Citation: 2008TCC91
Date: 20080208
Docket: 2004‑396(IT)G
BETWEEN:
PATRICIA NORTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally
from the bench on August 3, 2007,
in Vancouver,
British Columbia, and modified for clarity
and accuracy.)
Archambault J.
[1] Mrs. Patricia Norton is appealing income tax assessments
issued by the Minister of National Revenue (Minister) with respect to
the 1996 and 1997 taxation years. The issue is whether Mrs. Norton is entitled to an income
tax credit in respect of a donation of $20,000 made in 1996 to the Association
for the Betterment of Literacy and Education (ABLE). She claimed $6,049
in 1996 and, as a carry-over from 1996, $6,747 in 1997.
[2] During the course of his argument, counsel for the respondent
submitted to the Court written argument in which he presented an overview of
the case and a statement of the facts starting at paragraph 11, both of
which I reproduce hereunder. The comments in the footnotes are mine.
OVERVIEW
1. This appeal concerns whether a $20,000 payment by the
Appellant to The Association for the Betterment of Literacy and Education ("A.B.L.E.")
was a 'gift' giving rise to a charitable donation tax deduction pursuant to
section 118.1 of the Income Tax Act (the "Act").
2. The Appellant's 'donation' was on December 30,
1996. Her check was cashed on January 7, 1997, and on January 14,
1997 she received a payment of 75% of her donation ($15,000).
3. The Respondent characterizes the $15,000 payment as a kickback
and says that the receipt of a kickback is consideration that vitiates a gift.
4. Further, the Respondent has proof that of the 101
participants in the 'kickback' variant of the scheme 100 got the kickback of
75% of their 'donation' (the remaining 'donor', Mr. Richard Coglon was not
audited but received payments form [sic] the Appellant's husband's
company.)
5. The Respondent's [sic] assumed that A.B.L.E.
operated in 1993, 1994 and 1995 to operate tax schemes where 'donors' received
inflated receipts worth four times their actual cash outlay. These assumptions
were not demolished.
6. In documents written prior to trial, the Appellant
characterized the $15,000 kickback as a 'gift' but then during trial, the
Appellant's evidence was that she simply won a lottery organized by the
promoter of the charity, J.I.T. Fundraising Corp. ("J.I.T.").
7. J.I.T. was owned and operated by William ('Bill')
Norton, the Appellant's husband. J.I.T. raised $3,129,290 for A.B.L.E. during
the last quarter of 1996 and was paid $163,015 by A.B.L.E.
8. Bill Norton gave extensive evidence that the charitable
lottery idea was his and that he wanted to develop the business plan. He also
testified that the 'odds of winning' were 1 in 3.
9. Not one single document created in 1996 or before
referenced a lottery or odds of winning.
. . .
PART
II – FACTS
11. The Respondent submits that assumption 10(a), 10(b)(i) and
10(b)(ii) [of the Reply to the Notice of Appeal] were not rebutted:
10(a) A.B.L.E. was organized and promoted as a tax shelter by
Henry N. Thill.
10(b) The mechanics of the A.B.L.E. tax shelter varied from year to
year and from investor to investor:
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i)
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In 1993 and 1994 it was promoted primarily as the Funded
Charitable Donation Program (the "FCDP") in which a Taxpayer:
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(a)
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Decided the amount for which it wanted a charitable receipt;
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(b)
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Paid 25% of that amount as 'insurance premiums';
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(c)
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Used the 'insurance' to secure and, eventually, satisfy a 30 year
'loan' from a British Virgin Islands company;
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(d)
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Used the 'proceeds' of the 'loan' to make the 'contribution' to
A.B.L.E.; and
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(e)
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Received a charitable receipt from A.B.L.E. for the entire 100%
'loan' amount and thus realized a high overall rate of return on the 25%
invested.
