A. INTRODUCTION
A charity can issue an official donation
receipt only when a donor makes a “gift.” Perhaps surprisingly,
the Income Tax Act does not define what transactions
qualify as gifts. This has resulted in considerable uncertainty
for both charities and donors. In December of 2002, the
Department of Finance released draft rules – the so-called
“split-receipting rules” – that were intended to clarify
matters. These rules, though they have yet to be enacted
and currently are not even before Parliament in bill format,
are being enforced by the Canada Revenue Agency. In this
article, I suggest that the split-receipting rules should
be abandoned and advocate in favour of an alternative reform.
Readers interested in a more detailed analysis of these
matters may consult A. Parachin, “Reforming the Meaning
of ‘Charitable Gift’: The Case for an Alternative to Split
Receipting,” Canadian Tax Journal (2009) Vol. 57,
No. 4, 787.
B. THE NEED FOR REFORM:
It is no secret that ambiguity over the
precise meaning of charitable “gift” has frustrated gift
planning. The problem has been especially acute in relation
to the following issues.
1.
Significance of Consideration
Innumerable authorities have held that
a charitable gift for income tax purposes means a gift at
common law, i.e., a transfer of property for no consideration.
This means that a donor who sells property to a charity
for a deeply discounted price or acquires property from
a charity for in excess of fair market value consideration
is not entitled to a gift receipt. The idea that gift means
a transfer for no consideration is pervasive in the cases.
Many of the gift criteria enforced by courts that seemingly
have nothing to do with the issue of consideration – e.g.,
the requirements for voluntariness, charitable motive and
donor intent – have essentially been used by courts as tools
for disqualifying transfers for consideration as gifts.
Nevertheless, there are cases in which
courts have held that gifts were made even though consideration
was present. Frustratingly, these authorities do not explain
why they were departing from the no consideration rule.
In fact, they rarely even acknowledge that they are departing
from precedent. Thus, the state of the law is such that,
while it is generally understood that only transfers for
no consideration can qualify as charitable gifts, there
are a sufficient number of sporadic exceptions that it has
never really been clear either why or when the presence
of consideration will disqualify a transaction as a charitable
gift.
2.
Donor Restrictions
The topic of donor restricted donations
raises many difficult issues of law. One such issue is the
legal nature of such donations. There seems to be a widespread
misperception in the gift industry that a donor restricted
donation may be made without creating a trust. For a variety
of reasons, I contend that this is wrong. The better view
is that most so-called conditional gifts are actually not
gifts at common law but rather purpose trusts. The problem
that this creates is that a gift receipt is available to
a donor only if a “gift” is made. We therefore need to know
whether the meaning of gift under the Income Tax Act
is broad enough to include donations structured in the
legal form of charitable purpose trusts or whether it is
restricted to common law [read unconditional] gifts. The
tax authorities have never squarely addressed the matter,
leaving considerable uncertainty over this foundational
aspect of gift planning.
3.
Charities as Beneficiaries
of Trusts
Donors sometimes create trusts under
which charities are giving beneficial interests in trust
income and/or capital. The law dealing with such donation
arrangements is surprisingly underdeveloped. It is not always
clear when the settlor of such a trust will be considered
to have made a gift for income tax purposes. Further, there
is much confusion over the tax treatment of trusts that
distribute trust income or capital to charitable beneficiaries.
Has the trust made a charitable gift or merely distributed
trust property to a beneficiary of the trust? The confusion
stems at least in part from the association of gift with
its common law meaning. If “gift” is understood as meaning
a common law gift, then it is easy to see how the law dealing
with other donation arrangements has been left to languish.
C. THE PROPOSED SOLUTION - THE SPLIT RECEIPTING RULES:
The draft split-receipting rules provide
that the receipt of partial consideration by a donor will
not preclude a transaction from qualifying as a gift. Thus,
under the proposed rules, a donor who transfers property
worth $100,000 to a charity for consideration worth $10,000
may be considered to have made a gift of $90,000. At first
glance, this would seem to be fairly responsive to the problems
identified above.
