Advisor fraud and investor taxation

By Doug Carroll | May 17 2013 07:13PM

At issue
Fraud can rear its ugly head in any area of commercial activity, and the financial advisory field is certainly no exception. Indeed, the highly interpersonal nature of the advisor-client relationship can make it an especially fertile ground for the unscrupulous ‘con’fidence man.

Defrauded individuals may feel doubly victimized when the tax assessment shoe drops, with the potential for particularly harsh results when registered money is involved. Even the judges in the first two cases below suggest that Ministerial discretion may be warranted for these losing taxpayer-litigants.

On the other hand, fraudulent activity can lead to some anomalous results, as the last case demonstrates.

Mignault v. R. 2011 TCC 500

Advisor had Mr. Mignault withdraw $287,920 from his RRSP over four years, with the net $202,794 paid to the advisor’s corporation. It was the last Mr. Mignault saw of those funds.

While the judge acknowledged that Mr. Mignault may have believed that he was only reinvesting within an RRSP, the documents (prepared by the advisor) and his own testimony supported the factual finding of a withdrawal. He was liable for tax on the RRSP withdrawals, with $85,126 already having been withheld.

Penalties for two of the years were also upheld as Mr. Mignault could not show that he met either the objective or subjective standard for a due diligence defense.

St. Arnaud v. R., Braun v. R, Patenaude v. R., 2011 TCC 536

These three taxpayers were not directly connected to one another, but had the same advisor – to their mutual misfortune.

Each taxpayer moved RRSP or RRIF funds into new self-directed accounts to purchase shares of corporations purportedly poised for lucrative initial public offerings. Semi-annual statements were issued for 4 or 5 years before it came to light that the shares were worthless from the start, and otherwise not qualified for RRSP/RRIF investment.

For RRSP and RRIF acquisitions, consideration paid in excess of fair market value is brought into a taxpayer’s income. The judge found that though these taxpayers had done nothing wrong themselves, the purchasing funds “left the sheltered environment and so must, under the scheme of the Act, and its specific provisions, be subject to tax.”

Johnson v. R., 2011 TCC 396

The taxpayer was an innocent participant in a $45 million Ponzi scheme, being one of the ‘up’ investors. She was assessed for amounts she received in excess of what she had provided, totaling $614,000 and $702,000 for the 2002 and 2003 taxation years, respectively.

The scheme of the Income Tax Act requires that income must derive from a source. On the facts, the judge held that while Mrs. Johnson received something, there was an insufficient connection between the capital she provided and her receipts. Thus, as the capital was not a source, the receipts could not be characterized as income.

Practice points – for investor due diligence
1- Verify the credentials, licensing and professional ‘good standing’ of your advisor and the financial organization he or she represents.


  • Be aware of what reports and statements you are entitled to receive, be sure that you do receive them, and be careful to store them securely.
  • 3-

  • Review, respond and act immediately upon correspondence with the Canada Revenue Agency, and be prudent in deciding whether and who to appoint to communicate with CRA on your behalf.

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