AMENDED
REASONS FOR JUDGMENT
Pizzitelli J.
[1]
These cases were heard at the same time and on
common evidence.
[2]
The Appellants appeal reassessments from the
Minister of National Revenue (the “Minister”) denying
them charitable tax credits pursuant to section 118.1 of the Income Tax Act
(the “Act”). Specifically, the Appellant,
Douglas Moshurchak, was denied recognition of charitable gifts claimed for 2004
totalling $57,004, and for 2005 totalling $928,052. The said Appellant claimed
a cash donation of $14,250 and an in‑kind donation of $42,754 for 2004,
and a cash donation of $116,000 and an in‑kind donation of $812,051 for
2005. For 2006, the said Appellant carried over unused deductions, after
transferring some to his spouse, which were also denied. The Appellant, Juanita
Mariano, was denied recognition of charitable gifts totalling $45,044 for 2005,
consisting of a cash donation of $7500 and an in‑kind donation of $37,544.
I. The Legal Issues
[3]
The Respondent has identified the 5 legal issues
related to determining the issue of whether the Appellants were properly denied
their charitable contributions, namely;
1. Did
the Appellants make any ‘gifts’ to Millenium and CCA [the charities later
defined] within the meaning of section 118.1? The Respondent says this involves
determining whether the Appellants had the “donative
intent” to do so, as well as whether a gift was actually made having
regard to the other requisite elements of a gift.
2. Is
the Global Learning Trust (2004) a valid trust at law? The Respondent challenges
the validity of the Trust due to to its failure to have “certainties” present or due to the non-exercise of
unassignable duties by its Trustee.
3. Is
the GLGI Program and all the transactional steps involved in it a “sham”?
4. If
1 and 2 are answered in the affirmative and 3 in the negative, then was the
fair market value of the licenses donated what the Appellants claimed?; and if
so,
5. Do
subsections 248(30) to (32) apply so as to reduce the eligible amounts of the gifts
to Nil?
[4]
The Appellants take the position that the only
real issue in dispute is the fair market value of the gift in kind of licences
which, they argue, their expert witness report confirms is higher than the
value of the tax receipts claimed by all the Appellants; save and except that
it concedes that the value for the Appellant, Douglas Moshurchak, for its 2005
year was only $423,057 and not the $812,051 claimed by him for the year, while
asks that the value of the licences be valued at $52,724 for 2004, instead of
the lower amount of $42,754 claimed. For Mariano, the value sought is $42,682
instead of the lower amount of $37,544 actually claimed. Let me just say,
bluntly, that I will not allow any increase in the charitable donation over the
amount of the charitable tax receipt in any event as it is trite law that a
claim must be based on the issued charitable receipt.
[5]
I intend to review and analyse the above issues
in dispute after a brief review of the relevant facts and description of the
donation program involved.
II. Background
facts and Description of Donation Program
[6]
The donation program known as the Global Learning
Gift Initiative (the “Program”) involved an
offshore entity, Phoenix Learning Corporation (“Phoenix”),
which was a Bahamian corporation, acquiring software licenses consisting of 6
different courseware titles, at nominal value, ranging from 13.3 cents per licence to 26.7 cents per licence, from a Florida
corporation, Infosource Inc. (“Infosource”), and
in turn, gifting most of such licenses to a Canadian trust, Global Learning
Trust 2004 (the “Trust”), and directly or
indirectly selling the balance to such Trust in order to fund its purchase of
licences from Phoenix. The Trust was settled by a Mr. Morris, a Bahamian
resident and expat Canadian under the laws of Ontario and of which Global
Learning Trust Services Inc., an Ontario corporation, was the appointed trustee
(“Trustee”). The Trust then distributed them to
the participants, like the Appellants, who, after submitting a predetermined
set of documents described later, were accepted as capital beneficiaries of the
Trust; who in turn donated them to a select charity, Canadian Charities
Association (“CCA”), and received a donation
receipt having a purported value that exceeded the donation receipt received
for their cash outlay to another charity, Millenium Charitable Foundation (“Millenium”), by a factor of 3 or more times.
[7]
The Program was promoted by Global Learning
Group Inc. (the “Promoter”) a Canadian
corporation owned by Robert Lewis, whose name was linked to earlier donation
programs such as Global Learning Systems, which entered into letter agreements
with both charities for a fee. The Agreements indicate that the Promoter was to
receive about 20% of the cash donations made to Millenium, net of its expenses
in relation to the Program, and 20% of the amount of both the cash and in‑kind
donations made to CCA. Millenium redonated 80% of the cash donations it
received to CCA so, in the end, retained only a small portion of the cash
donations it received from which it had to pay its operating expenses,
including fees paid to other entities like JDS Corporation (“JDS”), of which one Mr. Denis Jobin was the sole
officer, director, shareholder and worker, for administration services such as
maintaining a database and preparing and/or issuing tax donation receipts on
its behalf.
