The Queen v. McBurney, 85 DTC 5433, [1985] 2 CTC 214 (FCA)

Stone, J:—This appeal is brought against a judgment of the Trial Division which held that the respondent was entitled to deduct from income certain payments made by him in the years 1976 and 1977 to the Ottawa Christian School Association, The Community for Christian Learning Association of Ottawa and The Immanuel Christian School Society of East Toronto (referred to in the reasons for judgment below as OCSA, CCL and ICSS repec- tively.

The facts of this case are fully set out in the judgment under appeal.* [1] At all material times children of the respondent were attending a school operated by one or other of the above non-profit corporate organizations of which the respondent was a member. These organizations were each registered as a “charitable organization” or “charity" with the Minister of National Revenue.

The learned trial judge found that the respondent's dissatisfaction with tax-supported schools led him to send his children to the schools in question. He found in particular (at 467: DTC 6495) that in the view of the respondent the public schools “providing a necessarily secular education, do not impart that hour-by-hour, subject-by-subject infusion of Christian values and interpretation of subject matter which the plaintiff and his fellows seek for their children’s education” and that the separate schools “are not ideally appropriate for their children’s education". That the respondent regarded it as his Christian duty to educate his children in a Christian envir- onment is made clear from the following testimony given in cross- examination (Transcript, at page 165):

Now, Mr McBurney, as a father, I assume, you realize, you had an obligation, to educate your children, that, would be fair, wouldn’t it?

BY THE PLAINTIFF

Of course

BY ME OLSON

And, I assume, that you felt an additional obligation, as a Christian father, to educate them in a Christian environment?

BY THE PLAINTIFF

That’s correct

BY ME OLSON

And, that would be one . . . those two tenets, would be the basis on which you sent your children to the schools, we were talking about yesterday and today?

BY THE PLAINTIFF

Because, I thought those schools, at least tried to provide a kind of education I wanted for our children, Yes.

The learned trial judge dealt in some detail with the nature of the education received at each of the schools. He wrote (at 467; DTC 6495):

Studies of the Bible and of the Christian religion are not merely core subjects of those schools, because, transcending the teaching of particular subjects, Christian thought, perceptions, values and works permeate the entire educational formation [of] the young people who are enrolled in those schools. The charitable quality of the schools operated by the three non-profit corporations could well be characterized as both educational and religious.

And (at 471; DTC 6498):

Read in light of each corporation’s constitution, the respective curricula demonstrate, as the witnesses testified, that the subjects offered are taught as vehicles for the expression and inculcation of religious faith. Robert Hudspith, who holds a Master’s Degree in Engineering from McMaster University, was the first headteacher in the CCL school which opened in 1975. During the previous year, he had been the chairman of the CCL Board of Directors. He testified that the Ontario Ministry of Education was reluctant to grant credits for some courses, history for example, because of the “very overtly Christian approach” and perspective in which the course was taught as “the work of God in history”. The Core Bible Studies, according to Mr Hudspith, were what the board and the faculty “considered to be the very hub of the curriculum”. This was “the central understanding of what learning and education were all about . .. the very foundation the rest of the learning would stem from”. He further explained that “one of the basic notions that underlies the curriculum is that .. . we are servants in much the same way that Christ was. He taught us to be servants . .. service in the sense that whatever skills or knowledge we have, we use it to be disciples of Christ, in service to other people. So . . . it was focused towards using it for an expression of love”. Mathematics, science and language are taught from the same perspective. In addition to the foregoing, the CCL school’s curriculum includes a service project whereby students perform what was once called “corporal works of mercy”, such as visiting retarded children, elderly people and other shut-ins, doing grocery shopping for them and being generally helpful. The service project, a part of the school’s program, takes up about 2 to 3 hours a week according to Mr Hudspith.