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[the "Fake Loan Variant"]
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(ii)
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In 1995 the tax shelter was promoted as the Publishers'
Philanthropic Fund of Bermuda (the "PPF") and, to a lesser extent,
as the Gift Provider's Fund. The PPF was described as a group of
"Publishers, royalty rights holders and producers of intellectual
properties [that] have over many years profited enormously through their
individual and collective enterprise" and have decided "to give
some of this wealth back to society" through contributions piggy-backed
onto Taxpayers' contributions in a ratio of 3:1, while remaining anonymous,
and allowing the 'select' Taxpayers to receive the entire charitable receipt
amount. Thus, in this variant, the Taxpayer:
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(a)
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Decided the amount for which it wanted a charitable receipt;
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(b)
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Contributed 25% of that amount;
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(c)
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Received a top-up 'contribution' equal to three times the size of
the initial contribution through the anonymous benevolence of the PPF; and
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(d)
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Received a charitable receipt for A.B.L.E. for the entire amount
and thus realized a high overall rate of return on the 25% invested.
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[The "Top-Up Variant"]
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12. In short, prior to 1996, A.B.L.E. had a three year track
record of promoting tax schemes where donors received inflated charitable
donation receipts for four times the 'donors' [sic] actual cash outlay.
13. On September 19, 1996, Bill Norton formed
J.I.T. to promote A.B.L.E.
[Evidence of Mr. Norton, R1 Volume 1, Tab 7, page 214, 219,
R2 draft affidavit, paragraph 5].
14. On October 18, 1996, J.I.T. signed a contract with
A.B.L.E. to promote A.B.L.E. J.I.T. was entitled to commissions of 5% of all
donations raised.
[R3, paragraph 2.2(h)].
15. Between October 18, 1996 and December 31, 1996,
J.I.T. raised $3,129,290 of 'donations' for A.B.L.E. [R1, Volume 1,
Tab 7, page 229, and the oral evidence of Mr. Norton, in cross‑examination,
admitting that the February 21, 1996 date was a typographical error and
should have read February 21, 1997].
16. In return for raising $3,129,290 for A.B.L.E., J.I.T. was
paid gross commissions of $163,015.92. [R1, Volume 1, Tab 7,
page 229].
17. Using the gross commissions, J.I.T. issued cheques for
$50,000 and $92,000 signed by Mr. Norton to one of Mr. Norton's other
companies "Barely Legal". [R1, Volume 1, Tab 7,
page 243 and 244, and the oral evidence of Mr. Norton acknowledging
that 'Barely Legal' was his company].
18. Mrs. Norton's tax returns confirm that she received
payments from Barely Legal.
19. Mr. Kuhn testified that in 1996 A.B.L.E. issued
receipts for 235 'donors'. Mr. Kuhn's full breakdown of every 1996
donor was entered as evidence.
[R1, Volume 1, Tab 9.]
20. Of the 235 1996 A.B.L.E. 'donors', 134 participated in
the Top‑Up Variant of the scheme that had been running since 1995.
21. Of the remaining 101 1996 'donors':
a) Mr. Kuhn found that 91 received cheques for 75% of
their 'donation'
(the "Kickback Cheques"). [Volume 1, Tab 9 summary, with
every source cheque copied front and back and entered as evidence with in [sic]
Volume 2, Tab 14].
b) Mrs. Norton was one of the individuals who received
a Kickback Cheque. [Volume 1, Tab 9, page 335‑336, and
Volume 2, Tab 14, page 579‑580].
c) For nine of the remaining 'donors' Mr. Kuhn found
that there was a pattern of wire transfers from the same bank account that
issued the Kickback Cheques. Although the wires went to countries with secrecy
laws that prevented Mr. Kuhn from further tracing, Mr. Kuhn analysed
the pattern of wire transfers and found that there was a striking pattern of
wire transfers matching 75% of the amounts donated by the donors who had not
received a Kickback Cheque. [R1, Volume 1, Tab 9, pages 341‑343].
d) One of the taxpayers who Mr. Kuhn believed received
a kickback by way of wire transfer was Mr. McPherson, who was the subject
of a Tax Court of Canada case that found he had indeed received a kickback of
75% of his donation. [McPherson v. The Queen, 2006 TCC 648].
e) The remaining taxpayer, Mr. Coglon, was not audited
because his donation receipt was disallowed at the initial assessment stage.
[Oral Evidence of Larry Kuhn].
22. J.I.T. issued a cheque to Mr. Coglon on
January 17, 1997. [R1, Volume 1, Tab 7, page 244].
