Inside the offshore tax scheme that left iconic Olympian Donovan Bailey owing nearly $2.3 million in unpaid taxes

Copyright The Star

https://www.thestar.com/news/investigations/2018/06/11/inside-the-offshore-tax-scheme-that-left-iconic-olympian-donovan-bailey-owing-nearly-23-million-in-unpaid-taxes.html

By Jesse McLean Investigative Reporter

Donovan Bailey gave the charity $3.75 million assured that one day a good chunk of the money would end up back in his pocket.

It was part of a tax plan the Olympic gold medalist used to protect the sponsorship fees and prize money he had built up over years of competitive sprinting.

Olympic gold medal sprinter Donovan Bailey owed the Canada Revenue Agency nearly $2.3 million in unpaid taxes stemming from his participation in an offshore tax scheme.

The funds had been shielded from taxes in an athletic trust, but once retired Bailey had to wind down the trust and wanted to minimize the Canada Revenue Agency’s cut of his earnings.

According to the tax plan, Bailey’s donation would flow through a complicated web of transactions before the bulk of the money would make its way back to the sprinter, tax free, through an offshore trust.

The plan was actually a tax cheat scheme, the government would later find, in which the charitable donation was a masquerade to escape paying taxes.

Once the world’s fastest man, Bailey would soon be left destitute.

The plan’s architect was Stuart Bollefer, a Bay Street tax lawyer with the firm Aird & Berlis whose corporate bio describes him as “a natural problem solver” who “has the ability to find innovative resolutions to his clients’ tax issues.”

Bollefer promoted the tax strategy to other clients, too, including at least one other prominent Olympic athlete, a world-champion skier. The scheme allowed clients to shuttle millions of dollars to offshore trusts using a colourful cast of characters, including a Bahamas-based businessman later accused of stealing $20 million, and his former partner, who was shot in the head outside his Nassau office.

The Canadian government went after Bailey and other Bollefer clients for unpaid taxes, threatening some with the possibility of criminal prosecution.

By 2017, Bailey owed nearly $2.3 million to the CRA, according to records filed as part of his formal proposal to settle outstanding debt under the Bankruptcy and Insolvency Act.

“He was wronged. He was put into something if he’d received proper advice, he would have done better,” said Gary Luftspring, a lawyer who represented Bailey for his proposal to settle his tax debt. Bailey declined to comment.

“I think all the athlete understands is: If you do this, it will enable you to have more money when you stop competing on an annual basis and it will limit the amount of tax you have to pay,” Luftspring continued. “In this case … the advice was negligent.”

Bollefer, who denied in court filings that his handling of funds in a similar offshore plan for another client was negligent, would not discuss Bailey’s or other clients’ cases.

“As a lawyer, I am bound by the obligations of maintaining solicitor-client confidentiality so that I may not disclose or discuss any client matters,” he said.

Bollefer’s firm, Aird & Berlis, also refused to comment.

Using court records from an Ontario lawsuit, tax appeals and bankruptcy court filings, the Star has reconstructed the inside story of this international tax shelter drama that was still playing out in a Canadian courtroom in 2018.

***

Sitting in a downtown Toronto law office in 2006, Kate Pace Lindsay was impressed by Bollefer. He seemed professional and highly capable. “He spoke confidently about the tax planning he was doing for his other clients, including athletes,” Pace Lindsay later described in court documents.

An accomplished alpine skier, Pace Lindsay competed in three Olympics, was once ranked number one downhill skier in the world and, in 1993, won the Canadian Press’ Bobbie Rosenfeld Award for being Canada’s female athlete of the year.

She had accumulated roughly $1 million in her athletic trust, where she was required to deposit all her prize money and endorsement fees in order to maintain her status as an amateur athlete. Eight years after retiring, Pace Lindsay had to wind down the trust.

She turned to Bollefer for guidance.

“At no time did he explain to me that there was any risk in following his advice,” she said in an affidavit filed as part of her lawsuit against Bollefer and his firm.

In Bollefer’s office in 2006, the lawyer explained to Pace Lindsay how his plan would work and presented her with a complex flowchart:

* She would donate $750,000 to an offshore Canadian charity, which in turn gave the money to a Jamaica-based university.

* Pace Lindsay would claim the charitable tax credit on her personal income tax return.