[8]
The other parties involved in the Program, aside
from the lawyers for the Promoter who appeared to have acted for almost
everyone involved at some time or another, other than for Infosource Inc., were
the administrators of the program. IDI Strategies Inc. (“IDI”), a corporation owned or controlled by James
Penturn and Richard Glatt that had been involved with earlier donation
programs, contracted with the Promoter to effectively administer the program
for an annual fee that consisted of a lump sum of cash and a percentage of the
cash donations made by donors under the Program, payable on the date of each
such donation and which the Promoter directed Millenium to pay out of funds
payable to it within the terms of the Promoter’s letter agreement with
Millenium above discussed. The services IDI provided included general administrative
and record keeping, developing and maintaining an electronic database for
recording the details of the donors’ identification and contact information and
their donations of cash and other properties, handling all verbal inquiries and
preparing all required documentation in relation to the Program. JDS above
mentioned was also contracted by the Promoter to perform computer consulting
work, evidenced by numerous invoices issued to and paid by the Promoter in
2005, was contracted by the Trust to develop, maintain and host a database and
register and record complete records of all capital beneficiaries and the
property received and distributed by the Trust; all for essentially a lump sum
set‑up fee and monthly fee of $3000; performed contract work for IDI as
evidenced by payments made to it, and even kept databases and prepared tax
donation receipts for Millenium and CCA, even though it had no contract with
CCA but because, as Denis Jobin of JDS testified, they were all part of the
same program from which he received instructions from Jack Keslassy of IDI,
with whom he shared a small office. It should be noted JDS prepared the
Assignment of Licences and related documents, including the Trust resolution
approving the acceptance of participants as capital beneficiaries and the
allocation of a specific number of licences.
[9]
Another relevant party involved in the Program
was Escrowagent Inc. (the “Escrow Agent”), a
corporation controlled by Allan Beach, one of the solicitors for the Promoter,
and others, who purportedly received documents from each applicant, including
the Appellants, consisting of a Deed of Gift to Millenium for a cash outlay, a
Cheque to Millenium for such outlay, a Deed of Gift of the In‑kind
property ( i.e the courseware licences) to CCA, a cheque of $10.70 to the
Escrow Agent for its fees, an Application for Consideration as a Capital
Beneficiary to the Trust, and two directions to the Escrow agent authorizing it
to deliver the gifts and accompanying Deed of Gift to the requisite charities,
to date such cheques or documents to reflect the date of actual delivery and
arrange for delivery of charitable receipts back to the donor- all if the donor
did not revoke such gifts within 72 hours for the cash gift and 48 hours for
the licences gift after being notified by email of being approved as a capital
beneficiary and given a distribution of property from the Trust; and, in some
cases, the donor would execute a Waiver of the time periods purportedly allowed
for them to change their minds, referenced in the Deeds of Gift above, as in
the case of Mariano (all such documents or items hereinafter together referred
to as the “Transaction Documents”). All of the
Escrow Agent’s services were clearly effectively undertaken by IDI and JDS from
the evidence which includes correspondence from the Escrow Agent to the CRA
confirming it, in fact, only played a small role and that the contemplated
deliveries were made by IDI, JDS or others.
[10]
Infosource, earlier mentioned, was the developer
and proprietary owner of the 6 instructional courseware titles that formed the
subject matter of the licenses in issue (the “Licenses”)
described as:
1. Office
2000 Seminar on a Disk, which involved training for various Microsoft Office
applications at beginner, intermediate and advanced levels;
2. How
to Master Office XP, which was similar to Office 2000 Seminar on a Disk updated
for Office XP;
3. How
to Master Office 2003, which related to Microsoft’s further update of its
Office products;
4. IC3,
which was an internet and computing course certification to enable the user to
obtain the competency;
5. A+
2003, which dealt with an application that could be used for individuals
training to become computer hardware technicians to handle the use of PCs; and
6. MCSE
2000, or the “Microsoft Certified Systems Engineer for 2000”, which was a more
advanced application related to deploying Windows 2000 to multiple PCs.