And further (at 472; DTC 6499):

All three witnesses testified clearly, as was amply confirmed on cross- examination, that the curricula include, and the schools present and teach secular subjects, to be sure. But it is also clear that religious teaching was and is not kept separate and apart from the teaching of secular subjects. It was and is blended with them such that, if the secular and religious teaching were (to make an analogy) chemical elements, they would be combined in solution of varying proportions from hour to hour throughout the school year. There is no doubt that the enrolled children were and are being provided with knowledge and being taught skills which will serve them well in a secular society. There is equally no doubt that at all material times they were simultaneously being instructed and edified in Christian precepts, and that the teaching of the secular subjects was utilized to that end.

The main point at issue in this appeal is whether the payments in question are “gifts” within the meaning of subparagraph 110(1 )(a)(i) of the Income Tax Act SC 1970-71-72, c 63, as amended.

110 (1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted from his income for the year such of the following amounts as are applicable:

(a) the aggregate of gifts made by the taxpayer in the year (and in the immediately proceeding year, to the extent of the amount thereof that was not deductible under this Act in computing the taxable income of the taxpayer for that immediately preceding year) to

(i) registered charities

not exceeding 20% of the income of the taxpayer for the year, if payment of the amounts given is proven by filing receipts with the Minister that, in the case of a donation to a registered charity or registered Canadian amateur athletic association, contain prescribed information.* [2]

The respondent raises secondary issues which I shall come to presently. In deciding the main point the learned trial judge concluded (at 478; DTC 6504) that: “There were no tuition fees charged by any of the three corporations” and that “. .. no material consideration and no tuition fees were charged or given”. Accordingly, he was able to distinguish the case at bar from an earlier decision of the Trial Division, The Queen v Zandstra (1974) 2 FC 254; [1974] CTC 503; 74 DTC 6416, on the basis that it was there found that “tuition fees of a fixed amount were levied by the recipient charity”.

It is conceded that the organizations in question are “charitable organizations” or “charities” as the case may be. On the other hand, it is contended that the payments were not “gifts” within subparagraph 110(1)(a)(i) of the statute and (except to the extent portions were allowed) that the Minister was correct in refusing to treat them as such for the purpose of computing the taxable income of the respondent for the years in question. The appellant points to portions of the record as indicating that as a member of the charitable organizations or charities concerned, the respondent was expected to make payments during the years his children were attending the schools. For example, the OCSA addressed a letter dated May 25, 1976 to the parents of children attending its school. The letter referred to a recently held membership meeting where the budget for the 1976-77 school year was approved, resulting in “an increase in average tuition or donation fees . . . per family per school year”. A sliding scale fee formula was set out in the letter based upon family income with a maximum fee or donation established. The letter was to be used by parents concerned “to arrive at the fee payable’. The letter went on to read:

As outlined at the Membership meeting, the sliding scale has been a very useful tool in arriving at the contributions parents should make in order to meet our financial obligations. The Board has not had to go back to the parents requesting additional funds in addition to the set fees, since its introduction 3 years ago. However the sliding scale has not been used by all of the parents as it was intended. In accepting the sliding scale formula we are committed as fellow Christians to use this conscientiously, with the purpose in mind to contribute in accordance with what we have received, so that we may carry each other's burden. It appears that some parents simply pledged the minimum or the average.

We urge you to use the scale as intended and complete the attached pledge form and mail it together with your postdated cheques.

The Treasurer must have your payments for next school year by June 15. What is meant, of course, is that sufficient funds have to be received by that time to continue our operation. In previous years it has been difficult to keep up our payments in the vacation months.

To repeat, the main question here is whether these payments were "gifts” within the meaning of subparagraph 110(1)(a)(i) of the statute. To conclude, as did the learned trial judge, that they were not "tuition”, of course, leaves this question unanswered for even if they were not tuition it remains to be determined whether they were "gifts” within the statute. The learned trial judge appears not to have addressed this question directly, having concluded that they were deductible from income because they did not represent tuition or material consideration paid or given in respect of the respondent's children.

