The lack of a statutory definition of a “gift” has created ongoing problems between taxpayers and the Canada Revenue Agency in regards to charitable donation tax receipts. Ultimately, the various disputes that arise are settled by the courts, who in the process fulfil their common law role of whittling away at a concept to discover the legal ‘truth’ of it. We have written previously on the Berg[1] case, which resulted in a 2012 Tax Court of Canada judgment that created a chink in the CRA’s armour regarding leveraged donation tax schemes. It is now, however, time for an update, since Berg has been overturned and new caselaw has cropped up besides.
Berg Revisited
Mr. Berg, readers may recall, was involved in a scheme whereby he donated timeshare units that he had largely “paid” for with a loan that was never intended to be called in, and in return received very highly inflated charitable donation tax receipts. He argued, and the Tax Court agreed, that he should be entitled to charitable donation tax credits for the value of his out-of-pocket expenses on the donated property. The Court’s reasoning was that his only intended benefit was the tax receipts, which despite their inflated nature were not considered a benefit that vitiates charitable intent. Mr. Berg benefited from a bit of a situational idiosyncrasy here, in that the Court found his pretence “loan” documents were not a benefit because he knew they were bogus.
Nonetheless, the ruling stood for the concept that the benefit and the donation could be separated out, so that the overall scheme did not vitiate the “donative intent” that is one of the requirements of a gift. This flew in the face of an established line of cases, especially Marécheaux[2], which the CRA had been heavily relying on to say that when a donation is tied to a benefit, no part of the donation constitutes a legal gift. Under this logic, Mr. Berg would have received zero tax credits because his overall intent to benefit would spoil even the otherwise-legitimate part of his donation.
Berg extended a ray of hope to taxpayers embroiled in battles with the CRA over leveraged donation schemes (and we should note that, perhaps unlike Mr. Berg, many of them did not realize they were becoming involved in anything questionable). This did not last very long, however. Berg was overturned at the Federal Court of Appeal in January 2014[3], where the reasoning on donative intent was brought back into line with Marécheaux.
David v The Queen[4]
Even more recent than this, however, is the case of David, decided at the Tax Court of Canada in April 2014. The judgment notes that the Court heard the facts during the time that the Berg appeal was being held, and that they waited until that decision came out before issuing their own. We know, therefore, that the Tax Court was in a position to reconcile its judgment with that of the Berg appeal. In David, which was in fact several taxpayers heard jointly, all the appellants had made donations for which the CRA claimed they received inflated tax receipts and, following Marécheaux as usual, reassessed their tax credits at zero.
The Tax Court took the opportunity presented by this case to confuse the issues a little further. The logic is tortured, but the result is that the receipt of a benefit will negate a gift, but an inflated tax receipt alone is not a benefit (this latter conclusion is based on the very narrow ratio of Doubinin[5], a case with very different facts). Apparently, the inflated tax receipt is better described as a “burden”, because it causes the taxpayer troubles that interfere with his claiming credits for any legitimate portion of the gift. However, there may be a “particular circumstance” that does in fact make the receipts a benefit, such as (according to Doubinin) if the taxpayer makes the donation in anticipation of the future return of a large portion of the gift back to him. Nonetheless, the fact that the appellants probably knew they were claiming inflated receipts in this case was not enough to negate their gifts. No other examples of “particular circumstances” were discussed. Finally, the entire issue of donative intent was thrown out of the reasoning on a procedural point.
In short, look forward to the possibility of the Federal Court of Appeal attempting to clarify this.
[1] Berg v. The Queen, 2012 TCC 406
[2] Marécheaux v. R., 2009 TCC 587
[3] Canada v. Berg, 2014 FCA 25
[4] 2014 TCC 117
[5] The Queen v. Doubinin, 2005 FCA 298