In a case that’s sure to rock the tax-shelter world, Michael Perris, an Oakville chartered accountant, was found liable last month for recommending a tax scheme to his clients and was ordered to pay more than $45,000 in damages.
Mr. Perris was sued by Eric and Valerie Lemberg after they invested $78,500 in a donation tax shelter in which artwork was purchased, donated to a charity and a receipt issued for multiple times the amount paid, based on a fair market value appraisal of the art.
In 2004, the Canada Revenue Agency successfully attacked a test “art-flip” tax shelter case. The courts ruled the value of tax receipt was limited to the actual amount paid for the art, not for the higher appraised value.
Mr. Perris was the Lembergs’ accountant who prepared both their personal tax returns and the corporate tax returns of their manufacturing company and advised them on how best to organize their financial affairs to minimize taxes.
In 1998, Mr. Perris told Mr. Lemberg about the art-flip donation program. On his recommendation, Mr. Lemberg purchased artwork for donation in 1998 and again with his wife in 1999. Together, they spent a total of $78,500.
Needless to say, the shelters didn’t pan out and in 2001, they were reassessed by the CRA, which allowed a tax credit only for the amount paid, leaving the Lembergs out about $40,000 — the difference between the amount paid and the tax savings ultimately allowed by the CRA.
Five years later, the Lembergs became suspicious that Mr. Perris had made an “undisclosed commission” on the artwork. Mr. Perris confirmed he received a “small amount of money on the transactions, about $7,500.”
When Ms. Lemberg learned of the undisclosed commissions, she was upset. The Lembergs testified that if they had known that Mr. Perris was earning a commission, they never would have agreed to the shelters.
The Lembergs sued Mr. Perris and his firm for the $40,000 they were out, plus $75,000 in arrears interest charged by the CRA, the $7,500 in commissions and an additional $29,000 in interest they had to pay on money borrowed to pay the back taxes, for a total claim of $151,500.
The judge concluded that Mr. Perris was in a fiduciary relationship with the Lembergs and breached his obligations by obtaining a secret commission that was not properly disclosed. As a result, the judge ordered Mr. Perris to compensate the Lembergs for the $40,000 they were out plus the secret commission of $7,500. He did not award interest costs since the Lembergs had use of the funds during the years in question.
Tax litigator David Chodikoff, a partner with Miller Thomson LLP, called this decision “really big,” and said it represents a “clear precedent” for taxpayers who may have been similarly advised to invest in a tax shelter where secret commissions were paid.