The word "gifts” is not defined in the statute. I can find nothing in the context to suggest that it is used in a technical rather than in its ordinary sense. This latter sense was attributed to that word by courts of Australia as it appeared in a like context of an Australian taxing statute allowing "gifts” to be deducted from income in certain circumstances. (Commissioner of Taxation of the Commonwealth v McPhail (1967-68), 41 ALJR 346 at 347; Leary v Federal Commissioner of Taxation (1980), 32 ALR 221 at 221, 237 and 241). The same approach was taken by the Trial Division of this Court in The Queen v Zandstra (supra). It adopted the views expressed by Owen, J in the McPhail case which decided that payments made by a parent to the building fund of a school attended by his son were not deductible as "gifts”. At 348 of the report, Owen, J stated:

But it is, I think, clear that to constitute a "gift”, it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.

The judges of the Federal Court of Australia who heard the Leary case, while generally agreeing with Owen, J, placed some qualification on the test he enunciated. Thus, after referring to the above passage, Deane, J in his concurring reasons for judgment stated (at 243):

I would question the unqualified nature of his Honour’s comments. Ordinarily, a gift will not be made in pursuance of a contractual obligation: the mere fact that a person has made a contractually binding promise to make a gift may not, however, necessarily deprive it of its character as such when it is made: see, eg, the illustration of the father of the prospective bride given by Ridley J in Attorney- General v Holden [1903] 1 KB 832 at 837. Ordinarily, a gift will be without valuable material return; again, the mere fact that a donor receives, either from a stranger or the donee, a valuable return which he may or may not welcome may not prove conclusively that there was no gift: see, eg Collector of Imposts (Vic) v Peers, supra, at 121-2.

If a transfer of property is in return for valuable consideration received by the transferor from the transferee, it will not be a gift by the transferor. If the relevant property is not, for that reason, precluded from being properly regarded as a gift, the above-mentioned considerations indicate usual attributes of a gift, namely, that a gift will ordinarily be by way of benefaction, that a gift will usually be not made in pursuance of a contractual obligation and that a gift will ordinarily be without any advantage of a material character being received in return. I would add to those usual attributes of a gift, the attribute that a gift ordinarily “proceeds from a 'detached and disinterested generosity’, Commissioner v LoBue (1956) 351 US 243, 246; ‘out of affection, respect, admiration, charity or like impulses’. Robertson v United States 343 US 711, 714”; See also Overseers Etc of the Savoy v Art Union of London [1896] AC 296 at 308 and 312; Collector of Imposts (Vic) v Cuming Campbell Investments Pty Ltd, supra, at 641. In the clear case, one will be able to determine from overall impression of the circumstances whether the relevant transfer can properly be described as a gift. In a borderline case involving dispute as to whether a particular transaction constitutes a gift . . . the presence or otherwise of these usual attributes of a gift will provide the reference point for answering the essential question remains, however, . . . namely, whether the transfer in question can as a matter of ordinary language, properly be described as a gift.

Apart from this qualification (which I would not consider material), the approach taken by Owen, J in the McPhail case has stood through the years and has found favour in the Trial Division of this Court in the Zandstra case. That case also involved annual payments made by a taxpayer to a charitable organization of which he was a member. That organization, as here, operated a Christian school which two of the taxpayer’s children attended in the years the payments were made. The amount of payments was arrived at in much the same manner as in the present case, being based upon projected school operating costs and the number of children attending. Parents were assessed on the basis of family income. It was their view that payments were made out of a sense of moral obligation rather than a legal or contractual one. In holding that these payments were not “gifts” within the meaning of subparagraph 27(1)(a)(i) of the Income Tax Act (being in all relevant respects similar to subparagraph 110(1)(a)(i)), Mr Justice Heald stated (at 262; CTC 509):

It seems clear from the evidence of most of the witnesses that they considered they had a primary duty to their own children to provide them with a Christian education in a separate Christian school and that obligation has been discharged by the payments to the Jarvis School. Such a factual situation clearly, in my view, removes these payments from the “gift” category.

