On September 8, 2017, the Tax Court of Canada (“TCC”) released its decision in Cassan v The Queen, a matter involving a complex investment and donation program offered through EquiGenesis 2009-II Preferred Investment Limited Partnership (“EquiGenesis”), with the participation of a charity, The Giving Tree Foundation of Canada (“TGTFC”). The program consisted of a 20-year leveraged investment with an optional leveraged donation, through TGTFC, to the participants’ charities of choice. Leveraging for the program was provided through a 10-year loan with interest accruing on an annual basis. Any time participants failed to make the corresponding annual interest payments, they were deemed to have requested additional funds. The participants were required to transfer their funds, including the loan, to TGTFC, in exchange for a charitable donation receipt for the entire amount and TGTFC was further instructed to invest 98.04% of the donated amounts (the entire value of the loans) in debt notes issued by the same investment manager who, in turn, lent the money to the entity that funded the loans assumed by the participants.
The Minister of National Revenue (the “Minister”) described the program as a “self-contained structured finance investment program and gifting tax shelter” and rejected the charitable donation tax credits claimed by the participants in 2009, 2010 and 2011 because the transfers were not gifts as defined under section 118.1 of the ITA. The Minister also submitted that, even if the transfers were considered gifts, the eligible amount of those gifts should be nil, in accordance with subsections 248(31) and (32) of the ITA, as a result of the advantage received by the participants in the program by way of the loans being “limited-recourse debts in respect of the gifts” under subsection 143.2(6.1) of the ITA.
The first argument proposed by the Minister was that the participants did not have “donative intent,” one of the three elements required for a valid gift. The Minister claimed that the participants were solely motivated by the investment value of the donation program, in terms of tax credits, rather than an intention to impoverish themselves. Following long-standing jurisprudence on donative intent, however, the TCC found that the tax advantage received by donors is not considered a “benefit” and that the motivation of a tax credit under section 118.1 does not vitiate the intent or disqualify the gift. Furthermore, the TCC found that, while participants received a benefit in exchange for their transfer to TGTFC, through below market interest rates on their loans, this benefit was not greater than 80% of the fair market value of the property transferred and, therefore, it did not disqualify the gifts, as per subsections 248(30) and (32) of the ITA.
The second argument advanced by the Minister was that the loans were “limited-recourse debt” as per subsection 143.2(6.1), and so the eligible amount of the otherwise valid gifts was nil. The Minister claimed that the loans were related to the gifts by the participants to TGTFC and should be deemed “limited-recourse debt” because: i) there were no bona fide arrangements for the repayment of the loans within the 10-year period in paragraph 143.2(7)(a) of the ITA; ii) the loans were only part of a series of arrangements that would extend beyond the 10-year limit set out in subsection 143.2(12) of the ITA; and iii) interest was not paid annually, but rather added to the principal. The TCC agreed with this argument and held that, viewing “the borrowing arrangements as a whole,” the arrangements were not bona fide for several reasons, including that there were no arrangements to repay the loans within 10 years and that there was sufficient evidence to suggest they were part of a series of transactions extending beyond that time. The effect of the TCC’s holding that the loans for the donation program were “limited-recourse debt” resulted in the entire value of the loans and interest being included as an advantage received by the participants, thus, reducing the eligible amount of the gifts to nil.
While TGTFC contributed millions of dollars to dozens of other charities in Canada over several years, it had its charitable status revoked in May 2015 for supporting the EquiGenesis gifting tax shelter discussed in this case. Charities and other qualified donees should be careful with their participation in leveraged donation programs that may cause their donors to be audited by the CRA and may eventually lead to the revocation of their registered status.