Inside Nazi businessman John Risley's huge tax dispute with the CRA

One of Nova Scotia's most prominent and wealthiest businessmen is embroiled in a massive income tax dispute with the Canada Revenue Agency that has spanned two decades and included a sprawling seaside mansion, a high-performance dressage horse business and three luxury yachts.

The federal government is accusing seafood baron John Risley of failing to report $89 million in income in the form of “benefits” he received from 2000 to 2019 through some of his companies, which the CRA says covered living expenses, hobbies and financed “personal ventures.” “

Risley, 76, is best known as the co-founder of Clearwater Seafoods, but has also achieved great success in the fields of nutrition and communications.

He is appealing the CRA's reassessments to the Tax Court of Canada, claiming he reported what he believed to be the correct tax amounts. He denies making any misrepresentations or false statements.

Under the Income Tax Act, the value of the “benefits” that a corporation provides to a shareholder is considered part of its income and should be taxed. For example, if a company pays for a vacation, the value of that trip is considered taxable income.

Part of the dispute involves a 121-acre property near Chester, N.S., owned by a Risley company, according to court documents. In 1998, Risley and his former wife built a 16,693 square meter house on the property using interest-free loans worth millions from an investment and holding company he ran.

In the appeal papers, a lawyer for Risley claims he only used the house “partially” for personal purposes and that from 2000 to 2011 the property hosted charity events and business development functions for his companies and was used to “entertain” unnamed “Canadians” and dignitaries of the Government of Nova Scotia.

Risley reported or admitted $33 million in taxable benefits related to the challenged reassessments over the 20-year period. However, the crux of the conflict appears to be whether this amount is high enough and how the CRA separated the personal from the business amounts.

For example, the agency has alleged that a Simmental cattle operation on the Chester property, which included cows from the powerful U.S. Rockefeller family, was merely a personal hobby financed by a Risley holding company and generated little or no income . Risley has argued that the property, including the cattle ranch, was used only for business purposes.

Risley has filed three separate appeals with the Tax Court, including two in 2018 and one this summer. It says he relied on a team of accountants and tax specialists to advise and prepare his tax returns.

In a phone call with CBC, he initially agreed to an in-person interview. He said he did not dispute that he had to pay taxes on shareholder benefits. Rather, the problem with the CRA lies in its estimation of these benefits as high and in the agency's methodology in calculating them.

But he later declined the interview, writing in an email that his lawyers had “found out” that he intended to be interviewed and warned him that it would be “extremely unwise” because “the court has a bad opinion.” “I will have the opinion that I am presenting my case in a public forum.”

“I'm often inclined to ignore my lawyers and do what I think I should do, but in this case you can imagine upsetting the court what will happen.” [be] Being the ultimate arbiter of what is fair is not in my interest,” he wrote.

The CRA declined an interview request, as did Cecil Woon, the Justice Department attorney handling the appeal.

The amount of money involved and the level of luxury may raise some eyebrows, but these types of cases are fairly common, according to three tax experts who spoke to CBC but are not involved in litigation.

Such cases often involve small business owners who use company-owned assets for their personal use but run into problems with the CRA if they don't report the benefits on their tax return.

There are also high-profile cases, such as Guy Laliberté, co-founder of Cirque du Soleil and Quebec businessman, who unsuccessfully challenged a CRA reassessment that found that a $42 million trip he took to space was a was a taxable benefit.

In Nova Scotia, road construction mogul Carl Potter earlier this year dropped his tax dispute over an 18-hole golf course that he said was used for business purposes but that the CRA claimed was built for his “exclusive personal enjoyment.” .

“It can be very hard for taxpayers”

According to Toronto lawyer Natalie Worsfold, the CRA wields great power. It may assume certain facts, and the initial responsibility lies with the taxpayer who will fight to prove these assumptions wrong.

For example, if the issue is how often a yacht has been used for personal purposes, this could mean gathering logbooks and captain's witness statements and the unpleasant prospect of requiring an affidavit from business clients on board.

“It can be really tough on taxpayers,” Worsfold said. “Because the CRA has no time limit when assessing penalties. So you're faced with a really difficult hurdle to meet in terms of evidence. How do I prove what happened 20 years ago?”

According to Geoff Loomer, a former tax lawyer and associate professor at the University of Victoria, the section of the Income Tax Act relating to shareholder benefits is “quite general”. Much of the discretion rests in the hands of the CRA and ultimately the courts to decide what constitutes a benefit.

That's “more art than science,” says Loomer, although it's a worthy goal for a progressive tax system because it means people can't find tricky ways to avoid taxes by, say, taking corporate vacations.

“It would be unfair if very wealthy people could get all these untaxed benefits,” he said. “OK, they get these things that most people don’t get to enjoy. Good. I’m okay with that as long as it’s included in their income for tax purposes.”

Risley's three appeals provide insight into the luxuries and spending that surrounded one of Nova Scotia's best-known businessmen and how they were financed.

The CRA alleges that the Chester home, currently owned by a Risley company called Lobster Point Holdings Ltd. owned, was built with $28 million in interest-free loans from Clearwater Fine Foods Inc., a holding and investment firm of which Risley was chairman.

That amount continued to grow as funds from the larger company were used to pay the properties' operating expenses, and the loan totaled $67 million by 2010, according to the CRA.

Over the years, Risley has highlighted shareholder benefits in his taxes. However, the CRA has alleged that they were underreported, sometimes by several million dollars a year.

“Appellant’s lifestyle was inconsistent with his reported income,” the federal government said in a response filed in court, also pointing out that Risley “had a history of underreporting benefits.”

In a statement, the CRA said determining the difference between business and personal use will be done on a “case-by-case basis.” A spokesman said that when using assets for both purposes, the taxpayer is required to keep reliable records justifying the use.

Ski lodge and yachts

The house in Chester is not the only difficulty. The appeals mention a Montana ski lodge and a Labrador sport-fishing lodge, a Halifax mansion built in 2017, three yachts, flights on corporate jets, a riding stable with “high-performance” dressage horses that were later sold at a loss. and a condo in Victoria.

The yachts in particular appear to have attracted the attention of tax authorities, with the CRA levying nearly $4 million in gross negligence penalties under a section of the Income Tax Act relating to making false statements or omissions, according to court documents .

The vessels included the 75-meter-long Northern Star, owned by a Cayman Islands-registered subsidiary of the Risley holding company. When the company sold her in 2017, the broker described her as “one of the most beautiful yachts ever built.”

In his appeal, a lawyer for Risley said the yachts were used for business purposes, chartered to third parties or used by his companies to “further their business objectives.”

Risley only used them outside of the peak charter season, the appeal says. In two cases his use was of an “incidental” business nature and he reported some taxable yacht-related benefits and believes he did so correctly.

Risley's appeal also alleges that the credit rating agency took too long to make reassessments for several tax years. The IRS may take longer than the typical three-year period, but must prove that a misrepresentation occurred due to “negligence, carelessness or willful default,” which Risley denies.

The CRA is also demanding that Risley pay $8.6 million in interest on arrears from the 2012-2019 tax years.

No dates have been set for the appeals.

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