REASONS
FOR JUDGMENT
Woods J.
[1]
These reasons relate to six separate appeals
which concern the disallowance of a tax credit for a purported charitable gift
to CanAfrica International Foundation (“CanAfrica”). The appeals were heard consecutively
on one day, and one set of reasons is being issued for all.
[2]
CanAfrica issued to each of the appellants (or a
spouse) a donation tax receipt which formed the basis for tax credits claimed
in the appellants’ income tax returns. In reassessments issued under the Income
Tax Act for the 2006 taxation year, the credits were disallowed in their
entirety.
[3]
The amount of the donations as listed on the
receipts is set out below.
|
APPELLANT
|
RECEIPT AMOUNT
|
|
Rubirosa Tiroy
|
$ 2,500
|
|
Rolando David
|
$10,000
|
|
Danilo Magarro
|
$ 5,000
|
|
Ray Castro
|
$15,000
|
|
Maria S. Grande
|
$20,000
|
|
Aris N. Ani
|
$ 5,000
|
Background
[4]
In 2006, the appellants or their spouses were
independently solicited by a tax return preparer, Rodigo Layco, to make donations
to CanAfrica. At the time, CanAfrica was registered as a charity under the Act,
which enabled it to issue valid donation tax receipts.
[5]
Although CanAfrica had charitable status in
2006, the Canada Revenue Agency (CRA) was also in the midst of an investigation
of CanAfrica, which led to a revocation of its registration as a charity in
2007. In addition, the president of CanAfrica, Ambrose Danso-Dapaah, pled
guilty to selling false donation receipts for the 2005 and prior taxation
years.
[6]
Many of the appellants appear to acknowledge
that the tax receipts issued to them were false, and they seek relief on the
basis that the CRA should bear some responsibility. It was wrong, it is
suggested, for the CRA to list CanAfrica as a registered charity on its website
without warning taxpayers of the concerns that the CRA had at the time.
[7]
If the CRA had issued a warning, the appellants
suggest, they would not have entered into these transactions. The appellants
generally seek to have at least a portion of the tax credit allowed, as well as
a waiver of interest and penalties.
[8]
The respondent did not address this argument in
the replies. Instead, the respondent submitted that the tax credits should be
disallowed on the basis that no gifts were made.
[9]
The respondent submits that to be a true gift,
the donation must be made without a benefit in return. It is suggested that the
tax receipts issued by CanAfrica were inflated and that the appellants expected
to benefit by receiving inflated tax credits as a result. These benefits negate
any gift, it is suggested.
Amounts paid as a donation to CanAfrica
[10]
The first question to be considered is what
amounts were given as a donation to CanAfrica.
[11]
The starting point for the analysis is to
consider what the Minister assumed in making the assessments because the
appellants have the initial burden of proof to demolish these assumptions, at
least on a prima facie basis. The assumption that is relevant to this
issue is reproduced below from one of the replies.
[T]he Appellant was
involved in a scheme with her tax preparer where the Appellant, in
consideration for a charitable receipt from CanAfrica, would pay 10% of the
face value of the receipt amount, plus a commission, to her tax preparer.
[12]
The Minister assumed that the appellants paid 10
percent of the face amount of the tax receipts, and an additional unspecified
amount as a commission. This assumption will be considered to be true unless an
appellant establishes otherwise.
[13]
I would make a few preliminary comments before
considering the evidence.
[14]
First, the appellants all relied almost
exclusively on their own self-interested testimony, or the self-interested
testimony of a spouse, to satisfy this burden of proof. None of the appellants
had contemporaneous documentation, such as copies of cheques, to support that
they donated more than 10 percent of the receipts.
[15]
The lack of supporting documentation is a
problem for the appellants. In this regard, I agree with the comment of
Sheridan J. in another case involving CanAfrica, Patel v The Queen, 2011
TCC 555, at paragraph 16.
[16] The
Appellant pointed out to me that there was nothing illegal about making a
donation in cash. This is quite true: paragraph 3501(1)(e) of the Regulations
specifically contemplates that possibility. However, when a taxpayer chooses to
deal only in cash, whether for charitable donations or any other matters likely
to come under the scrutiny of the Minister of National Revenue, she imposes on
herself the burden of having some means of verifying the otherwise untraceable
transactions. [ … ]
[16]
Further, if self-interested testimony is to be
convincing, it must be detailed and cogent. If the evidence is implausible, it
should be viewed with additional skepticism. This is also a factor in these
appeals which involve very large donations and a charity involved in issuing
false donation receipts.
