Not everyone understands what it is that lawyers do or the technicalities that can sometimes impose themselves on donations to charities. Unfortunately, sometimes it takes the case of a donation gone wrong to illustrate some of the complexities that can accompany large donations. Once such instance recently arose in the Tax Court in the case of Odette (Estate) v. the Queen[1].
The case was decided by Chief Justice Rossiter and dealt with a situation where there was a donation of shares in a private corporation. As with most such shares, the ones donated met the definition of non-qualifying securities (NQS), NQS are basically securities and other instruments which are not easily liquidated and generally not available for sale in the public markets (i.e., the stock exchanges). When NQS are donated to a private foundation the law deems no gift to have taken place (for purposes of the donation tax credit) until the foundation sells the shares within five years or they otherwise cease to be NQS.
In 2013 Mr. Odette donated approximately $17 million worth of shares of his private company to his private foundation. This is the typical NQS transaction. Some weeks later, the corporation whose shares were now held by the foundation, ostensibly bought the shares back from the foundation with a promissory note. In this case, the promissory note was a promise to pay the full value for the shares. The company in fact did make payments and the private foundation received the full amount of the $17 million.
The CRA argued that the promissory note did not constitute an actual sale, but rather a promise to pay. The donor’s lawyers though argued, that the Income Tax Act uses the word ‘consideration’ when describing the sale of the shares and that the law did not mean to allow for the exchange of one NQS for what amounts to another. According to the CRA then the ‘sale’ of the shares did not meet the technical requirements of the Act and so no receipt should be issued.
Chief Justice Rossiter went through a fairly straightforward textual and contextual analysis of the provision to determine that a promissory note was not the type of consideration that the Income Tax Act allowed in order to redeem the transaction. In other words, selling the private company shares for a promise to pay for them shares simply did not count as a sale. This is notwithstanding the fact that the corporation actually paid the $17 million. The logical inference from the decision is that had there not been a promissory note and the $17 million been paid directly for the shares there would have been no particular problem with the transaction.
It is reasonable to assume that large donations let alone donations as larger as $17 million will receive the review of experienced lawyers, but this case illustrate the clear need for a deep analysis into both the text and policy behind provisions when constructing transactions. And that lawyers must be involved at every turn.
One ventures to say, that while the law may have conceivably allowed for the transaction to be structured in this way, some deeper thinking about the policy behind the provision may well have discouraged the use of the promissory note. For this reason, lawyers should be involved in all types of structuring and they must be given the latitude to provide the advice necessary to avoid appeals to Court and the costs involved.
[1] 2021 TCC 65
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By: Adam Aptowitzer
Adam Aptowitzer is the managing partner at Drache Aptowitzer PC. He practices in the area of Charity Law and Tax Litigation. He can be reached at aaptowitzer@drache.ca.