There can be little doubt that here, too, the respondent saw it as his Christian duty to ensure his children receive the kind of education these schools provided. The payments were made in pursuance of that duty and according to a clear understanding with the charities that while his children were attending these schools he would contribute within his means toward the cost of operating them. I cannot accept the argument that because the respondent may have been under no legal obligation to contribute, the payments are to be regarded as “gifts”. The securing of the kind of education he desired for his children and the making of the payments went hand- in-hand. Both grew out of the same sense of personal obligation on the part of the respondent as a Christian parent to ensure for his children a Christian education and, in return, to pay money to the operating organizations according to their expectations and his means. In my judgment the Minister was correct in refusing to treat these payments as “gifts” under subparagraph 110(1)(a)(i) of the Income Tax Act.

It is significant, in my view, that in the years after his children were no longer attending the OCSA school, the respondent’s payments to that charity declined dramatically. With respect, I am unable to draw from this evi- dence the inferences that the learned trial judge was able to draw, namely (at 477; DTC 6504) that “there is nothing to be made” of this fact and, specifically, that “no inference of his paying a tuition fee can be drawn in these circumstances”. On the contrary, this evidence supports the appellant's contention that the payments made by the respondent in 1976 and 1977 were directly related to the presence of his children at this school where they received the Christian education he felt in conscience bound to secure for them.

I have already concluded that these payments were made out of a sense of Christian duty to ensure these children a Christian education and to contribute toward the cost of that education. It is also argued that they were made in pursuance of a legal obligation to send these children to school. As a parent residing with his family in Ontario the respondent, it is argued, was bound by certain of the provisions of section 20 of the Education Act, SO 1974, c 109. By subsection (5) of the section, unless his children were excused from attending an elementary or secondary school, he was obliged to “cause” them to do so. An exception is to be found in paragraph (a) of subsection (2) which provides that a child is excused from attending an elementary or secondary school if “he is receiving satisfactory instruction at home or elsewhere” (my emphasis). In my view, these various provisions cast upon the respondent a legal duty to ensure that his children receive satisfactory instruction at the schools in question and, if not, then to cause them to attend an elementary or secondary school. He was able to meet this obligation by entering into the above described arrangements one aspect of which involved making these payments. While these provisions were not specifically pleaded, I think we can take judicial notice of them as they are found in public laws of Ontario* [3] bearing upon the issue to be decided. From the outset, the dispute here has centred upon the question whether the payments were made voluntarily or, instead, in response to a material advantage received in return. I do not see that failure to plead the statute in this case should bar us from taking notice of it. It would be otherwise had it placed the respondent in a position of permanent disadvantage before the Court. Such is not the case here. The essential facts rendering the statute of some relevance were pleaded by the appellant or were admitted. It was alleged that the payments were not deductible from income because they represented consideration paid for the education of the children rather than “gifts”.

The respondent raises two secondary issues in paragraphs 29 and 30 of his memorandum of fact and law:

29. If some but not all of the Respondent’s contributions to the subject schools were “gifts”, the Respondent submits that the Minister disallowed too much. The Minister should have applied paragraph 7 of Information Circular 75-23 rather than paragraph 9 of that Circular when reassessing the Respondent, fully taking into account the religious nature of the schools.

30. It is respectfully submitted that before reassessing the Respondent, the Minister should have given the Respondent an opportunity to be heard on the subject of the schools’ cost allocations so that if he wanted to, he could have tried to bring himself within the more favourable provisions of paragraph 7 of Information Circular 75-23. It is no answer for the Minister to say that the Respondent had the right to appeal, because the Circular is a matter of administrative practice rather than substantive law.

Information Circular 75-23, bearing the formal title “Tuition fees and charitable donations paid to privately supported secular and religious schools”, is dated September 29, 1975. It deals from an administrative standpoint with payments made to support schools of the kind that provide both secular and religious education. I am satisfied on the record that such was the case here, where, in addition to religious subjects, secular subjects such as history, mathematics, science and language were also taught even though from a Christian perspective. The information circular appears designed to assist a taxpayer in gaining whatever advantage may be had under subparagraph 110(1)(a)(i) of the Income Tax Act from payments made to privately supported schools which are both secular and religious. It recognizes that receipts may be issued for income tax purposes for a portion of an amount paid to attend schools of this kind and sets forth two methods of calculating the deductible part of the amount paid depending on how the school maintains its accounting records. These methods are contained in paragraphs 7 and 9 of the circular:

