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Citation: 2004TCC438
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Date: 20040622
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Docket: 2004-43(IT)I
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BETWEEN:
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MARK DOUBININ,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell J.
[1] For the 1996 taxation year, the
Appellant claimed a charitable donation of $27,548.00 in respect
to an organization called The Association for the Betterment of
Literacy and Education ("ABLE"). ABLE was a registered
charity in 1996 and had been registered for several years prior
to this. In December 1996 the Appellant paid amounts to ABLE
totalling $6,887.00. He was issued a receipt for his donation in
the amount of $27,548.00, which was equal to four times the
amount he actually donated. The additional "top-off"
amount was to be paid to ABLE by a benefactor group called
Publishers' Philanthropic Fund of Bermuda ("PPF").
There was no evidence to support that this additional amount was
ever paid to ABLE. ABLE was deregistered as a charity on
September 25, 1999. The Minister of National Revenue (the
"Minister") disallowed the entire deduction because it
was not a charitable gift as defined in subsection 118.1(1) of
the Income Tax Act (the "Act") and
therefore the Appellant was not entitled to a tax credit for
donations and gifts pursuant to subsection 118.1(3) of the
Act.
[2] At the hearing, the Appellant
advised that for the purpose of computing his tax payable, he was
requesting deduction for the amount of $6,887.00 only, being the
actual amount he paid to ABLE in 1996.
[3] The issue is whether the Appellant
made a gift to ABLE in the amount of $6,887.00 which he can
deduct in the 1996 taxation year.
[4] The Appellant testified that in
1996 he approached Larry Williams, a financial planner, to
oversee his investments and to minimize his taxes. A statutory
declaration of Mr. Williams was introduced as Exhibit A-5. The
Respondent objected on the basis that Mr. Williams was not
present to cross-examine. The Appellant stated he had no
personal relationship to ABLE, or to any of its officers or
directors, and that he was not familiar with ABLE until Williams
suggested it as a potential investment in his portfolio. He was
told ABLE's main activity was to promote and improve literacy
through distribution of educational materials. He was also
advised that PPF was a private philanthropic entity administered
by directors which received donations and distributed the money
to individuals who supported educational programs through
donations to those charities. Once an individual became a member
of ABLE, that individual was then eligible to receive a gift from
PPF. He testified that Williams told him he could be chosen by
PPF, at its discretion, and if chosen, PPF would donate money to
ABLE equal to three times the amount of his donation. He would
also receive a tax receipt equal to four times the amount of his
actual donation. However there was no guarantee. He stated that
he had no expectation that he would be chosen to receive an
additional benefit through PPF. When he was chosen, he testified
that he thought PPF actually topped off his donation to ABLE and
that ABLE did receive the money from PPF. He therefore felt he
could use the receipt issued to him for $27,548.00.
[5] It was his evidence that after
Larry Williams first recommended ABLE as part of an overall
investment strategy, he took further steps to ensure the legality
of this organization by first checking with the Canada Customs
and Revenue Agency (the "CCRA") to ensure that ABLE was
granted tax exempt status and registered as a recognized charity,
which it was, and second, by obtaining an independent legal
opinion dated September 25, 1996 from the Law Firm of Bennett
Jones Verchere (Exhibit A-3).
[6] He believed what he was told about
ABLE - that it was engaged in literacy and educational pursuits.
He said Williams showed him excerpts of brochures on ABLE's
programs and the work it was doing. He was prepared to donate up
to $8,000.00 to this charity but he testified that it was
Williams who decided upon the amount he would donate as a means
of minimizing his tax payable. He knew there was an opportunity
that PPF could donate money in his name and that he would receive
a receipt for the larger amount for tax purposes, but that there
was no guarantee of this in either ABLE's documents or the
information Williams gave him.
[7] As part of this plan, the
Appellant signed two pledge forms; the first dated August 28,
1996 for $4,000.00 and a second undated one for $23,548.00. He
stated that this second one was probably signed in October 1996.
On cross-examination he said he did not know why there were
two forms. Williams completed these pledge forms for the
Appellant. He testified that these forms were pledge forms only
and that they were required by PPF, so that this organization
could consider whether to donate an amount in his name. He stated
that Williams advised him these forms were to be used by PPF if
there was additional money available that this group could donate
to ABLE. If PPF donated the money, then he would receive a tax
receipt for four times his cost outlay. However he did not expect
or know if PPF would donate. He also stated that he did not
request, and Williams did not advise him, what his chance might
be of receiving this PPF donation. The Appellant stated despite
these problems that he has continued to place confidence in
Williams and that Williams was still providing financial advice
to him.
