detailed explanation of the facts and supporting documentation. I further explained to the auditor that a "bare trustee" or nominee corporation can operate as a conduit for tax purposes, and that the bare trust need not be disclosed to third parties or on public documents. The auditor wrote back four months later, continuing to claim that my clients had misrepresented the facts, and claiming that the documents I had supplied (executed ten years earlier) had been deliberately backdated by my clients and their accountants.

My clients were incensed.

I wrote a strong letter back to the auditor, offering to have the documents and signatures in question forensically tested by a crime lab to determine that they were in fact ten years old, on condition that the auditor agree that, if the lab proved the documents had not been backdated, he would cancel his proposed reassessments.

I also wrote to senior management in the local Tax Services Office, complaining about the auditor's conduct, his baseless allegations of misconduct on my clients' part, and his failure to grant them the presumption of honesty stated in Revenue Canada's Declaration of Taxpayer Rights.

Six months later, the auditor wrote back to say that he would not proceed with his proposed reassessments.

Problem vanished!

(1996)