Tax Shelter Arrangement Transferring Pharmaceutical Goods Found to Not Be a Gift

By Ryan M. Prendergast

Jun 2023 Charity & NFP Law Update
Published on June 29, 2023



On June 8, 2023, the Tax Court of Canada provided its reasons in the case of Parker v. The King. This case regarded a taxpayer seeking to appeal a reassessment of a taxation year in which he claimed a charitable tax credit on the basis he had made two donations to registered charities through the Canadian Humanitarian Trust Tax Shelter (“CHT Arrangement”). One of these was a cash donation while the other was a donation of pharmaceuticals. The Minister of National Revenue (“the Minister”) subsequently allowed the cash donation after initially disallowing it, but maintained the challenge against the pharmaceutical donation.

Donations of pharmaceuticals under the CHT Arrangement were reviewed by the court in Morrison v. The Queen. Here, in a similar fact pattern, it was found that a donation of cash was allowed, while a donation of pharmaceuticals was not, as the plaintiff had not established that he had previously acquired the pharmaceuticals which he alleged to have donated.

The CHT Arrangement was a gift giving arrangement tax shelter which was established with a stated purpose to provide support for charities in their relief of international poverty. Part of this mission was the donation of pharmaceuticals to developing countries. The scheme of the CHT Arrangement was that a donation would submit an application to become a beneficiary of a trust which would entitle them to “World Health Organization Essential Medicine units” (“WHOEM units”), subject to a lien. These WHOEM units were from a foreign pharmaceutical distribution company and would never enter Canada at any point. This lien listed the purported value of the WHOEM units. The taxpayer would then execute a deed of gift of the pharmaceuticals to a third-party charity (the “In-Kind charity”), which would then transfer them to a distributing charity. At no point did the taxpayer ever have physical possession of the pharmaceuticals.

The Crown argued that, as the appellant never acquired the pharmaceuticals in question, there was no transfer of property and therefore no gift. The appellant agreed that he never had possession, but relied on certificates from CHT to demonstrate that he was the owner. However, these were missing pages and signatures/dates in some spots. The court found that these errors prevented them from finding that the certificates were valid as proof of his ownership over the pharmaceuticals. Also, the court in Morrison found similar certificates to be “worthless pieces of paper” as they did not provide any solid evidence that the pharmaceuticals were transferred from CHT to the taxpayers.

Also, as in Morrison, there was not sufficient evidence to prove that the pharmaceutical distribution company ever acquired the WHOEM units from the manufacturer. Without this step in the transaction, the chain of transfers could not be established. There was no evidence that the distribution company had ever distributed the pharmaceuticals to the intended charity. A CRA investigation found that the manufacturer of the drugs had no knowledge of the distributor and had never done business with it. The bank documents submitted as evidence did not reflect cash flow from the distributor to the charity.

Based on these facts, the court found that there was no gift and consequently did not allow the receipt concerning the pharmaceutical donation. CRA routinely audits these kinds of gifting arrangements and tax shelters. The fact situation in Parker is not dissimilar from increasingly complicated schemes to obtain donation tax credits through these arrangements. Donors and charities should be aware that they can have severe consequences from participating in these schemes once they are eventually audited, and charities that participate in these schemes may also face penalties or revocation. Donors and charities need to be extremely cautious of gifting arrangements that sound too good to be true.


Read the June 2023 Charity & NFP Law Update