[11]
Infosource sold Licenses to its courseware,
substantially all in the U.S. market with less than 5% in the Canadian market, which
were packaged for one to multiple titles, were perpetual or time limited, and
were for single or multiple users. At the relevant time, the products were
delivered online or in CD Rom formats. The online delivery for multiple users
involved the setup of an access site with a password. This option provided
clients with administrative access and the ability to track the activities of
their users through the so-called learning management system (the “LMS”).
[12]
Infosource entered into various Licence agreements
with Phoenix from 2004 to 2007, however the two most relevant are the two
initial agreements reflected by an agreement dated October 20,2004 and a
Schedule “B” amending the initial agreement dated September 14, 2005 pursuant
to which Infosource transferred 250,000 licenses for each of the courseware
titles to Phoenix on both dates, for a fee of $400,000 and $200,000 U.S.
respectively; thereby transferring 3 million Licenses, consisting of 500,000
licences per courseware title, for a total fee of $600,000 within that one year
period (hereinafter referred to as the “Master License
Agreements”). The Master License Agreements permitted assignment of such
licenses to third parties on subsequent notification to Infosource and allowed
the holder, at its expense and from an authorized party, to convert the
licenses to CD Rom format only, on a basis of one courseware title per CD. By
the end of 2006, more than 5,000,000 of these Licences had been transferred to
Phoenix, pursuant to all the respective License agreements between them. It is
these Licences that were purportedly transferred through a “pipeline”; from Phoenix to the Trust to the
Appellants to CCA.
III. Position of Parties
[13]
The Appellants argue that the Court should focus
on the need to see the transactions through the lens of the Appellants’ appeals.
In short, the Appellants’ position is that they met the four conditions of
making the cash donation: i.e., 1. they made the donation; 2. the donation
was made to Millenium, a registered charity; 3. they obtained a valid donation
receipt; and 4. they claimed the deduction in the appropriate year. They argue
the cash gift was voluntary and made the donation to benefit the charity, and
achieved a tax savings. With respect to the donation in kind of Licences the Appellants
say they have also met all the conditions; namely, 1. they received and
owned the Licenses; 2. they donated the Licenses to CCA or its successor; 3.
CCA was a registered charity; 4. they obtained a valid receipt; and 5. they
claimed the deduction in the appropriate year.
[14]
The Appellants argue that the circumstances
behind them obtaining the Licenses, i.e, the chain of title for the Licenses
from Infosource to Phoenix, then to the Trust, then to the Appellants and then
finally to CCA are irrelevant, as is the fact the charities were subsequently
deregistered. Qua Appellants, they argue, all the conditions were met at the
time of the gifts and the gifts were separate, unconditional and did not result
in any other benefit to them other than their desire to make a gift and obtain
their entitled tax advantage therefrom. They point out that the Minister, in
fact, assumed all the aforesaid conditions, including that they executed the
appropriate deed of gifts, the charities were registered, they received receipts
and they executed all the necessary documentation. In short, “we dotted the i’s and crossed the t’s” as evidenced
by the Transaction Documents not in dispute and so qualify for the tax credits
claimed.
[15]
The Respondent takes a different approach than
the Appellants. The Respondent alleges that the Appellants participated in the
Program, a variation of an earlier scheme known as the Global Learning Systems,
that was marketed so as to indicate the result of participating was that a
participant would obtain a net or total cash advantage after the refunds from
charitable tax credits in relation to the purported gifts that exceeded the
participant’s cash outlay, which the Respondent described as essentially a “participation fee”. The Respondent described this scheme
as being one where the Appellants executed a predetermined set of documents at
the same time, the Transaction Documents; all of which were part of a donation
scheme whereby the tax donation receipt for the gift of Licences exceeded the
donation receipt for the cash gift by a multiple of three of more, resulting in
a net profit. In fact, the ratio of value of the tax receipt for the gift in
kind to cash for the Appellant Moshurchak was, in fact, 3:1 in 2004 and
about 8:1 in 2005, while being 5:1 for Mariano in 2005.
IV. Analyses of Issues
A. Was There a Gift by the Appellants to the Charities?
[16]
There is no dispute that the ITA does not define
what a “gift” is. The definition of gift is
found in established case law; namely, from the Federal Court of Appeal decision
of Linden J.A. in The Queen v Friedberg, 92 DTC 6031, at page 6032, (affirmed
by the Supreme Court of Canada):
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 … 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.
[17]
The three requisite elements of a gift thus are
that: 1. there must be a voluntary transfer of property; 2. the property
transferred must be owned by the donor; and 3. there must be no benefit or
consideration to the donor, which element has, in later jurisprudence, been
taken to mean that the donor must have had ‘donative intent’.