[17]
Second, some of the appellants testified that
the tax receipts were based on a cash donation plus a valuation of donated household
goods. However, none of the appellants provided evidence in support of the
valuation of the non-cash items. If any goods had been donated by appellants,
the evidence is not sufficient for me to ascribe any value to them.
[18]
Third, some of the appellants testified that
they gave approximately 16 percent of the face amount of the tax receipts in
cash, and also household goods.
[19]
Assuming that I accept that some appellants gave
16 percent to Mr. Layco, this is not sufficient to overcome the 10 percent
assumption made by the Minister because the Minister assumed that the appellants
gave 10 percent plus an unspecified commission. A part of the 16 percent should
be attributed to the commission.
[20]
I turn now to the testimony of the appellants.
The respondent did not call any witnesses.
[21]
Rubirosa Tiroy –
Ms. Tiroy was issued a tax receipt in the amount of $2,500.
[22]
At the hearing, Ms. Tiroy testified that she
gave only cash, and that she gave either $400 or $800. However, this testimony
changed on cross-examination after Ms. Tiroy was shown a letter that she had
given to the CRA. In the letter, Ms. Tiroy stated that she gave $400 cash and
some goods (Ex. R-2).
[23]
Overall, I found Ms. Tiroy’s testimony to be too
vague to be reliable and there were troubling inconsistencies. Further, Ms.
Tiroy did not provide any breakdown of the amount paid between commission and a
donation.
[24]
I conclude that the amount given by Ms. Tiroy as
a donation to CanAfrica was $250, which was the amount assumed by the Minister.
[25]
Rolando David –
Mr. David was issued a tax receipt in the amount of $10,000.
[26]
Mr. David testified that he gave cash of
approximately $2,500 and some clothing and household goods. This testimony was
too brief to be convincing, and no contemporaneous supporting documentation was
provided.
[27]
I would also note that Mr. David did not provide
a detailed description of the non-cash donation, and he had no estimate of its
value. He also did not provide a breakdown of the amount paid between
commission and a donation.
[28]
I conclude that the amount given by Mr. David as
a donation to CanAfrica was $1,000, which was the amount assumed by the
Minister.
[29]
Danilo Magarro –
A tax receipt was issued to Mr. Magarro’s spouse, Elisa Magarro, in the amount
of $5,000, which was claimed as a donation on Mr. Magarro’s income tax return.
The respondent does not take issue with the transfer of the tax credit to the
spouse.
[30]
Ms. Magarro testified that she attended at Mr.
Layco’s office to deliver a letter on behalf of a friend. While she was there,
Mr. Layco asked her whether she wished to make a charitable donation to
CanAfrica for which she would receive a tax credit equal to one-half of the
amount given. She stated that she paid cash to Mr. Layco in the amount of
$5,000 as the charitable gift.
[31]
Mr. Magarro testified that his spouse did not
tell him about the details of the donation.
[32]
I do not find the testimony of Mr. and Ms.
Magarro to be convincing. If their testimony is to be believed, I would have to
find that the following improbable events took place.
(a) Ms. Magarro
made a large donation at a time when she had been laid off from work. Her
spouse’s income was approximately $58,000.
(b) Ms. Magarro
gave the donation based on a solicitation from a tax return preparer without
her being provided detailed information about the charity.
(c) Ms.
Magarro paid $5,000 by means of a bag of bills that she kept at her house.
(d) Ms. Magarro
told her spouse almost nothing about the donation, even up to the day of the
hearing of his appeal.
(e) Ms.
Magarro donated the funds without making any inquiries about CanAfrica’s
activities. Ms. Magarro testified that she checked the website of the CRA with
respect to the registration of CanAfrica, but she did not check the website of
CanAfrica itself.
[33]
Taken together, the circumstances above are
highly improbable. I conclude that the amount given by Ms. Magarro as a
donation to CanAfrica was $500.
[34]
Aris Ani – A tax
receipt was issued by CanAfrica to Mr. Ani in the amount of $5,000.
[35]
According to Mr. Ani’s testimony, he paid cash
of approximately $2,200 to $2,700 as well as making a donation of clothing and
other household items. He did not provide a detailed description of the goods.
[36]
Mr. Ani’s testimony as a whole is implausible.
Mr. Ani and his spouse have four children and they have a net family income of
$53,000. Mr. Ani testified that he had to finance part of the donation through
an advance on his credit card. In the absence of further explanation as to why
Mr. Ani would donate such a large amount to CanAfrica, I find it unlikely that
Mr. Ani would have given such a large amount to this charity.
[37]
Mr. Ani also testified that he did not really
care about the tax refund. I do not believe this.
