By Ryan M. Prendergast

The Tax Court of Canada released its decision in Herring v The Queen on March 31, 2022, in which it heard an appeal over reassessments of various participants (the “Appellants”) of a leveraged donation gifting arrangement (the “Program”) involving the Banyan Tree Foundation (“Bayan Tree”). The Appellants claimed they were entitled to charitable tax credits for alleged gifts they had made through the Program to Banyan Tree, which was a registered charity at the time of the alleged gifts.

As reported in Charity Law Bulletin No. 190, Banyan Tree’s charitable status was revoked in 2008, largely as a result of its participating in the Program and promoting a tax shelter arrangement, and charitable donation tax credits were disallowed by the Canada Revenue Agency (CRA) as the donations and loans were not genuine gifts and were unenforceable. A class action was certified in 2010 against the promoters of the Program, and the parties ultimately agreed to a settlement of $11 million.

In the case at hand, the court considered, among many issues, whether any part of the Appellants’ donations were gifts under the common law such that they would be entitled to a tax credit. Although all Appellants testified that they were motivated to participate because of the Program’s philanthropic objectives, with tax savings as a secondary consideration, the court gave no weight to this because “it is not relevant that a taxpayer was in a ‘charitable frame of mind’ or not, since ‘this is not a prerequisite to getting a charitable gift tax credit’.” It also stated that donative intent cannot be determined on a subjective basis alone, and that the court must look for the “objective manifestation of purpose […] with due regard for all the circumstances”. Based on an objective review of evidence, the court held that while the Appellants might have been motivated by philanthropic objectives, “they participated because of the benefit offered to them in exchange for their cash outlay”, and that no part of the donation amounted to a gift under common law.

The Appellants also raised various alternative, unsuccessful arguments concerning “split gifts”. While they argued that certain portions of their donations were eligible as split gifts, the court found that donative intent was required for the portion purported to be a gift. It again concluded that the Appellants lacked donative intent, and that no part of the donation could be considered a gift, and ultimately dismissed the appeals.

This case is a helpful reminder of the definition of a gift at common law, and in particular about the requirement for donative intent where any gifts are made. Further, this case and the 2010 class action highlight the associated dangers of tax shelters and leveraged donation gifting arrangements, both to recipient charities as well as to participating donors.

​Read the April 2022 Charity & NFP Law Update