23. J.I.T. not only received commissions for the Wire‑Transfer
Donors but went so far as to loan some of them the money for their donations.
For example, Mr. Norton admitted that J.I.T. loaned Conrad Clemiss,
$50,000 to make his donation. [Oral evidence of Bill Norton on cross‑examination,
R1, Volume 1, Tab 7, page 243, and see also R1, Volume 1,
Tab 11 documents from the trust accounts of James Comperelli].
24. Every donor in 1993, 1994, and 1995 received a receipt
with a face value of four times the cash the donor paid. [Undemolished assumptions].
25. Mr. Norton's evidence was that he promoted
A.B.L.E. based upon his 'lottery' idea where charitable donors could 'win' a
lottery – thus making the charity he promoted more competitive and
allowing him to realize a profit in commissions or other "revenue
streams" such as "shared advertising".
26. Although Mr. Norton provided two lottery
style tickets for years after 1996 [A1(b) and (c) – the
glossy tickets], the ticket he provided for 1996 [A1(a) – the non
glossy ticket] makes no mention of a lottery but rather refers to a 'gift' from
the PPF.
27. Not one single document corroborates Mr. Norton's
evidence that he promoted A.B.L.E. in 1996 as a lottery. He admitted this fact
under cross examination.
28. Mr. Norton testified that the 'odds of winning' in
1996 were 1 in 3. Not one single document corroborates his evidence and he
admitted this fact under cross examination.
29. Mr. Norton described attending one 'reverse draw'
and speculated on multiple other draws for 'winners' in his 1996 'lottery'. Not
one single document, not even an airline ticket, corroborates this evidence.
30. Mrs. Norton's evidence was that she relied upon and
"trusted" her husband.
31. Mrs. Norton's evidence was that she could not
remember how she decided to donate $20,000.
32. Mr. Norton's evidence was that he was the person who
picked the amount of $20,000.
33. Mrs. Norton was one [sic] the board of
directors of A.B.L.E. in 1993.
34. Mrs. Norton's evidence was that she had never made
any other charitable donation to A.B.L.E. or any other charity before or after
the donation at issue in this appeal.
35. Prior to Mrs. Norton's December 30, 1996
donation, kickback cheques had already been issued to numerous (approximately
40) donors.
36. Mr. and Mrs. Norton disavowed knowledge of the
references to an 'Educational Gift' in the promotional materials. [R1,
Volume 1, Tab 5(a), page 60, Tab 5(b) page 77].
37. Both Mr. and Mrs. Norton's evidence was that
Mrs. Norton relied upon the 'promotional package' entered as Exhibit A5
that included A2, A3, and A4. [Oral evidence of Bill Norton]
38. A2 is identical (other than the exclusion of the legal
opinion) to the document disavowed by the Norton's [sic] at R1,
Volume 1, Tab 5(b).
39. A2 contains references to an educational gift.
40. The Bennett Jones opinion relied upon by the
Appellants assumes as a fact that donors may receive an education gift and that
the determination of who shall receive a gift rests at the discretion of the
PPF based upon the recommendations of fundraisers − such as
JIT. [See paragraph 6 of
the Bennett Jones opinion, page 2].
41. Mr. Norton testified that the PPF actually existed
and that he had met its members: Henri, Nicolas Thil, and
Don Fraser.
42. Mr. Norton testified that Don Fraser was
chairman of Eurobank.
43. Mrs. Norton received her cheque from a Eurobank
account. [R1, Volume 2, 594].
44. Mr. Kuhn testified that at the conclusion of his 2‑3
year audit of over 594 A.B.L.E. donors he could find no evidence that the PPF
actually existed.
Rather, his evidence was that it seemed to be just a 'circular flow of funds'
skimming money off of inflated prices for the Speed Reading kits to, in
essence, use the same money.
45. The Speed Reading kits given out by A.B.L.E. were the
same speed reading kits used for over thirty years in various Thill schemes.
[Oral evidence of Bill Norton and Larry Kuhn].
[3] To these facts, I would add the following.