[8] The Respondent's witness,
Larry Kuhn, a tax auditor with CCRA, reviewed ABLE's
promotional material as well as the two variations of donating to
ABLE. These both involved providing donors with tax receipts for
amounts in excess of the amount actually donated. He testified
that ABLE had issued 6.4 million dollars in receipts over
four years but had distributed only speed reading courses to high
schools, which he characterized as "window dressing".
On cross-examination, he did admit that there was nothing
in ABLE's documents to suggest that a scheme existed of
moving money through several corporations. Mr. Kuhn also admitted
that the documents contained no guarantee of tax savings but that
individuals would be motivated by the tax profit, due to the
method of promotion contained in the documents.
[9] The Respondent argued that ABLE
was at all material times controlled and promoted as a tax
shelter by Henry Thill. Most of the case law provided by the
Respondent documented other questionable schemes promoted by
Mr. Thill since the 1980s. The basis of the Respondent's
argument was that the Appellant made the donation to ABLE in
consideration of PPF making a payment to ABLE equal to three
times the payment made by the Appellant and that the Appellant
would receive a charitable donation tax receipt in an amount
equal to four times the Appellant's actual payment. The onus
is on the Appellant to establish that the transaction was
conducted without the expectation of receiving any material
benefit. The Respondent argues that he has not done so. The
Respondent submits that the Appellant's declarations of
subjective intent do not overcome the objective evidence which
supports that the transaction was promoted as a means to profit
and that the Appellant entered it on this basis without regard to
the needs of the charity or the ability of PPF to pay. Therefore
this transaction cannot be characterized as a gift, because the
Appellant expected a tax benefit and receipt based on the amount
PPF was to contribute. The Appellant's mere expectation of
receipt of this "gift" from PPF alone would negate the
Appellant's entitlement to any donation credit.
Analysis:
[10] Pursuant to subsection 118.1(3) a
deduction is allowed for "total charitable gifts", as
defined in subsection 118.1(1). This includes an "... amount
of a gift made by an individual ... to a registered
charity". Under subsection 118.1(2) proof of the gift in the
form of a receipt must be filed with the Minister.
[11] The word "gift" is not
defined in the Act but it is one of the requirements of
eligibility for the credit. In The Queen v. Friedberg, 92
DTC 6031 (F.C.A.), Linden J.A. discussed the term
"gift" in the following manner:
The Income Tax Act does not define the
word "gift", so that the general principles of law with
regard to gifts are utilized by the Courts in these cases. As Mr.
Justice Stone explained in The Queen v. McBurney, 85 DTC
5433, at p. 5435:
The word gift is not defined in the statute. I can find
nothing in the context to suggest that it is used in a technical
rather than its ordinary sense.
Thus, 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 (see Heald J. in The Queen v. Zandstra
[74 DTC 6416] [1974] 2 F.C. 254, at p. 261.) The tax advantage
which is received from gifts is not normally considered a
"benefit" within this definition, for to do so would
render the charitable donations deductions unavailable to many
donors.
The definition of the term "gift" as stated in
Friedberg has been accepted in numerous cases.
[12] Eligibility for the donation credit
under subsection 118.1(3) requires that a gift be made. It is
clear that the value of the donation cannot include any portion
of the PPF donation as there is no evidence it was ever paid to
ABLE. The Appellant abandoned that portion of his appeal in any
event. As for the money actually paid by the Appellant, it would
appear from the case law that revocation of the registration of a
charity's status (which for ABLE occurred in 1999) will not
have the impact of automatically disallowing donations that were
made while it was registered, provided receipts were properly
issued and donations properly made.
[13] The Respondent has challenged the
Appellant's payment to ABLE on the basis that the intent to
give does not exist here because the Appellant was motivated by
the expectation of receiving a material benefit via a significant
tax advantage. Generally if consideration is received, the
transfer is not considered a gift. However as stated by
Linden, J.A. in Friedberg, generally a tax advantage
connected to a gift is not normally considered a benefit. The
Respondent argues that there is no evidence of any other
motivation on the part of the Appellant except for the increased
tax benefit. This argument is based upon the view that a gift can
only occur where an individual voluntarily impoverishes himself.
In The Queen v. Burns, 88 DTC 6101 at page 6105 it was
stated:
I would like to emphasize that one essential
element of a gift is an intentional element that the Roman law
identified as animus donandi or liberal intent (see
Mazeaud, Leçon de Droit Civil, tome 4ième,
2ième volume, 4ième edition, No. 1325, page 554).