[38]
Mr. Ani’s testimony is too implausible to be
believed. I find that the amount given by Mr. Ani as a donation to CanAfrica
was $500, which is the amount assumed by the Minister.
[39]
Ray Castro - Mr.
Castro and his spouse were issued tax receipts in the aggregate amount of
$15,000. The explanation for receipts given to both spouses was that there was
a limit of $10,000 for a receipt to any individual.
[40]
Mr. Castro testified that he paid cash in the
amount of $2,600 in respect of these transactions.
[41]
I would note that the cash that Mr. Castro
claims to have paid is close to the 16 percent that other appellants testified
to giving. Since Mr. Castro could not establish a breakdown of the amount paid
between a donation and commission, he has not overcome the assumption of the
Minister that only 10 percent was provided as a donation.
[42]
I conclude that Mr. Castro paid $1,500 as a
donation to CanAfrica.
[43]
Maria Grande -
Ms. Grande and her spouse were issued tax receipts in the aggregate amount of
$20,000.
[44]
Ms. Grande testified that her understanding of
the arrangement was that a $5,000 donation receipt would be issued for every
$800 that was given. This equates to 16 percent and is consistent with a 10
percent donation assumed by the Minister and a 6 percent commission.
[45]
Ms. Grande also claims a tax credit for goods
provided by others. She has not established that she donated any goods.
[46]
During argument, the Crown submitted that no tax
credit should be allowed because Ms. Grande did not make this payment until
January of the following year. Although there is evidence to support this
argument, I do not think that it would be fair to decide the appeal on this
basis because the argument was not mentioned in the Reply.
[47]
I would conclude that Ms. Grande paid $2,000 as
a donation to CanAfrica.
[48]
Conclusion – In
summary, my conclusion as to the amounts given to CanAfrica is that each of the
appellants (or a spouse) paid 10 percent of the face amount of the tax receipts
as a donation to CanAfrica in the 2006 taxation year.
Amounts
eligible for tax credit
[49]
Pursuant to subsection 118.1(3) of the Act,
an individual may claim a tax credit with respect to a gift made to a
registered charity. The amount of the tax credit is determined by the amount of
the gift.
[50]
Some of the appellants suggest that they should
be allowed a tax credit based on the face amount of the tax receipt issued by
CanAfrica even though this exceeds the amount of the gift. The argument is that
the appellants should have been warned by the CRA regarding concerns about
CanAfrica.
[51]
This argument does not assist the appellants.
Even if I were to agree with them that the CRA should have provided a warning,
a tax credit can be claimed only to the extent provided by the applicable legislation.
Since the legislation provides that the tax credit is determined by the amount
of the gift, a tax credit cannot be allowed for more than this.
[52]
It remains to be determined whether the amounts
that were given as donations are gifts, as that term has been interpreted by
judicial authorities.
[53]
The respondent submits that the amounts given by
the appellants as donations are not true “gifts” because they were given on the
expectation of receiving a benefit in return. The benefit, the respondent
suggests, is the expectation of an inflated tax credit based on an inflated
donation receipt.
[54]
The respondent also submits that the quantum of
the benefit is not relevant, and that any benefit at all will negate the entire
gift: The Queen v Friedberg, 92 DTC 6031 (FCA).[1]
[55]
The central question to be determined is whether
an expectation of an inflated tax credit based on an inflated donation receipt
is a benefit that negates the gift.
[56]
This issue has come before the Tax Court of
Canada on several occasions and no clear principle has emerged. For example, in
Berg v The Queen, 2012 TCC 406 Justice Bocock concluded that an inflated
receipt does not negate the gift (at paragraph 33), whereas a contrary
conclusion was reached by Justice Webb, as he then was, in Tu Van Le v The
Queen, 2011 TCC 292 (at paragraph 13).
[57]
At the time of hearing these appeals, an appeal
of the Berg decision was before the Federal Court of Appeal. In light of
the uncertain state of the law on this point, I decided to hold these appeals
in abeyance pending further guidance from Berg. The appellate decision
was released on January 31, 2014 (2014 FCA 25), and the parties were then invited
to provide submissions on the decision, either orally or in writing.
[58]
The reasons of the Federal Court of Appeal in Berg
confirm that the receipt of a benefit will negate a gift. However, the Court
did not comment on the conclusion reached by the Tax Court that an inflated tax
receipt is not a benefit. Instead, Near J.A. concluded that Mr. Berg had not
made a gift because he had received a benefit in the form of transaction
documents that were designed to mislead tax officials (Berg, paragraphs
27, 28). In light of this conclusion, the Federal Court of Appeal did not
consider whether an inflated tax receipt is a benefit.