[18]
In The Queen v Burns, 88 DTC 6101, a
decision of Pinard J. of the Federal Court affirmed by the Federal Court of
Appeal ([1990] FCJ No. 174) discussed the concept of donative intent at p.
6105:
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 … 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. …
[19]
The Respondent has argued that the principle of
donative intent then has an essential element that the donor must intend to
impoverish himself or “grow poorer” from the
gift. I agree that this is accepted law. In The Queen v Berg, 2014 FCA
25, 2014 DTC 5028, Near J.A., in finding the taxpayer “did
not have the requisite donative intent for the purposes of section 118.1 of the
Act” stated:
[29] … In my view, Mr. Berg did not intend to impoverish himself by
transferring the time share units to Cheder Chabad. On the contrary, he
intended to enrich himself by making use of falsely inflated charitable gift
receipts to profit from inflated tax credit claims. …
[20]
It is clear that the element of “impoverishment”
is the crucial element to be found in determining donative intent, and that it
is often couched in the language of “impoverishment”,
or “not enriching one’s self” or “profiting from the gift” as indicated in Berg,
but also in many cases before this Court, including Bandi v The Queen,
2013 TCC 230, 2013 DTC 1192, and Glover v The Queen, 2015 TCC 199,
[2015] TCJ No. 160.
[21]
It is also clear from the above that the
expectation of receiving or actual receipt of a tax receipt itself from a
charity does not per se vitiate any gift. The tax advantage resulting
from claimed donation receipts is, after all, not the “benefit” contemplated by
Friedberg and other case law above mentioned. This does not mean,
however, that the expectation of an “inflated”
tax receipt exceeding the value of the property transferred or the receipt of
any other benefit does not vitiate a gift; all of which will depend on whether,
in the circumstances, the taxpayer intended to impoverish himself.
[22]
I note at this time that the Appellants’ counsel
argued that the Appellants deprived themselves of both the cash and licences
and hence impoverished themselves. The concept of deprivation in the context of
transferring the property to the donee, itself a separate requirement of a gift
as above alluded to, does not, in my opinion, equate with the concept of
impoverishment, otherwise every transfer of property would automatically
qualify as impoverishment. The concept of impoverishment means more than
depriving oneself of property; it clearly means depriving oneself of property
in such a manner as to not benefit from such deprivation. The manner in which
the Appellants frame the issue is simply incorrect in my opinion.
[23]
The Appellants also rely on the decision of
Justice Woods of this Court in David v The Queen, 2014 TCC 117, 2014 DTC
1111, who in turn relied on the Federal Court of Appeal decision in The
Queen v Doubinin, 2005 FCA 298, 2005 DTC 5624, for the proposition that the
receipt of an inflated tax receipt should not usually be considered a benefit
that negates a gift. Doubinin, at paragraphs 14 and 15, makes it clear
that the taxpayers in that case could not have relied on the inflated tax
credits because the charity in question could not have issued a tax receipt to
the taxpayers due to the fact the contributions were made by a third party and
so, on the specific facts of that case, Sexton J.A. found that “… it cannot be
said that the Respondent received any actual benefit from the “inflated tax
receipt”.”; thus, the expectation of the inflated tax receipt was irrelevant.
In David, a case involving the purchase of inflated tax receipts,
Justice Woods decided it would not be fair to decide the appeals on the basis
of a donative intent argument raised by the Respondent at trial since it had
not pleaded such assumption and granted the taxpayers a deduction for the cash
actually expended. David was appealed by the Respondent, has been heard
and a decision is pending by the Federal Court of Appeal. Accordingly, I am not
swayed by the Appellants’ argument in this case, as the issue of donative
intent has been specifically pleaded. Moreover, the language of the Federal
Court of Appeal in Berg, above referred to, suggests otherwise at par
24:
[24] The underlying facts are not in dispute. The series of
interconnected and pre-arranged transactions set out earlier in this judgment
have been determined and are not in question, nor is the intention of Mr. Berg
in dispute. It was accepted by the judge and it is evident from the record that
Mr. Berg understood from the outset that the series of interconnected and
pre-arranged transactions (or the “deal” as Mr. Berg himself described them as
referred to at paragraph 27 of the judge’s reasons) were designed to mislead
tax officials as to the FMV of the property transferred to Cheder Chabad. This
was done solely for the purpose of receiving inflated tax receipts and claiming
inflated tax credits. Nor can there be any doubt that Mr. Berg’s
participation in the scheme was conditional upon him receiving the pretence
documents to support his inflated claims.