In 1996, Mr. Norton wanted to create, with a business partner in Houston, Texas, a fundraising corporation that
would use the sweepstakes technique and earn commission fees and possibly fees
from the use of co‑operative advertising on the Internet. He said that in
1996 he met Mr. Thill's daughter-in-law, Ms. Marie Peters, who
was at that time ABLE's president, for the purpose of discussing the charity’s fundraising.
[4] Prior to committing to an agreement with ABLE, Mr. Norton
did some due diligence. He checked to see whether ABLE was a duly registered
charity for tax purposes. In the spring and summer of 1996, he also met a
lawyer from the BJV firm to get a legal opinion on the arrangement (the
donation program) to be used in connection with the raising of funds for ABLE.
He also stated that he had the reading kit evaluated by a University of Toronto professor and by another
professor from a U.S. education institution.
[5] He was able to obtain from BJV a legal opinion which is dated
September 25, 1996. However, I would stress that there is no mention in this
opinion of the fact that the education gift would amount to 75% of the donation
and that all people making a donation would be getting the education gift. The
opinion also assumes that the donation is a "voluntary, unconditional and
gratuitous transfer of property . . . made without the material expectation of
receiving the [Education] Gift or any other benefit or consideration"
(page 15 of Exhibit A‑2). It also states that, should there be
such a material expectation, the donor would "likely not be entitled to [the]
tax credit" for the donations (Ibid., page 19).
[6] So the difficult issue facing Mr. Norton was whether the ABLE
donation program involved a material expectation of receiving a benefit or
consideration. He said that he discussed this issue with the BJV lawyer and
explored the possibility that the so‑called education gift would be given
in the context of a sweepstake mechanism where only one out of three donors
would be entitled to receive the award, the gift or the winnings, depending on
which version was used. He wanted, as I understand it, to deal with the issue
of material expectation by creating uncertainty through having the draw
combined with the raising of funds. However, his solution of paying the so‑called
education gift ‑ which I call a partial reimbursement ‑ in
such circumstances was not dealt with in the BJV written opinion for the reason
that there were apparently some concerns about the issue of receiving a
consideration for the donation and about the British Columbia legislation
concerning “vice and gaming”, to use the words of Mr. Norton.
Respondent's position
[7] The respondent's position is outlined at paragraphs 46 to
60 of the respondent's written argument:
PART
III – LAW
46. Section 118.1 of the Act provides for a
charitable donation deduction that may be claimed by individuals who make
charitable donations, gifts to the Crown and certain gifts of cultural property
and ecologically sensitive land.
47. Among the requirements for eligibility for the deduction
is the requirement that the taxpayer make a "gift".
48. The term "gift" is not defined in the Act
so general principles of law govern with regard to gifts.
The Queen v. Friedberg, 92 D.T.C. 6031 (FCA) at 6032.
49. The Federal Court of Appeal in Friedberg went on
to define "gift" as:
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)
50. The Respondent submits that, although a payment was made
to A.B.L.E. by the Appellant during her 1996 taxation year, it did not qualify
as a "gift".
51. The Respondent submits that, on a balance of
probabilities, the Court must find as a fact that the Appellant both
anticipated and received the 75% kickback.
52. It is trite law (and common sense) that the anticipation
and receipt of a cash kickback of 75 % vitiates a gift. This has also been the
recent finding of the Tax Court of Canada in a case with much weaker evidence.
The Queen v. Friedberg, 92 D.T.C. 6031 (FCA) at 6032.
McPherson v. HMTQ, 2006 TCC 648.
53. It is submitted that this case turns on its facts.
54. Mrs. Norton is married to the promoter of the 1996
Kickback Variant of the A.B.L.E. scheme.
55. Not only is there a compelling pattern of similar fact
evidence that suggests that A.B.L.E. always operated on the basis of
providing inflated receipts in a ratio of 1:4, but the evidence is that is
exactly what happened in Mrs. Norton's case ($20,000 in, $15,000 back).
56. Further, the evidence is that every person audited in the
Kickback Variant received a kickback. In Mrs. Norton's case, the
government actually has the 'smoking gun' cheque.
57. Mrs. Norton relies upon the lottery explanation of
her husband. No documentary evidence supports this position despite the fact
that her husband would be in a unique position to obtain documents as the
promoter of the scheme.
