TaxMatters@EY - March 2014
Failure of charitable donation scheme upheld by Federal Court of Appeal
Kossow v The Queen, 2013 FCA 283
Brian Studniberg and Al-Nawaz Nanji, Toronto
At issue in this case was whether the taxpayer was entitled to a tax credit in respect of charitable donations made in 2000, 2001 and 2002 ($50,000, $60,000, and $50,000, respectively). The charitable donations were made as part of a leveraged donation scheme under which the taxpayer funded her donations by 20% cash and 80% by a 25-year non-interest-bearing loan she received from one of the promoters of the scheme.
The Crown argued that the donations did not constitute “gifts” within the meaning of the Income Tax Act (the Act) and that the general anti-avoidance rule (GAAR) of the Act also applied to deny the tax credits to the taxpayer.
Tax Court decision
Justice Valerie Miller stated that she viewed the Federal Court of Appeal’s (FCA’s) decision in Maréchaux v The Queen (2010 FCA 287) as determinative of whether the donation constituted a “gift” and, therefore, the Tax Court did not need to address the GAAR issue. Maréchaux dealt with another leveraged donation scheme. The trial judge in the case relied on an earlier FCA decision, The Queen v Friedberg (92 DTC 6031) for the description of a “gift” for the purposes of the Act: “a gift is a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor.”
On the facts, Justice Miller noted that the taxpayer’s donation was conditional on her application for the non-interest-bearing loan being accepted. The Tax Court also determined that the tax savings on account of the tax credit for charitable donations was the principal reason for the taxpayer making the donation. Moreover, Justice Miller observed that the taxpayer’s donation was not separate from the financing she received. As such, the 25-year interest-free loans were “significant benefits” she received for making her donation.
While that reasoning would have disposed of the matter, counsel for the taxpayer argued that a “gift” is only vitiated where there is evidence of consideration from the donee to the donor, relying on a recent Ontario Court of Appeal decision, McNamee v McNamee (2011 ONCA 533).
Justice Miller responded that this argument misconstrued what the Ontario Court of Appeal had stated in McNamee and that that decision was made in the context of a family law dispute. Moreover, Justice Miller added that the statement from McNamee as to a gift being called into question where there is consideration from the donee was not intended to be one of general application. Justice Miller confined McNamee to its particular facts in a family law context.
Federal Court of Appeal decision
The FCA observed the charitable donation program in Maréchaux was “strikingly similar” to the program in this case, and particularly so with respect to a substantial part of the purported gift being funded by an interest-free loan provided by the program’s promoters on terms that formed “part of a series of inter-connected contractual arrangements.”
Maréchaux stands for two propositions:
- A long-term interest-free loan is a significant financial benefit to the borrower.
- A benefit received in return for making a gift will vitiate the gift, whether the benefit comes from the donee or another person.
The FCA stated it was evident the long-term interest-free loans formed a part of the leveraged donation program that the taxpayer participated in, with the result being that she received a significant benefit as the recipient of the loans. The interest-free loan and the taxpayer’s donation were two components of one interconnected transaction.
The taxpayer’s counsel argued that the significant benefit received by a donor must come from the donee rather than from a third party, drawing on McNamee. However, the FCA did not agree, explaining that McNamee did not change the generally accepted definition of a gift per Friedberg.
The FCA observed McNamee was decided in respect of an estate freeze situation and did not involve a leveraged donation program or the interconnected transactions present in Kossow. It would be a mistake, then, to read McNamee out of context. Moreover, there was no need to revisit the Maréchaux decision in light of the McNamee decision from the Ontario Court of Appeal.
Interestingly, the FCA also strongly emphasized the continued relevance of Maréchaux to evaluating whether a gift was made at law in charitable donation cases. The FCA emphasized as well that there is no conflict between Maréchaux and McNamee, and it would therefore be instructive for taxpayers and their advisors to consider both when contemplating whether a gift has been made.