By Esther S.J. Oh

On August 22, 2023, the Tax Court of Canada released its decision in the case of Nixon v. The King, 2023 TCC 124 (CanLII). This was an appeal of reassessments made under the Income Tax Act for the Appellant’s 2002 and 2003 taxation years. The appeal was dismissed by the court. The Appellant taxpayer was a participant in initiatives organized by Berkshire Funding Initiatives Limited (“Berkshire”) and Talisker Funding Limited (“Talisker”). The Appellant received an official donation receipt from Ideas Canada Foundation (“Ideas”) for his two “donations” of $300,000 made in 2002 and 2003, respectively. The Minister of National Revenue (“Minister”) denied the claim on a number of grounds, but the primary reason was a determination that no gift was made by the Appellant since the Appellant received a benefit through his participation in Berkshire, by receiving an interest free loan.

The Berkshire program was previously reviewed by the Tax Court of Canada in a prior case, Kossow v. Her Majesty the Queen, where the court found that Ms. Kossow had not made a gift because of the significant benefit she received as a result of her participation in the Berkshire program. This decision was affirmed by the Federal Court of Appeal.

As background, Talisker and Berkshire jointly promoted and operated Ideas, which the Minister described as leveraged-donation programs. In this regard, Talisker had provided 25-year term interest free loans for those making donations to Ideas. The court described the following requirements which were generally required to obtain a loan and be a participant in Ideas:

1. Sign a pledge to Ideas in the amount the participant purports to donate;
2. Complete a loan application and power of attorney;
3. Complete a promissory note for the amount of the applied-for loan;
4. Write a cheque to Talisker “as agent” for his 20% contribution toward the donation to Ideas; and
5. Write cheques to Talisker (in its own right) for loan processing fees of 1-5% of the donation and security deposit equal to 10% of the donation.

Each of the loans totaled 80% of the participant’s donation to Ideas.

The Appellant argued that his fact situation was distinguishable from Kossow, and alleged that the loan he received was a separate, arms-length transaction from his donation to Ideas. In this regard, the Appellant argued that he did not follow the template that the other participants of the Berkshire program were required to follow.

The Appellant claimed that the funds that he obtained from Talisker were independent from his donation to Ideas. In this regard, the Appellant argued that the court should see the withdrawals of $300,000 from his bank account on September 18, 2002 and February 17, 2003 as impoverishments. The Appellant argued that the (claimed) loan from Talisker on the identical dates were separate transactions unrelated to his gift and therefore alleged that the Appellant received no benefit as a result of his participation in Berkshire and the claimed donation amounts of $300,000 in 2002 and 2003 should be allowed.

The court noted that prior to participating in the Berkshire program, the Appellant received promotional material from Berkshire, stating that he could expect to receive an annual cash flow benefit of $73,200 and $43,200 in 2002 and 2003, respectively. The court found that, “In the entirety of the promotional material, it was made clear to the Appellant that he would be financially enriched as a result of his participation in the Berkshire program.”

After reviewing numerous transactions that occurred, the court summarized the central issue in the case: whether the Appellant’s alleged donations of $300,000 in both 2002 and 2003 were gifts within the meaning of s. 118.1(1) of the Income Tax Act.

The court cited a 1991 ruling from Friedberg v. Her Majesty the Queen, where the court stated that for the purpose of s. 118.1(1):

...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....

In reviewing the facts, the court found there was “no commercial reality to the conclusion the Appellant wishes the court to reach, specifically that the loan from Talisker was a separate arm’s length transaction from his gift to Ideas.” In addition, the court stated that the objective facts contradicted the Appellant’s position that he had the intention to pay back a loan amount to Talisker.

Instead, the court found that the objective evidence at trial supported the conclusion that the Appellant and the promoters of the Berkshire program reached an arrangement, whereby the Appellant would immediately be reimbursed for claimed donations of $300,000 in 2002 and 2003.

Nixon serves as a reminder that initiatives and schemes which involve collection of payments through the guise of charitable donations in exchange for conferring of benefits to the individuals making those payments will be carefully scrutinized by the Minister and the courts and where there are not the requisite elements of a gift present, the official donation receipt will be denied.

​Read the Sept 2023 Charity & NFP Law Update