58. It is reasonable to infer that Mrs. Norton knew
she would be getting the $15,000 kickback both because everyone else did and
also because many donors before her had already gotten their cheques.
59. A.B.L.E. has already been the subject of several
decisions by the Tax Court of Canada and one decision by the Federal Court of
Appeal.
Doubinin v. H.M.T.Q.,
2005 FCA 298; 2004 TCC 438.
Webb v. Her Majesty the Queen, 2004 TCC 619 (TCC).
Julian v. H.M.T.Q.,
2004 TCC 330.
McPherson v. The Queen,
2006 TCC 648.
60 In no decision has an Appellant ever previously claimed
to have paid the full donation and been successful in their appeal.
[8] Mrs. Norton relied upon her husband's argument that there
was no material expectation of receiving a gift because of the lottery
mechanism. The only evidence to support her position was the two tickets that
were filed as Exhibit A‑1 (the B and C portions).
[9] As I pointed out during argument, the lottery ticket filed as
Exhibit A‑1 B, is a ticket for the U.S. market and does not refer
to ABLE; it refers rather to "A.B.L.E. ‑ Americans for the
Betterment of Literacy and Education" (ABLE Americans). The address
given for ABLE Americans is in Bellingham, Washington, and a Houston telephone number is provided. The evidence also
established that these tickets were not available in 1996, but came out in
subsequent years.
Analysis
[10] To the comments made by counsel for the Minister, I would add
the following. I would start with the statement made by Justice Bowie in the
Webb decision, which I think is also applicable here. At paragraph 17
he said:
The circumstances that
I have referred to lead me to conclude that there was nothing donative at all
about Mr. Webb's payment to ABLE. His intention was to receive a tax credit for
a charitable donation, as well as a substantial refund of the amount he had
given, such that when the two were aggregated they would exceed the $30,000 for
which he wrote the cheque.
[11] I believe that this conclusion applies in Mrs. Norton's
case. Even though Mr. Norton claims she did not know that she would
receive the education gift, he was the fundraiser through JIT and knew — or
ought to have known — that she would be receiving this education gift. He
acknowledged that he may have been involved in determining the amount of $20,000
that was given by Mrs. Norton to ABLE. On a balance of probabilities, I
conclude that he was the one who got her to make the $20,000 donation to ABLE. She
relied on him in tax matters. She could hardly provide any information during her
testimony without turning to her husband. Even when testifying about her own tax
returns, she consulted him.
[12] Moreover, she did not remember that she had communicated with
the Department of National Revenue on the question of the $15,000 refund, but,
after having been shown the statement (Exhibit R‑8) that she had sent
to the Minister, she acknowledged having done so. However, I have reason to
believe that the statement was not drafted by her, but by her husband. She
stated that the date of March 10, 1998, was not written by her and, in my
opinion, the person who wrote the handwritten statement is also the person who
wrote the date of March 10, 1998. So it is not surprising that she would
not remember having communicated with the Department.
[13] I repeat that she stated, during the course of her testimony,
that she had trusted her husband, and I believe that she did not know anything
about the business model and knew nothing of the various details of the donation
program: she completely relied on him to make the contribution. In my view, it
is fair to conclude that Mr. Norton was the mastermind behind the payment
of the $20,000 to ABLE given that he was the person in charge of raising funds for
that organization, and that he could see, although he denies it, that the
donors were paid the 75% reimbursement within a 15‑ to 60‑day
period. In any event, he ought to have known that this was being done. He
stated that it was important not to have too many losers in the draw in order
to be in a position to raise funds. I would also mention again that there was
an incentive for JIT to obtain as many donations as possible because its commissions
depended upon it and the duration of its agreement also was dependent upon the
amount of money being raised for the benefit of the charity.
[14] I also believe that the record speaks for itself. In all
previous years, the donors had been paid the refund or been getting the top-up
contribution, although there was no guarantee that this would take place. In my
view, the statements found in the documentation provided to donors —
including the acknowledgement form on which each donor acknowledged that the
donation was being made without any material expectation of receiving a gift —
are only window dressing or self‑serving statements. The reality is that
every donor in 1996 received a partial reimbursement of their contributions, and
it is fair to assume that they expected to receive it.