* The university would use the money, minus a 15-per-cent cut, to purchase a life insurance policy issued by Hampton Insurance, part of a network of companies tied to the Bahamas-based Britannia Consulting Group. The policy insured the lives of family members.

* The beneficiary of the insurance plan was another offshore trust. “Bollefer explained … that the majority of the money would be returned to me on the death of the person whose life was insured,” Pace Lindsay said in court filings.

Bollefer’s advice also included an even more complicated $250,000 investment through a “life-disability plan,” in which the money ultimately landed in an offshore trust. This secondary plan allowed Pace Lindsay to keep shares of private companies held in the athletic trust.

“I believed that I had retained a top notch lawyer with experience and expertise,” Pace Lindsay said in her affadavit. “I understood that it would reduce my taxes but there had never been any suggestion that it might be questioned as illegal.”

In late 2006, Bollefer gave her the name of the offshore Canadian charity to donate $750,000 and put the plan into motion: the Dillon Foundation.

Bollefer, Pace Lindsay later learned, served as the charity’s lawyer and was involved in its formation.

Neither Bollefer nor Pace Lindsay knew when she gave her donation that the Dillon Foundation had had its Canadian charity status revoked for failure to file an annual return — a sign of turmoil engulfing the charity’s directors in the Bahamas.

***

The Dillon Foundation charity was registered to a mail box in a rural stretch outside Pickering, Ont. Its directors were all Bahamas-based businessmen specializing in offshore tax structures.

They included Lester Turnquest, a former member of Bahamian parliament and his business partner, Hywel Jones, a Welsh expat and long-time contact of Bollefer. Jones’s firm, Britannia Group, controlled the insurance company that would issue the policy that would shepherd Pace Lindsay’s money to an offshore trust.

Britannia Group relied on guidance from lawyers such as Bollefer to make sure their tax structures complied with the law of whichever country its clients’ were based, Turnquest said in an interview. He said he was “not going to challenge (the CRA’s) assessment” that the plan was a sham to avoid taxes.

“It would be my regret if a charity I’m a director of was being misused,” Turnquest said. “If it falls afoul of the taxman, then you’ve failed your customer.”

While Bollefer was advising Pace Lindsay to invest in the plan, the Britannia Group was riven with infighting. Turnquest left the company and, he says, several clients followed him. Jones accused his former partner of stealing $20 million, igniting a vicious legal battle. Turnquest said he never stole any money and Jones was just bitter.

In court records filed in 2007 in the Bahamas’ supreme court, Jones alleged that he had been physically attacked twice since uncovering Turnquest’s “unauthorized transfers of assets to himself,” and claimed he was convinced “these attacks are not coincidental.”

“(I) now fear for my life,” Jones said in court documents. “I rarely sleep in my home and am constantly looking over my shoulder.”

In April 2009, a man approached Jones outside his Nassau office and shot him twice in the head.

Investigators arrested a 27-year-old repairman, who was later acquitted. Turnquest was never charged in the killing. In a presentation posted online, a company that scrutinizes offshore financial centres questioned whether Turnquest was behind the shooting.

Turnquest says his business dispute with Jones made him a convenient scapegoat.

“I resent anyone inferring I would kill someone over money,” he said. “I’m a business man … Killing someone is not a business decision.”

***

In the summer of 2008, Pace Lindsay received a letter from the Canada Revenue Agency. She was being audited.

She started to question the propriety of Bollefer’s plan but had become dependent on him to manage her offshore assets. She had no other connection to her investments, she said in court documents. The law firm responded to the tax agency on her behalf.

In January 2010, the CRA sent her a letter informing her that 100 per cent of the $750,000 charitable donation she had claimed on her taxes was being disallowed because the Dillon Foundation’s Canadian charity status had been revoked.

But that’s not all: The entire plan was a tax cheat scheme, according to the government.

“The ‘Donation Arrangement’ was orchestrated and promoted for the sole purpose of avoiding Canadian tax,” the letter read. “(It) was a sham designed to make the appearance that there was a donation, that the funds were used for charitable purposes, when in fact, none existed.”

Pace Lindsay felt sick about the accusation, her affidavit said. She never would have participated in anything that could be seen as tax evasion, she said.

And then things got worse. Pace Lindsay learned the CRA was considering a criminal investigation against her and others who had donated to the Dillon Foundation.

