In Lockie v The Queen, the Tax Court of Canada considered the appropriate determination of fair market value of certain items donated pursuant to a donation arrangement. The taxpayer in question had purchased in bulk certain gel pens, toothbrushes and school packs at a cost of $2,850 and donated them to a registered charity which issued a receipt for $15,078. The purchase and donation were made pursuant to a structured program which, although not described in the decision as a tax shelter, was promoted on the basis that participants would receive up to a 130 per cent return on their donation. CRA originally reassessed the donor on the basis that the fair market value of the gift was limited to the purchase price on the items. CRA later took the position that the donor was motivated by the attractive return on investment and thus lacked the necessary donative intent to claim a tax credit.
The Tax Court of Canada reviewed the facts and determined that the donor was motivated primarily by a desire to obtain a return on investment as a result of the donation. However, it concluded that because the only benefit to the donor was the donation credit arising from the gift, this did not vitiate the gift outright. However, the Court held that the fair market value of the gift was limited to the purchase price paid on the items. It held that because the items were purchased pursuant to a donation arrangement whereby the donor acted essentially as a conduit to purchase the items wholesale and donate them to a pre-selected charity, the appropriate market for determining the value of these products was not the retail market.
This case confirms, consistent with previous case law, that where a taxpayer purchases products for donation pursuant to a donation shelter arrangement, courts will limit the donation tax credits which may be claimed to the actual cash outlay of the taxpayer. As we have stated in previous editions of this newsletter, charities and donors should be highly cautious before participating in any donation tax shelter arrangements. CRA is auditing tax shelter involvement aggressively to deny tax credits and revoke charities for participation.