Mariano – Tax Court of Canada finds that transactions comprising a gifting tax shelter were shams

The taxpayers were participants in leveraged donation transactions, which were intended to result in a step-up of the adjusted cost base of courseware licences (e.g., on how to use Microsoft products) under ss. 69(1)(c) and 107(2) to their purported fair market value (with a view to avoiding s. 248(35), which generally limits gift amounts to ACB) before the licences were donated by them to a registered charity ("CCA").

In particular, a Bahamian corporation ("Phoenix") acquired various courseware licenses at a modest cost, and gifted most of them to a Canadian–resident Trust. Ostensibly, the licences then were distributed to the taxpayers as capital beneficiaries of the Trust, with the taxpayers then donating them to CCA. The participants also made cash donations to a second registered charity ("Millennium"), which redonated 80% of those amounts to CCA. The taxpayers knew that their cheques to Millennium would not be cashed until they were accepted as capital beneficiaries of the Trust and, thus, would receive the licences. The taxpayers were issued charitable receipts for three or more times their cash outlay (and perhaps 800 times the cost to Phoenix of the licences).

Pizzitelli J found that the taxpayers lacked "donative intent" as they had no intention to impoverish themselves, so that there were no "gifts" for that reason alone. Furthermore, the gifts were also invalid given that the licences which supposedly were donated had not yet been allocated to the taxpayers at the time they executed their Deeds of Gift (with the Schedule describing the gifted licences not yet attached). Their appointment as capital beneficiaries of the trust and the determinations to distribute the licences to them out of the trust property also were invalid as all this was handled by a promoter-related employee even though the trustee was not authorized in the trust deed to delegate these functions.

Notwithstanding that a capital beneficiary essentially was defined as an individual who had contributed to a registered charity in the year and had applied to be a capital beneficiary of the Trust, Pizzitelli J interpreted the class of beneficiaries as being all Canadians (or others) who had contributed in the year to registered charities, which then rendered the Trust invalid for uncertainty of objects.

The transactions for reasons grounded in the above findings were shams, with Pizzitelli J noting that it was not necessary for the taxpayers themselves to have been involved in the requisite deceit for the sham finding to stick.

The fair market value of the licences was their modest initial cost.

Neal Armstrong. Summaries of Mariano v. The Queen, 2015 TCC 244, under s. 118.1 - total charitable gifts, general concepts - sham, general concepts - fair market value, s. 104(1), and s. 107(2).