Taxpayer victories have been few and far between in the “donations in kind” world. Recently, in the Tax Court decisions in Marechaux v. The Queen (2010) and Kossow v. The Queen (2012), individuals who made donations financed in part by a low-interest or no-interest loan were entirely denied a donation tax credit because the Courts found no donative intent. In both cases, the presence of a collateral benefit in the form of the loan vitiated the gift.
Enter Berg v. The Queen (Tax Court of Canada, November 19, 2012). Mr. Berg had bought timeshare units intending to donate them. The purchase price was partly paid in cash, but the majority was financed by a low-interest loan. The value of the donation (as reflected in the donation receipts) was found to be exaggerated by a factor of about 10 times. It appears that by the time of the trial, the taxpayer agreed that the value was overstated, and the only issue remaining was whether the agreed value of the timeshare units (equal to the cash paid) was a “gift” at law.
In a finesse play, the taxpayer also agreed with the government’s position that the transaction documents were a ruse and had no binding effect beyond conveying title to timeshare units to Mr. Berg. The gift of the timeshare units was therefore valid, but the promissory note was not. The Court distinguished Marechaux and Kossow, stating that there could be no collateral benefit to Mr. Berg from legally ineffective documentation! As a result, the taxpayer was successful on its confined appeal.