Alberta court attempts to help victims of Ponzi scheme

An Alberta court has declared that an investment structure was, in fact, a Ponzi scheme — a ruling that aims to help victims sort out the tax implications of the damage they’ve suffered.

In the receivership of Base Mortgage and Investments Ltd. and Base Finance Ltd., the Court of Queen’s Bench of Alberta issued a declaration that Base Finance operated a Ponzi scheme, and that payments made to investors in the scheme should be treated as repayment of principal, rather than interest, for tax purposes.

The ruling is designed to provide some aid to victims of the scheme, who aren’t likely to recover much from the receivership.

The court noted that the receivership process “has been plagued by inadequate funding and by the lack of sufficient records and information. The receiver was only able to collect about $1.7 million despite claims in the millions from approximately 360 deceived investors.”

Alongside the dim prospect of recovering their investments, a key issue for investors was dealing with the Canada Revenue Agency (CRA) about the T5s that were issued to them by Base.

According to the court’s decision, the CRA refused investors’ requests to have the T5s reassessed so that payments they received from the scheme would be treated as a return of capital, rather than as interest.

The CRA told investors that the issuer would have to cancel the T5s. However, the company’s receiver was unable to do that for a variety of reasons.

Among other things, the receiver told investors that it didn’t have enough information to determine whether the T5s are erroneous, and that cancelling them would put it in the position of favouring the interests of certain stakeholders in the receivership.

Wronged investors then asked the court for an order cancelling their T5s and a ruling that any payments from the scheme be treated as capital repayment.

However, the court said that it couldn’t issue that sort of order either, and said that investors would have to deal with the tax court to resolve the T5 issue.

While the court denied investors, it also expressed sympathy with their plight, saying, “Requiring the more than 360 investors, some of whom are retired, elderly people, to each resort to tax court with respect to their particular circumstances when they have been cheated of their investments by this Ponzi scheme seems unreasonable and unfair.”

Nevertheless, the court declined to step on the jurisdiction of the tax court.

However, in an effort to help the investors, the court declared, among other things, that it views Base Finance as a Ponzi scheme, and that the interest payments it made should be considered a return of capital.

“It is my duty as the justice managing the receivership of the Base debtors to consider, and assist where appropriate, the investors who have been devastated financially by this Ponzi scheme,” the court said. It added that it hoped its findings “will aid the deliberations of the Tax Court.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.