[Emphasis added]
[24]
It seems at least clear to me that where a
taxpayer is aware he is receiving inflated tax receipts in the circumstances
that the expectation of inflated tax receipts is a benefit that vitiates the
gift, as Near J.A. found in Berg and I would suggest for the very reason
that such finding of fact would automatically lead to the conclusion the
taxpayer did not intend to impoverish himself, as Near J.A. also found as a
second reason for allowing the Minister’s appeal, but which it seems logical to
conclude also flows from the first.
[25]
The fundamental disagreement between the parties
in this matter lies in their framing of the issue. The Appellants argue that
the gift of cash is separate and unconnected to the gift in kind and hence,
since the Appellants only expected to receive a tax receipt equal in amount to
the fair market value of those unconnected gifts of property, there is, in fact,
no expectation of anything other than those expected fair market value receipts
and hence no benefit received. In other words, they only expected to receive a
tax receipt for the fair market value of the gifts, not an inflated value. In
fact, each of the Appellants testified that they expected to benefit charities
by gifts of cash and in kind with no strings attached and receive the tax
receipts to which they were legally entitled for so doing. The Appellants argue
that their position is evident from both the intention of the parties,
evidenced from their testimony, as well as the Transaction Documents themselves.
[26]
The Respondent’s position is that the Appellants
expected, for making their cash gift to Millenium, to be accepted as capital
beneficiaries of the Trust and receive a distribution of Licences as a result,
which had a fair market value about equal to the value of Licences requested by
them in their application to be accepted as a capital beneficiary and as
identified in the valuation of the EMC Partners communicated to them by the
Promoter; in essence, the two gifts are part of the same transaction and
connected. The benefits the Appellants expected to receive are, in fact,
numerous, a “chain of benefits” as described by the Respondent in argument;
namely, the expectation to be accepted as a capital beneficiary, the
expectation to be distributed Licences and the expectation that they would
receive a tax receipt for the donation of such Licences at an inflated value,
in the ratios above discussed, so that, in the end, they had an expectation
they would profit from the cash donation.
[27]
The Appellants suggest that their separate gifts
were motivated by their desire to help others in need. Mr. Moshurchak
specifically testified that, as a teacher, he saw the value in his students
being taught how to use computers and software and saw the Program as a way to
extend that valuable skill to adults who could not afford to buy such software
or be taught by teachers like him. Mrs. Mariano testified that she was
motivated by her desire to help others as well.
[28]
While I appreciate the subjective intention of
the appellants must always be considered, such stated intention is not
determinative but must be based in some objective reality. The Supreme Court of
Canada in Symes v Canada, [1993] 4 SCR 695 described the analysis
of intention to be undertaken, at page 736, as follows:
As in other areas of law where purpose or intention behind actions
is to be ascertained, it must not be supposed that in responding to this question, courts will be guided only by a
taxpayer’s statements, ex post facto or otherwise, as to the subjective
purpose of a particular expenditure. Courts will, instead, look for objective
manifestations of purpose, and purpose is ultimately a question of fact to be
decided with due regard for all of the circumstances. …
[Emphasis added]
[29]
Unfortunately, not only is the Appellants’ own
evidence more consistent with a stated intention of receiving a benefit other
than the moral gift of giving, the evidence from their testimony and
documentary evidence and other relevant circumstances strongly suggests the Appellants
did not have an intention to impoverish themselves but, rather, to profit from
their participation in the program.
[30]
In brief, Mrs. Mariano, a registered nurse,
testified she attended a seminar with a friend and an advisor and viewed a
presentation the same or similar to a slide show put into evidence by the
Respondent, after which she decided to participate in the Program which she
also thought involved the transfer of computers by some entity and not
software. She was not even aware of the type of property she purportedly was
gifting let alone which of the charities involved was making the computers
available to those in need. She admitted she signed all the transaction
documents without reading them through and allowed her financial advisor, one
Ms. “A”, to
complete the documents on her behalf. Moreover, she bluntly admitted that she
would not have donated cash without receiving the benefit of the tax credits
for the gift in kind. All she knew is that she donated $7500 in cash and was
going to get a net tax advantage “… more than that.”
Her subjective intention to receive a benefit is crystal clear from her own
admissions.
