In the recent case of Kossow v. the Queen (2012 TCC 325), the Tax Court of Canada examined another so-called “leveraged donation plan”, and relied on a recent Federal Court of Appeal decision to deny the tax benefit claimed by the donor.
In this case, the taxpayer made a number of donations over several years to a registered charity for which she received charitable receipts in return. Twenty percent of the funds for the donations came from the taxpayer’s own cash, with the remaining 80% coming from loans arranged by the promoters on favourable terms (non-interest bearing, 25 year term).
Once received by the charity, the taxpayer’s donations were transferred among various parties acting in concert with the promoters. Although the series of transfers was relatively complicated, the essence was that only a small part of the taxpayer’s donations was used principally for charitable purposes, with the bulk of the donations being either retained as fees or circuitously returned to the lender.
The CRA originally reassessed the taxpayer to deny 80% of the charitable credits claimed (i.e., the portion of the donation funded by the loan). However, the CRA subsequently reassessed one taxation year to deny the entire credit (the CRA was time-barred from reassessing the other years in the same manner).
In order to qualify for a charitable receipt, the taxpayer must make a “gift”. The term “gift” is not defined in the Income Tax Act but its meaning has been succinctly summarized by the FCA in The Queen v. Friedberg (92 DTC 6031) as a “voluntary transfer of property … for which no benefit or consideration flows to the donor”.
In the Court’s opinion, the FCA’s decision in Maréchaux v. The Queen (2010 FCA 287) governed the result. In Maréchaux, a strikingly similar plan was considered by that Court, which concluded that the donor had not made a “gift” because his donation was made with the expectation that he would receive a “significant benefit” – being an interest-free loan. In the Tax Court’s opinion, the taxpayer’s circumstances in Kossow were substantially indistinguishable from those in Maréchaux, with the result that her donations did not constitute gifts.
Of particular note is that, where at issue, the Court agreed that no part of the donation constituted a gift – including the portion of the donation funded out of the taxpayer’s own pocket. As did the FCA in Maréchaux, the Tax Court concluded that no part of the donation was given without an expectation of return. As a result, in that year, the taxpayer was left entirely empty-handed.
The Kossow and Maréchaux decisions highlight the potential risk that taxpayers face when they participate in tax-driven charitable donation arrangements. Participants must be very cautious when taking part in these plans and should not participate without first seeking professional tax advice.