To be sure, the proposed new rules seem
to remove ambiguity over whether consideration automatically
vitiates a transaction as a gift. Also, inasmuch as the
rules make clear that a donation need not be in the legal
form of a common law gift, they seem to make clear that
gift planners can structure donations in legal forms other
than gifts, e.g., contractual transfers, purpose trusts
or whatever other legal form makes sense in the circumstances.
There are, however, a number of reasons
to conclude that the proposed split-receipting rules are
unlikely to achieve much in the way of meaningful reform:
·
The split-receipting rules leave the term
gift undefined. The absence of a statutory definition is
ultimately what caused problems in the first place. Leaving
the term undefined is to repeat a past mistake.
·
It is apparent from Canada Revenue Agency
publications that, even under the proposed split-receipting
rules, gift continues to be closely associated with its
common law meaning. In other words, the split-receipting
rules are being approached by the Canada Revenue Agency
as though they merely establish a limited exception to the
general rule that gift means a common law gift. The legal
form of a donation thus continues to be a potentially important
factor. This form over substance approach is misguided.
It will continue to frustrate the development of much needed
tax policy in relation to donations structured in the legal
form of trusts.
·
Gift criteria that have historically been
employed to disqualify as gifts transfers for consideration
– e.g., voluntariness, charitable motive and donor intent
– continue to be enforced under the split-receipting rules.
What is the continued relevance of these criteria if split-receipting
is meant to allow transfers for partial consideration to
qualify as gifts? Confusion over the meaning of gift can
be anticipated to continue because of the continued enforcement
of gift criteria that one might reasonably have thought
would now be irrelevant.
D. AN ALTERNATIVE SOLUTION - STATUTORY DEFINITION OF "CHARITABLE
DONATION"
A few points stand out to me from the
gift jurisprudence and reform efforts to date. One is the
necessity for a statutory definition. Leaving the term gift
undefined has not and will not work to move away from the
common law understanding of the term. I propose the enactment
of a statutory definition of “charitable donation.”
This expression lacks any established meaning at common
law that could frustrate efforts to move beyond the form-over-substance
approach of the common law that has prevailed in the authorities.
But how should this term be defined?
This brings me to the second point, the importance of theory.
The theoretical thinking behind the tax concessions for
charitable gifts does more than merely explain why these
concessions exist; it also informs the analysis of what
transactions should qualify for the tax concessions.
Subsidy theory is the most commonly accepted
theory accounting for the tax concessions for charitable
gifts. Subsidy theory posits that tax concessions for charitable
gifts are no more than a state financial subsidy for charities
delivered through income tax law. The subsidy is said to
be defensible because (1) charities do good works and (2)
charities would be underfunded without a state subsidy.
But if this is really all there is to
it, then many of the issues that the authorities have fixated
upon, e.g., whether the donor received consideration, had
the requisite donor intent, donated voluntarily or was inspired
by a charitable motive, are utterly irrelevant. All that
really matters is whether the donor has economically equipped
the charity to carry out its charitable purposes. If so,
then the transaction can qualify as a gift regardless of
whether the donation is structured as a common law gift,
a trust, a contractual transfer or any other kind of transaction.
Based on these observations, I propose
a statutory definition of charitable donation that
allows any transfer of property, regardless of how it is
structured, to qualify for the tax concessions for charitable
gifts. This will remedy much of the incoherence and confusion
that plagues the current jurisprudence.
Admittedly, my proposed definition will
not solve all of the problems with the current tax treatment
of charitable gifts. The confused treatment of distributions
from trusts to charitable beneficiaries would remain unresolved.
Similarly, some of the problems associated with donations
structured as charitable purpose trusts would continue.
For example, while my proposed statutory definition makes
clear that a donation is made when a taxpayer transfers
property to a charity to hold as a trustee of a charitable
purpose trust, it leaves unresolved whether this donation
arrangement creates a new taxpayer – the purpose trust –
separate from the donor and the charitable donee.
Nevertheless, by reorienting thinking
away from the view that gift means a common law gift and
toward the more theoretically sound view that a charitable
donation is any transaction that has a particular economic
effect—the enrichment of a charitable donee—my reform removes
the blinders that are responsible for the poorly developed
state of the law in relation to donation arrangements involving
trusts. The statutory definition that I have proposed thus
paves the way for future reform in relation to these donation
arrangements.