[31]
Mr. Moshurchak, a retired teacher, on the other
hand, insisted his intention was solely philanthropic, a desire to help the
needy with no expectation to benefit other than the tax advantage that he did
not consider a benefit, but an entitlement. He testified he attended a few of
the seminars in Saskatoon before making his mind up to participate and identified
a slide show presentation put to him by the Respondent as similar or the same
as that he viewed at such presentations. He testified that he understood that
he did not have to donate any Licences received as a capital beneficiary to CCA
and could, for a small fee, have the licences converted to CD Rom format and
keep them for himself or donate them to another charity. However, after making
inquiries, he decided there was no charity in Saskatchewan that could use them
so left them with the default charity identified in the Direction forming part
of the Transaction Documents, namely, CCA. There was no evidence tendered as to
the details of any such inquiry, neither to locate another more local charity
to donate them to, nor, for that matter, to substantiate where and at what cost
he could have had them converted to CD Rom format. There is nothing in the
promotional materials, be it the slide show run by the Promoter at the hotels,
nor any other evidence in any online site or otherwise, that dealt with such conversion
procedure in any detail or disclosed the cost thereof. Moreover, aside from
testifying he went online to ensure CCA was a registered charity and phoned it
to make sure they were in operation, he does not appear to have made any effort
to investigate their use of the Licences, whether and how they converted them
to CD Rom or how they distributed them. For someone that evidence showed had no
history of making any large donations, or any donations beyond the $50 to $100
range in any prior years, who suddenly donates $14,250 in one year and a
purported $116,000 in another for the stated purpose of benefitting needy
adults to learn how to operate computer software, without taking steps to
ensure such largesse was properly converted and distributed and thereafter
following up to see if he got his money’s worth, seems incredible. He seems not
even to question the fact that two of the courseware products, the MCSE and A+
were highly technical software designed for advanced users for certification of
computer hardware systems and multiple users, as earlier described, a far cry
from the How to use Microsoft basic programs the other products referred to.
[32]
Moreover, Mr. Moshurchak also testified he
decided to not revoke his cash gift to Millenium because, from his inquiries,
he was satisfied it was a “United Way like charity.”
There is no evidence given as to why Mr. Moshurchak came to that conclusion and
the only evidence of a description of Millenium put out by itself was from a single‑page
web site Millenium had in the years in question, as confirmed by a Mr. Kroger
who testified as the executive director of Millenium, that described it as
accepting donations and making donations to other registered charities and
specifically only mentioning its support of CCA but no other charities. The
only evidence of a description of Millenium found in the promotional materials
of the Promoter is that it is a “foundation’s
foundation” and “the expert’s source for
charities to turn to for support”, yet absolutely no charities, other
than CCA, are mentioned in the same promotional material. This is hardly the
foundation upon which to base a conclusion that Millenium was a United Way‑like
charity, the latter of which openly advertises the large number of charitable
recipients it contributes to.
[33]
Mr. Moshurchak, who testified he had experience
in identifying and choosing software for his school board and teaching its use
to his students, seems to have put very little thought or energy into
investigating the charities or the conversion of the software onto CD Rom nor
its ultimate distribution, including even whether and to whom it was actually
distributed, something that is totally inconsistent with his stated
philanthropic intention that sprang from his experience, knowledge and professed
interest in the subject matter. I simply do not find his testimony credible.
[34]
Mr. Moshurchak also admitted that it would have
mattered to him if he had not been accepted as a capital beneficiary, that he
understood the program would generate a total cash advantage and agreed that
same would be in the range of 76% based on the Promoter’s presentation using a
3:1 ratio. He also testified that had he not participated in this Program, he
definitely would have made a large contribution to another charity, a statement
I do not find credible given his history of small donations, but could not say
for certain to whom or for what amount but probably not as much, suggesting at
the very least the size of his cash donation was related to the benefit he
received. Mr. Moshurchak also admitted that he and his spouse had commuted
their teacher’s pension and that he was aware the program was marketed as a
means to offset the tax cost of cashing in registered pension plans, as
referred to in the promotional material he admitted reviewing and which was a
factor he considered in deciding whether to participate in the program. All of
these facts suggest his subjective intention was to profit, not impoverish
himself, from his participation in the Program.