The donor must be aware that he will not receive any
compensation other than pure moral benefit; he must be willing to
grow poorer for the benefit of the donee without receiving any
such compensation. [emphasis added]
Justice Dussault made a similar comment in Dutil v. The
Queen, 95 DTC 281 where he stated at page 287:
. . . it may be seriously doubted whether such a gift even
exists in the true sense when the taxpayer's sole motivation
is clearly to enrich himself, not impoverish himself.
But enrichment may occur in some cases where a taxpayer for
example donates art that was purchased at a price below its fair
market value. The Act deems the value of the donation to
be the fair market value, not the valuation paid by a
taxpayer.
[14] The Respondent has attempted to
differentiate between those cases where enrichment occurs due to
a difference between the cost and fair market value and those
where enrichment occurs because of an inflated tax benefit. The
Respondent suggests this difference is due to the form of the
transaction. For example instead of buying property at a fair
market value of $1.00 at 25 ¢ , the Respondent suggests that
in essence a donation of 25 ¢ was made with the expectation
that a tax receipt would issue for $1.00. In the former case the
gift was purchased at 25 ¢ because of the expectation of
donating at its higher fair market value. In both cases the
taxpayer makes a donation with a value yet to be determined.
Where art, for example, is donated, the value falls between what
is paid and a higher value generally based on appraisals. Here
the Appellant made a gift of $6,887.00, but the ultimate value of
this gift would be determined by PPF's actions and would be
either the actual amount donated or the amount donated plus the
additional gift contributed by PPF. The Appellant's donation
therefore of $6,887.00 was potentially worth $27,548.00.
[15] The problem arises here because the
Appellant's receipt was for the higher of the two amounts but
in actual fact no additional amount was paid by PPF. The true
value of the gift here is equal to the amount donated by the
Appellant or $6,887.00.
[16] I accept the Appellant's evidence
that he had no expectation of receiving any material benefit or
consideration or that the ABLE documentation gave him any such
guarantee. He hired a financial advisor in 1996 who advised, as
part of an overall personalized financial plan, that he donate an
amount of money to ABLE. The advisor chose an amount less than
the amount he was prepared to donate. He was clearly at arm's
length in dealing with ABLE. He is not implicated in any
fraudulent scheme, although Henry Thill and ABLE may be part
of a fraudulent tax shelter. The first time he heard of ABLE was
when Williams suggested he donate to this charity.
[17] He did not rely solely on the advice of
his financial advisor. He took the additional steps of verifying
the tax exempt status of ABLE through CCRA and he sought and
obtained an independent legal opinion from his solicitor. After
receiving professional advice he followed Williams'
recommendation and made his donation in the form his financial
advisor suggested. His actions were reasonable and prudent. I do
not see where he could have done more in the circumstances. The
Respondent argued that ABLE's pamphlet information and the
Appellant's history of very small charitable donations
overcome the Appellant's statements that he would have
donated the $6,887.00 even if he had received a receipt for only
that amount. I must reject Respondent's arguments. There was
no guarantee set out in the pamphlet information other than a
calculation of tax savings based on receiving a PPF gift. I do
not believe the Appellant's history of charitable donations
has any bearing on his actions taken in 1996 under the coaching
of a financial advisor.
[18] He is not part of a tax evasion scheme
and although he may have been motivated by potential tax
benefits, I do not believe this can be equated to consideration
for a gift because tax benefits are not considered a benefit. I
accept the Appellant's evidence that he did not expect a
benefit based on an amount four times in excess of what he
contributed or in fact on any amount. On the evidence I believe
in making the donation of $6,887.00, he expected a receipt and
benefit in that actual amount. He was aware that PPF could choose
his donation to "top off" the amount to ABLE and that
he might benefit by a receipt and benefit in excess of his actual
contribution but there was no guarantee given to him orally or in
writing. If he received it, I believe he considered that PPF
donation to be a bonus, not only for himself, but for ABLE. His
evidence was that he believed PPF would actually pay that amount
to ABLE if he was chosen and that ABLE would then have a gift of
four times his donation. If he was not chosen by PPF then he
would receive a receipt and benefit for his "full gift"
which was the amount he donated of $6,887.00. This in essence
would be the fair market value of his donation.
[19] I conclude that based on these facts
and my acceptance of the Appellant's evidence he had the
requisite intent that his donation of $6,887.00 was a charitable
donation to a registered charity for which he would receive a
benefit. It was a genuine gift and not given with the expectation
of receiving a material benefit or any other type of
consideration from PPF. The PPF donation was a mere possibility
which should not operate to deny the Appellant his entitlement to
a deduction in these circumstances.
[20] For these reasons, the appeal is
allowed, without costs, and the assessment is referred back to
the Minister of National Revenue for reconsideration and
reassessment.
Signed at Ottawa, Canada, this 22nd day of June 2004.
Campbell J.
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