[59]
Since this issue was not clarified by the
Federal Court of Appeal in Berg, it is useful to consider other judicial
decisions. The respondent referred to several decisions of the Tax Court of
Canada, and I have also found guidance in The Queen v Doubinin, 2005 FCA
298, which is a decision of a higher court.
[60]
Although the facts in Doubinin are very
different from the facts in these appeals, the Court’s comments on whether an
inflated tax receipt is a benefit are helpful. In this regard, Sexton J.A. writes:
[14] The
Appellant argues that the receipt of the "inflated tax receipt" was a
benefit. We do not agree.
[15] It was
impossible for the Respondent to benefit from the inflated tax credit on the
specific facts of this case because even if PPF had made the donation to ABLE,
ABLE could not have validly issued a charitable receipt in the Respondent's
name for the amount donated by PPF. Section 118.1 of the Income Tax Act
does not allow one individual to claim a charitable tax credit for a gift made
by some other person.
[16] Thus, it
cannot be said that the Respondent received any actual benefit from the
"inflated tax receipt". In fact, it might well be described as a
burden. If he had not received it, he would have not experienced the difficulty
he later faced in claiming a credit for the $6,887, which he actually
contributed to a registered charity.
[17] The
Appellant also relies upon the case of Webb v. The Queen, 2004 TCC 619
where the taxpayer was denied a tax deduction in any amount. That case involved
a donation to the same charity, ABLE. However, there, the Tax Court found that
the taxpayer had knowingly participated in the issuance of false receipts and
in addition that the taxpayer made the donation in anticipation of the future
return of a large portion of the gift back to him, either from ABLE or through
an indirect channel. This is not the case here. In the present case there is no
evidence that the Respondent had any knowledge of any wrongdoing. Indeed, he
was advised by Revenue Canada that ABLE was a registered charity at the time of
his contribution. Further, there was not the expectation of a benefit which the
Tax Court had found in Webb.
[61]
Based on these comments, I would conclude that
the issuance of an inflated tax receipt should not usually be considered a
benefit that negates a gift.
[62]
The Court in Doubinin seems to leave open
the possibility, however, that there may be extraordinary circumstances in a
particular case that should be taken into account.
[63]
Are there particular circumstances in these
appeals that would justify a conclusion that the inflated tax receipts are a
benefit that negates the gifts? In my view there are no such circumstances.
[64]
Unlike many of the cases dealing with so-called
leveraged charitable donations, the transactions in these appeals are not
complex and do not involve a series of inter-related transactions to which the
cash is connected. The appellants simply paid cash, and perhaps household
goods, as a donation to CanAfrica and received greatly inflated tax receipts.
The appellants likely knew that they were claiming inflated tax credits, but
this is not a sufficient reason to deny the tax credits altogether.
[65]
In my view, on the facts of these appeals the
appellants did not receive a benefit that negates the gifts.
[66]
Before concluding on this issue, I would comment
that the respondent raised another argument at the hearing that was not
mentioned in the replies. It was submitted that the appellants did not
establish (except perhaps Mr. David) that they had donative intent. The
appellate court decision in Berg confirms that this is a requirement to
have a valid gift (at paragraph 29).
[67]
In my view, it would not be fair to decide the
appeals based on this argument. The appellants did not have prior notice of it,
and accordingly they did not have a chance to prepare and introduce evidence on
the point.
Waiver of
Interest
[68]
Most of the appellants also seek a waiver of
interest. This request cannot be granted because the Tax Court of Canada does
not have the jurisdiction to provide this type of relief. Although this point
was not mentioned in the replies, it was noted by Justice Angers in a case
management hearing.
Waiver of
penalties
[69]
The appellants also seek a waiver of penalties,
on the basis that the CRA should have provided a warning about donations to
CanAfrica.
[70]
The issue of penalties is troubling because the
respondent submits that no penalties were imposed and most of the appellants
disagree with this. Despite the differing positions, none of the parties
introduced sufficient evidence to support their position.
[71]
Since this issue was clearly raised in the
appellants’ notices of appeal, and I do not have sufficient evidence to
determine whether penalties have been imposed, the judgments in these appeals
will provide that penalties, if any, should be deleted.
Conclusion
[72]
The result in all the appeals is that the
appellants should be allowed the charitable tax credit with respect to 10
percent of the face amount of the tax receipts, and any penalties imposed
should be deleted.
Signed
at Ottawa, Ontario this 15th day of April 2014.
“J.M. Woods”
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