A. INTRODUCTION
On November 12, 2009, the Tax Court of
Canada (“TCC”) released its decision in Maréchaux v.
The Queen.
The decision relates to an appeal by a taxpayer from an
assessment made under the Income Tax Act (“ITA”)
in which a tax credit claimed by the taxpayer in respect
of a purported $100,000 gift to a registered charity was
disallowed in its entirety. The decision is significant
because it is one of the first dealing with a leveraged
donation gifting arrangement from the donor’s perspective.
Leveraged cash donations are one form
of tax shelter gifting arrangement that has been flagged
by the Canada Revenue Agency (“CRA”). In such arrangements,
a taxpayer receives a pre-arranged loan and makes a donation
of the loan proceeds plus additional cash to a registered
charity. The taxpayer is not at risk for the loan and the
charity must use the proceeds in a predetermined manner.
CRA has issued several Taxpayer Alerts
warning taxpayers that it intends to audit tax shelter gifting
arrangements, including leveraged cash donations. Every
such audit completed to date has resulted in a reassessment
of taxes, plus interest and in some cases the CRA has denied
the gift completely.
B.
FACTS
The appellant in Maréchaux was
one of 118 participants in an arrangement known as the 2001
Donation Program for Medical Science and Technology (the
“Program), marketed by Trinity Capital Corporation (the
“Promoter”). The Program was advertised as providing a return
on donation of up to 62.4 percent, depending on the donor’s
province of residence. The promotional materials also promised
no alternative minimum tax consequences and a tax opinion
from a firm of respected tax lawyers.
The participants in the Program each
donated a minimum of $100,000 to a registered charity, the
majority of the donation being financed by a non-interest
bearing 20-year loan. The promoter of the Program arranged
for each participant to borrow these funds from a lender
that had been created for the sole purpose of providing
loans for the Program. Participants were also required to
pay an amount equal to 10% of their pledge to the lender
for fees, insurance and a security deposit. A crucial feature
of the loan was that it could be fully repaid by assigning
the insurance policy and security deposit to the lender
any time after January 15, 2002 (the “Put Option”). The
funds were transferred to the charity, which issued donation
receipts in the full amount of the transferred funds. Most
of the participants then claimed charitable donation tax
credits for their 2001 taxation year and went on to satisfy
their loans by assigning their security deposits and insurance
policies to the lender.
The remainder of the Program involved
a series of interrelated transactions among several different
entities. The Promoter directed the charity to distribute
the majority of the donated funds to two other qualified
donees, which in turn spent the funds in a pre-determined
manner. In the end, the charities involved in the Program
retained only a very small amount of the donated funds.
On December 31, 2001, the appellant taxpayer
participated in the program to the extent of the minimum
donation of $100,000. The appellant received an $80,000
non-interest bearing loan, $70,000 of which was added to
$30,000 of his own funds and transferred to a charity. The
remaining $10,000 of the loan was paid to the lender for
fees, insurance and a security deposit. The appellant then
received a donation receipt from the charity in the amount
of $100,000.
In a reassessment for the 2001 taxation
year, the tax credit in respect of the appellant’s $100,000
donation was disallowed in its entirety. The appellant served
a notice of objection to the assessment and subsequently
filed an appeal to the Tax Court of Canada.
C.
DECISION
The TCC’s decision turned on whether
the $100,000 donation could be considered a gift. If the
donation was not a gift, the $100,000 could not be included
in the calculation of the taxpayer’s charitable donation
tax credit. Section 118.1 of the ITA provided at the time
for a tax credit to individuals based on the total amount
of gifts made to registered charities and other listed organizations.
This tax credit was calculated based on the “total charitable
gifts” of an individual for a taxation year, which is defined
in subparagraph 118.1(1). However, the ITA does not define
the term “gift.” The TCC examined briefly how the general
meaning of the word gift has been expressed in case law,
including the definition of “gift” that was provided in
The Queen v. Friedberg:
“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.”
The TCC applied the Friedberg definition
to the facts of the appeal and stated “it is clear that
the appellant did not make a gift to the [charity] because
a significant benefit flowed to the appellant in return
for the donation.”
The benefit received by the appellant was the $80,000 loan,
coupled with the Put Option. The Court found that the loan
was given in return for the donation and that the financing
and the donation were “inextricably tied.”
In the Court’s view, “it is self evident that an interest-free
loan for 20 years provides a considerable economic benefit
to the debtor.”
The court also noted that the $8,000 security deposit, which
was assigned to the lender in full satisfaction of the loan,
could not reasonably be expected to accrete to anywhere
near $80,000 in 20 years. The appellant attempted to argue
that his participation in the Program was primarily for
charitable reasons and presented evidence of his past charitable
works and giving. The TCC rejected this argument, stating
“[O]nce it is determined that the appellant anticipated
to receive, and did receive, a benefit in return for the
Donation, there is no gift.”
Therefore, the appeal was dismissed and the TCC ruled that
the tax credit for the entire amount was properly disallowed.