[35]
Finally, as far as valuing his stated intention
of philanthropic motivation, the evidence is clear that, in respect of his
large 2005 donation, Mr. Moshurchak and his advisor, one Mr. “S”, negotiated for a larger ratio of licences for
cash, 8:1 based on the actual cash sent by Mr. Moshurchak directly, on the
basis that, as a repeat contributor and having regard to the large size of the
cash donation, he would be able to obtain a larger number of Licenses. He also
negotiated a kick‑back of part of the commission his advisor, Mr. S,
received for what I will bluntly call the sale of the program to Mr. Moshurchak,
and Mr. S. sent a cheque to Millenium for an additional $10,000 for the
benefit of Mr. Moshurchak. Not only is the kick‑back ample evidence
of a vitiating benefit received by Mr. Moshurchak, but the fact he was
negotiating both the kick‑back and the value of Licences he would receive
confirms that the cash and Licences were clearly connected donations in his
mind. Moreover, Mr. Moshurchak’s testimony was expressed in the manner of
“dealing” and “negotiating” the level of his contributions and benefits, more
consistent with making a financial investment than making an unconditional
gift. I should also note that it is quite clear from Marchevaux that the
court will “not disregard a benefit simply because it
was provided by a third party.” In my opinion, as far as Mr. Moshurchak’s
appeal goes, he would be considered to have received a benefit from his gift
just as a result of this kick‑back he negotiated.
[36]
The Appellants also argue that the transaction
documents support their stated intention to support their donative intent and
the non‑connection of the two donations by arguing that they had the
ability in the two respective Directions they executed in favour of the Escrow
Agent to revoke their decision to deliver the cash or gift of licences within
72 and 48 hours respectively of being advised of their acceptance as capital
beneficiaries. Consequently, they argue that they could have made a gift of
cash only, or a gift of licences only, or both or none. On its face, such
options seem to suggest there was no requirement of a cash payment and hence it
could not be seen to be a fee for participating in any scheme.
[37]
Frankly, the evidence of Mr. Jobin, of JDS, was
that no cheques were cashed before any participant was notified of his or her
acceptance as a capital beneficiary by the Trust via an email sent by Mr. Jobin
as part of his duties. Mr. Moshurchak testified he was aware his cheque
would not be cashed until the expiration of such 72 hour period as “that’s … the security” of the program. The Directions
themselves clearly tie a participant’s acceptance as a capital beneficiary to
the cash gift. The practice of the program administrators clearly shows no
cheques were cashed until after the email signalling such acceptance had been
sent out; a practice consistent with the “security” evidence of Mr. Moshurchak
and understood by him.
[38]
It is clear to me that any participants in the
program knew that their cheques for the cash contribution would not be cashed
until they were notified they were accepted as capital beneficiaries and, thus,
would be receiving the further benefit of Licence distributions for further
gifting. There is no evidence anyone, let alone the Appellants, ever revoked their
Licences donations or elected to keep the Licences for themselves.
[39]
With respect to keeping the Licences, it is
clear the from the details contained in the Assignment of Licences that each of
the Appellants would have received a large number of the 6 types of Licences;
begging the question of what they would do with such a large duplication of
each if they were retained for their own use. Aside from the fact Mrs. Mariano
was not even expecting to receive Licences, it begs the question what she would
have done with multiple copies of them, 195 in all, or what Mr. Moshurchak would
have done with over 4,500 Licences purportedly distributed to him consisting of
over 700 of each of the 6 types of Licences in 2005 alone. Considering
there is no evidence, as earlier mentioned, that any participant was notified
what the actual cost of converting the Licences to CD Rom format for his own
use would be in any of the promotional material or Transaction Documents
pertaining to the Program, and given the testimony of Mr. Jobin, who issued
donation receipts on behalf of CCA, that no one ever elected to keep them
throughout the entire program, I am satisfied such option was window dressing
at best; designed to give CRA the impression there was an actual choice or that
the donations were unconnected.
[40]
I also note that the purported target of these
philanthropically issued Licences was the charitable recipient, not those that
could afford to buy them, as the Appellants have taken great pains to point out
in their arguments on the philanthropic intent of Infosource selling the Licenses
to Phoenix in the first place, and so on down the chain, including the gifting
of them by the Trust to the participants and ultimately to CCA, the preferred
entity expressly conveyed by the Trust in the Direction itself. Keeping the Licences
as an option seems inconsistent with the alleged philanthropic purpose of the
program itself and I do not find such option was realistic or intended by
anyone. The option was simply window dressing.
[41]
Counsel for the Appellants points to the fact
that Mr. Wall, the purported educational director of CCA based in Halifax and
the party charged with reconciling such charity’s inventory of converted Licences
at its Toronto warehouse, also received Licences he donated to CCA, as
confirming evidence there was no obligation to make a cash donation to
Millenium as part of the program in order to be accepted as a capital
beneficiary and receive a distribution of Licences. Counsel for the Appellants
argues that this shows anyone could qualify as a capital beneficiary without a
separate cash donation and hence there was no requirement of a cash donation
and hence the two donations are not connected. This begs the question as to how
any member of the public, other than a person like Mr. Wall directly involved
in the Program, who did not attend a presentation of the Program or view the Program
on-line or was not solicited by one of the commissioned sales persons or
advisors, would even know of such option. A cash donation was always mentioned
and integrated into any calculations of net cash advantage or total
contributions. Such position is just not credible.