7. The most favourable treatment will be received where the school can and does segregate the cost of operating the secular portion of the school and the cost of providing religious training. Under this method, the net cost of operating the secular portion of the school is to be pro-rated over the number of pupils enrolled during the school year to determine a “cost per pupil” for the secular training. An official donation receipt can be issued for that portion of a payment which is in excess of the pro-rated “cost per pupil” for academic training. If a taxpayer has more than one child in attendance at the school, the amount to be deducted from his total payment, to determine the donation portion, is the “cost per pupil” for academic training multiplied by the number of his children enrolled during the school year.

9. Where such a school which operates in a dual capacity does not or cannot segregate the cost of operating the secular portion of the school and the cost of providing religious training, a donation receipt can be issued only for that part of the payment which is in excess of the net operating “cost per pupil” of the whole school for a school year. The net operating cost of the whole school in this case will be the total operating costs of the school including both secular and religious education (excluding capital expenditures and depreciation) less miscellaneous income, grants and donations from persons with no children in attendance, unless such grants or donations were designated for capital purposes. “Cost per pupil” will be the above described cost divided by the number of students enrolled during the school year. For taxpayers with more than one child in attendance, the rule in the last sentence of paragraph 7 above will apply using the “cost per pupil” of the whole school.

In arriving at the deductible portion of the 1976 and 1977 payments for purposes of reassessment the Minister applied the formula appearing in paragraph 9 of the information circular. I am persuaded that he was correct in so doing. There was not made available to the Minister a segregation of “the cost of operating the secular portion of the school and the cost of providing religious training” such as would have enabled him to apply paragraph 7 of the information circular. In fact, no segregation of cost was done for the simple reason that in the eyes of these charities secular subjects taught from a Christian perspective constituted the teaching of religion. In my view the Minister was left with no alternative but to apply the formula set forth in paragraph 9. I cannot accept the respondent's contention that a cost segregation was submitted to the Minister but was ignored in making the reassessments. In my opinion the weight of the evidence is the other way. There is some suggestion in the record below that one of the charities, the OCSA, by a letter to Revenue Canada of June 7, 1980 at- tempted to provide a cost segregation but that letter was not entered into evidence at trial. This attempt at cost segregation was found by the Minister to be unsatisfactory and, on the record before us, in my view we are not in a position to say that the contrary was true.

Finally, it is argued that the Minister ought to have given the respondent an opportunity to be heard on the question of cost segregation before the reassessments were finalized and thereby, if he could, bring his case within paragraph 7 of the information circular rather than paragraph 9 which he perceived as less advantageous. In effect, it is argued that there was here a denial of natural justice. I am unable to accept this contention either. The respondent was reassessed upon relevant aspects of his 1976 and 1977 income on December 22, 1980. He made no attempt to communicate any objection to the Minister until March 6, 1981 when he filed notices of objection. In each of those notices he expressed the wish . . . to appeal immediately to the Federal Court of Canada and waives reconsideration of the subject assessment by the Minister”. By letter of May 19, 1981 the Minister declined to grant this request and informed the respondent that his objections to the 1976 and 1977 reassessments would be considered by the Appeals Branch . . as expeditiously as possible". In fact, these reassessments were confirmed by notice of confirmation dated May 26, 1981.

In my judgment the evidence establishes that after the reassessments were issued, the respondent had no interest in making representations to the Minister concerning cost segregation and possible application of paragraph 7 of the information circular. Rather, he was intent from an early stage on submitting the dispute to the Courts and he did so. He cannot now be heard to say that he was denied an opportunity which he, himself, chose not to seek. In view of this conclusion it is not necessary to consider the wider question, viz, whether the rules of "natural justice" have any place in the administrative process when the results of that process formed the basis of an action in the Court.

For the foregoing reasons, I would allow this appeal with costs both here and below and would restore the assessments or reassessments made herein by the Minister of National Revenue in respect of the respondent’s taxation years 1976 and 1977.

Appeal allowed.