Although the point was not argued, the
TCC also addressed the issue of whether the appellant made
a partial gift, consisting of his own cash outlay. The court
noted that “in some circumstances, it may be appropriate
to separate a transaction into two parts, such that there
is in part a gift, and in part something else.”
However, the court decided such a separation was not appropriate
in this matter.
D.
LEGISLATIVE AMENDMENTS
Since the transactions at issue in Maréchaux,
proposed changes to the ITA related to split-receipts and
donation tax shelters have significantly changed how these
transactions would be treated on an assessment, though the
results could potentially remain the same. New subsections
248(30) to (41) are proposed to be inserted in the Act to
allow a donor to receive a donation tax receipt even in
situations where the donor or someone else received a limited
advantage as a result of the gift.
Under the proposed amendments donors are permitted to receive
something in return for a donation provided the amount of
the donation is reduced by the amount of any advantage received
by the donor and a receipt is only issued for the eligible
amount of the gift. Subsection 248(31) provides that the
“eligible amount” of a gift is the amount by which the fair
market value of the property transferred exceeds the amount
of the advantage in respect of the gift. A broad definition
of “advantage” is set out in subsection 248(32) of the Act.
These changes generally apply to gifts made after December
20, 2002, with a few exceptions.
Several proposed amendments introduced
in December 2003 were designed to reduce the tax benefits
available from charitable donations made under tax shelter
gifting arrangements. With the addition of paragraph 248(32)(b),
the proposed definition of advantage includes the amount
of limited-recourse debt incurred in respect of a gift at
the time when the gift is made, as determined pursuant to
the newly introduced definition of limited recourse debt
in proposed subsection 143.2(6.1). The purpose of these
proposed amendments was to curtail abusive tax shelter schemes
involving leveraged donations.
The amendments apply to gifts made on or after February
19, 2003. The cumulative effect of paragraph 248(32)(b)
and subsection 143.2(6.1) is to reduce the amount of the
gift made by the donor by the amount of the loan borrowed
if the indebtedness is of limited recourse to the lender
or if there is a “guarantee, security or similar indemnity
or covenant” in respect to that debt or any other debts.
The Department of Finance noted that debt incurred as part
of a leveraged cash donation will be considered to be limited-recourse
debt if it is to be repaid under an arrangement such as
a guarantee, security, or similar indemnity or covenant
in respect of the debt structured as part of the donation
arrangement, structures seemingly very similar to those
in the Program at issue in Maréchaux although we
have not reviewed the actual Program documents.
Proposed subsection 248(34) deals with
the repayment of limited recourse debt. This subsection
generally provides that a repayment of the principal amount
of a limited-recourse debt in respect of a gift is deemed
to be a gift in the year it is paid. However, in some situations,
the total amount of limited-recourse debt and other advantages
to the donor may exceed the fair market value of the property
transferred to the charity, thereby resulting in no eligible
amount being available to the donor. In such cases, the
donor would need to pay off the excess amount before any
amount will be allowed as a gift. The Technical Notes to
this provision explains that “a payment financed by other
limited-recourse debt or made by way of assignment or transfer
of a guarantee, security or similar indemnity or covenant
is not recognized for these purposes.” Examples in this
regard include “the assumption of a taxpayer’s limited-recourse
debt by another person, in exchange for an insurance policy
in favour of the taxpayer that guarantees a particular rate
of return on an investment held by any person, would not
qualify as a deemed gift under subsection 248(34).”
At common law, in order to qualify as
a gift, property must be transferred voluntarily with an
intention to make a gift. Where the transferor has received
any form of consideration or benefit, it is generally presumed
that such an intention is not present. However, subsection
248(30) provides that the existence of an advantage in respect
of a property transferred to a qualified donee (e.g. a registered
charity) does not “in and of itself” disqualify the transfer
from being a gift under two situations, namely (a) where
the amount of the advantage does not exceed 80% of the fair
market value of the transferred property and (b) where the
transferor establishes to the satisfaction of the Minister
of National Revenue (the “Minister”) that the transfer was
made with the intention to make a gift. Under the latter
scenario, the Technical Notes indicate that the taxpayer
would need to apply to the Minister for a determination
of whether the transfer was made with the intention to make
a gift.
Notwithstanding the fact that these amendments
have fallen off the legislative agenda and have not been
enacted, CRA already requires charities to comply with the
proposed split-receipting rules and its administrative positions
have been upheld by courts. Therefore, any leveraged donations
made on or after February 19, 2003 will be dealt with on
the basis of the proposed amendments.
E.
COMMENTARY
Had the transaction at issue in Maréchaux
occurred after February 19, 2003, the $100,000 gift would
have to be reduced by the value of the limited-recourse
debt incurred in respect of the donation plus any other
advantages received by the donor. In addition, if donative
intent cannot be established in accordance with subsection
248(30), i.e. if the amount of the advantage exceeds 80%
of the transferred funds, the gift may be disallowed entirely.
It could be argued that some of the legislative changes
directed at leveraged donations were not necessary given
the Court’s reasoning in Marechaux. However, it
is clear that since the release of the proposed amendments
many, if not all, similarly structured programs have disappeared,
providing certainty to taxpayers that might not have otherwise
been there in the interim.
