E-mail fraud causes tax trouble

TV’s famous Addams Family may have been creepy and kooky, but the taxpayer in a recently reported case would no doubt have preferred those antics to the true-to-life horror visited on him by another Adams family.

Even the judgment reads like a screenplay, with a cast (as the judge called it) that included a 23-year-old girl whose father had just been assassinated; a security “diplomat”; transcontinental couriers; and a handful of pliable airport officials. Add to that our unsuspecting taxpayer—a Calgary lawyer named CR—and things were ripe for a $400,000 fraud.

I’ll come to the tax issue shortly, but first, I’ll set the stage for you.

Out of Africa

On Saturday, April 16, 2005, CR received an unsolicited (and as noted by the judge, grammatically challenged) e-mail from one Purity Adams, purporting to be a South African writing from Abidjan,Côte d’Ivoire (Ivory Coast).

Her father had been assassinated after a business trip during which he deposited US$8.5 million in a trunk now held by an Ivory Coast security service. She decided to reach out to a Canadian lawyer to assist her with obtaining the trunk’s release.

CR replied and within 90 minutes received the terms of his engagement. For facilitating the release, he would receive a 10% recovery fee, and act as trustee of the remaining funds for at least 10 years.

Needless to say, Purity belied her namesake.

Within the week, CR had wired over $20,000 to Purity and her beleaguered brother David. A month later the trunk was impounded at the airport and CR sent $200,000 to secure its release. While those funds were in transit, he advanced another $100,000. Military officials caught wind.

On receiving notice in July that the trunk had reached London, CR was asked for another $132,825 to cover freight charges.That’s when he got suspicious. He called the RCMP and flew to London.

He was intercepted at the airport by New Scotland Yard; rode with two of the conspirators; and managed to call in the bobbies after a sprint across a hotel lobby. One of the men escaped; the other was arrested and later released without a hearing. No money was recovered.

Justice for all?

Despite the international intrigue, CR’s woes were not at an end. In his 2005 tax return, he claimed a $398,995 deduction in determining his income from his law practice. The deduction was denied, so an appeal ensued to the Tax Court of Canada.

To be entitled to a deduction, a taxpayer must have a source of income against which to claim that deduction. The judge sided with CR, agreeing his activities were carried out within the precincts of his practice, and were therefore a legitimate source of income.

Still, CR would have to show that the amount was reasonable in order to be entitled to the deduction, which the judge held could only follow from CR having a reasonable belief in the existence of a container with US$8.5 million in Ivory Coast.

In the end, the judge determined there were simply too many inconsistencies and questions about the story to sustain such a reasonable belief. Deduction was denied. Ironically, the judgment was released April 3, mere days after the end of Canadian Fraud Awareness Month.

Doug Carroll, JD, LLM (Tax), CFP, TEP, is Vice President, Tax and Estate Planning, Invesco Canada.