[15] I should point out that there is a credibility issue with
respect to Mr. and Mrs. Norton's testimony. Although she believed that
ABLE was a worthy cause, Mrs. Norton had never given any money to this
charity from 1993, when she was on its board of directors, until
1996, when she made the $20,000 donation. The only other donation that she ever
made from 1990 to 1998 was an amount of $30.
[16] With respect to the funds that he raised from October 1996
to December 1996, Mr. Norton's testimony was that the donors’ receipt
of the education gift would be entirely subject to the lottery mechanism, i.e.
they had only a 1 in 3 chance of getting it. Unfortunately, his testimony
is contradicted by that of the auditor, whose audit revealed that the donors
were all receiving the reimbursement, and if there ever was any lottery mechanism
such as that described by Mr. Norton, it certainly was not in place in
1996.
[17] I should also state that both Mr. and Mrs. Norton were
pretty evasive when they had to discuss what took place when Mrs. Norton’s
contribution was made. Mr. Norton was, moreover, very reticent or evasive
in recognizing that the documentation that was being used during the fall of
1996 did not refer to a lottery mechanism, and that the education gift arrangement
was still being used at that time.
[18] In his testimony, he said that people could win up to 75% of
their contribution to ABLE when in reality they all got 75%. It is my opinion
that he was in a position to know that each donor would be getting this refund,
that his wife knew about it, and that, if she did not know, he was the one
guiding her in making the contribution and, therefore, he knew about the refund
when she made the contribution to the charity.
[19] In my view, Doubinin v. R, 2005 CarswellNat 2814, 2005
FCA 298, although Mr. Norton did not refer to it in his argument, is
the only decision that could have lent any support to his position. In my view,
that decision is of no help to him because there are substantial differences between
that case and the facts of this particular case. The Federal Court of Appeal stated
in Doubinin at paragraph 8:
The Tax Court judge
allowed the Respondent's appeal. In so doing the Tax Court Judge found that
the Respondent was entitled to a tax credit in the amount of $6,887.
The Tax Court Judge accepted the Respondent's evidence that he had the
requisite intent to establish that his donation of $6,887 was a charitable
donation to a registered charity. The Tax Court Judge said “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…”.
[20] It should be stressed that what was involved in Doubinin
was the top‑up contribution arrangement, and the "Tax Court Judge
accepted the . . . evidence that [the taxpayer] had the requisite intent to
establish that his donation of $6,887 was a charitable donation". The taxpayer
had actually made the "donation of $6,887", and it was only after
being told by ABLE that PPF had made the top-up that he claimed a tax credit in
respect of an amount of $27,548. Then, upon learning from the Minister prior to
the hearing before the Tax Court that PPF had not made the top‑up contribution,
the appellant reduced his tax credit claim to $6,887 (par. 6 of the
Federal Court of Appeal decision).
[21] In my view, the donation program that was marketed in the fall
of 1996 by JIT is typical of the numerous aggressive tax shelters that attempt to
leverage tax deductions or credits. There are many examples of this. There is the
gifting of art to charities in a scheme that has been referred to as “art
flipping” (for an example, see Dutil v. The Queen, 95 DTC 281). There is
the buying of false charitable tax receipts as in Abouantoun v. The Queen, 2002 DTC 3811 (case summary), a decision that
I rendered. The same technique of leveraging tax deductions was in widespread use
in tax shelters for research and development in Quebec, as in McKeown v.
The Queen, 2001 DTC 511. The same technique has been used with seismic data,
for example, in Global Communications Limited v. The Queen, 99 DTC 5377.
A similar technique was likewise used in marketing softwares in Morley v.The
Queen, 2004 DTC 2604, another decision of mine. The technique in all these
tax shelters is the same: you write off more than the amount you have paid or are
liable to pay. In this fashion, you make a profit with the tax benefit alone, so
no one cares how the money is being spent.
[22] For all these reasons the appeal is dismissed, with costs to
the respondent.
Signed at Ottawa, Canada this 8th day of February 2008.
"Pierre Archambault"
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