Aird & Berlis’s insurer hired a criminal tax lawyer, who met with a CRA investigator in 2012 to convince him not to pursue a criminal case.

In an email to Pace Lindsay, the lawyer describes the CRA agent saying “that he had been recently coming around to the view that you and the others were ‘probably’ just ‘dupes’… He said that you and the others are not the ‘focus’ of his investigation.”

A CRA spokesperson would not confirm who was the subject of the investigation.

With the threat of criminal charges behind her, Pace Lindsay hired a new lawyer to negotiate a deal with the CRA.

***

Around 2010, Donovan Bailey learned the CRA was re-assessing his 2006 and 2007 tax returns in which he had claimed millions in charitable tax credits under Bollefer’s plan.

While Bollefer’s tax advice relied on some of the same offshore entities as were used for Pace Lindsay, tax court filings suggest Bailey’s donation was directly to the university in Jamaica.

Bailey appealed but the government dug in, saying the main purpose of the scheme was for Bailey “to eventually recuperate, at a bare minimum, the $3,750,000 he injected into the arrangement as if that amount of income would have been exempted from tax.”

Bailey’s lawyer, Gary Luftspring, stressed to the Star that there is nothing wrong with people trying to avoid paying excess taxes.

“Tax lawyers are in business in order to make sure you don’t pay more than you have to pay. If there is a person alive who says they want to pay way more than they have to pay, let me see them,” he said.

The problem, he said, comes when the CRA uses its “overriding power” to decide a plan is designed not to minimize taxes paid but to evade them.

In the end, Bailey would have to settle his debt in bankruptcy court — something Bollefer had his own experience with.

In 2001, Bollefer filed a consumer proposal under Canada’s Bankruptcy and Insolvency Act to settle outstanding debts.

The tax lawyer owed $457,000 and had just $202,500 in assets, according to a case summary. The summary does not say who was owed money.

Different than declaring bankruptcy, a consumer proposal is a formal offer to pay creditors a percentage of what is owed to them. Bollefer’s proposal was accepted and the case was discharged in 2004.

***

By 2017, Pace Lindsay had paid more than $430,000 to settle the CRA’s re-assessments, and racked up significant legal and accounting bills, including $46,000 in “wasted fees” paid to Aird & Berlis for Bollefer’s professional advice, her court affidavit said.

She wanted Bollefer and his firm to pay for the damages his tax plan had caused her and sued, alleging breach of trust and negligence. Bollefer had never presented the plan as anything other than routine, her court documents said.

In Bollefer’s court filings, he accepted responsibility for not ensuring the Dillon Foundation was a properly registered charity but he denied “the allegation that I was negligent in respect of the handling of any funds invested” through the offshore plan.

He testified that it was his practice “always to warn the people that this was a very aggressive plan,” but could not recall specifically discussing the risks with Pace Lindsay.

In February, Ontario Superior Court Justice Bernadette Dietrich found Bollefer and his firm “breached their duty to provide competent legal advice.” There was compelling evidence that Bollefer was negligent in his failure to warn the skier about the tax plan’s risks, the judge said.

The judge left the amount Bollefer and his firm would have to pay to be determined at a trial. The two sides have since settled out of court.

***

While Pace Lindsay’s case was before the courts, officials with the Office of the Superintendent of Bankruptcy heard the sad, final accounting of what Bollefer’s plan allegedly did to Donovan Bailey.

In October 2017, Bailey, flanked by his lawyer, answered questions about his personal finances. He owed nearly $2.3 million in taxes but owned just $3,000 worth of belongings, plus a share in his recently deceased father’s property, a teardown in Jamaica, court records said. He had no car. He was making minimum payments toward his credit cards.

Bailey was bringing in about $2,000 a month from sporadic work as a sports commentator. The court records don’t explain what happened to the more than $3 million moved to the offshore trust.

Bailey, embarrassed by the experience, would not speak to the Star, said his lawyer Luftspring.

In late 2017, the CRA accepted Bailey’s proposal to settle his outstanding debt, in which he blamed his financial misfortune on “suspicious tax planning based on erroneous professional advice.” Under the deal, the CRA would get $750,000 — about 33 cents on the dollar of what Bailey owed — paid for by Bollefer’s and his firm’s liability insurance.

“Bollefer is a nice guy. I think he was trying to do his job,” Luftspring said. “He blew it, in this case.”

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