[42]
In any event, it is the donative intent of the Appellants,
as arm’s length participants in the Program that is at issue here, not that of
Mr. Wall, an obvious insider, who has also been denied the deduction and will
no doubt be affected by the decision rendered in this case, making his
testimony somewhat unreliable. I found Mr. Wall to be a totally uncredible
witness, as I will discuss later on, and am inclined to conclude any
distribution of Licences to him was a benefit of his employment or contract
with the Promoter.
[43]
I must also add that I have a serious problem
with the form of the Direction No.2 executed by the Appellants in favour of the
Escrow Agent, under which the Appellants represent and warrant that they are
the beneficial owners of the Licences, free and clear of any liens. The Licences
are described as being in a Schedule “A”, which was not attached to the
Direction at the time of signing or at any time thereafter and which, based on
the evidence of Mr. Jobin, was prepared by him and communicated to the Appellants
by email at a later date, instructing them they had been approved as a capital
beneficiary and to go online for the details. It is he who date‑stamped
the direction after such events. It is clear the Appellants were not the owners
of any Licences at the time of executing their Direction and thus did not own
anything at the time. They clearly had no knowledge of what number of each of
the respective Licences they purported to own and could not have as that fact
was established later on. Mr. Moshurchak testified the execution of the Direction
on the same date as the other documentation was simply a matter of convenience
to avoid him coming back to sign afterwards, notwithstanding that he testified
he had attended his advisor’s office on numerous occasions beforehand and that
he was only a 10 minute drive away. However, it also begs the question of how a
donor can gift a property that has not yet been identified or own what he can’t
identify. One can argue that the direction, at best, amounts only to a gift of
value, not specific property, especially since the makeup of the number of Licences
was not yet known. It defies logic and common sense to suggest someone can have
the donative intent to give something he cannot even identify yet. In any
event, this document and the explanation of Mr. Moshurchak suggest to me that
he was fully expecting to receive the distribution of Licences in any event in
return for his cash outlay.
[44]
I note in the Promotional materials that the
participants are told:
THE FOLLOWING 3
CRITERIA COMPLETE THE PROCESS
1. YOU make a
cash donation to a charity.
2. YOU become a
beneficiary of a trust.
3. YOU have the
option of donating a Gift in Kind to another charity.
all of which clearly emphasizes the fact
that acceptance as a beneficiary and the implied distribution of property from
the Trust is automatic. Moreover, in reviewing the presentation slides and
other promotional material, it is quite evident little is mentioned of the charities
or their charitable works, other than the names of both Millenium and CCA or
its successor, ICAN, which figure prominently everywhere and are the only two
charities ever mentioned by name, as the emphasis is clearly on the net cash
flow advantage, underlying calculations to demonstrate such advantage and
salesmanship‑like comments on how “No one will dispute that writing a
cheque for $10,000 and receiving a tax credit of $18,564 IS A BAD THING.” or
“WHAT IF There was a way for you to redeem your RRSP’s in a tax efficient
manner”, not to mention many other dangled carrots.
[45]
It is clear that neither the Promoter nor any of
the administrators involved, either hired and paid for by the Promoter, the
Charities or the Escrow Agent, such as IDI and JDS, could be paid under the
program if there was no cash donation. It is clear the Promoter received its
compensation only in cash, pursuant to agreements with Millenium and CCA, both
at the stage they were made by the participants to Millenium, and again at the
stage Millenium redonated 80% of such cash received to CCA who paid the
Promoter, from its cash received, a further amount equal to 20% of both the
value of such cash redonated as well as the value of Licences donated by the
participants to CCA based on the EMC valuation. IDI was paid in cash via the
direction of the Promoter to Millenium, to pay from amounts owing to it, funds
to IDI based also on a percentage of cash donations. If there was no cash,
there was no method of payment to the Promoter and those down the chain and so
there was no business to be carried on by the Promoter or others. Common sense
and the business model clearly identified for the Program support the need for
a cash contribution to make the program work. The fact the program was used to
compensate insiders like Mr. Wall only demonstrates that the Promoter was
willing to ignore its own materials and Transaction Documents when convenient
and what little value the Promoter ascribed to the licences. Mr. Wall is the
only person in evidence who appears not to have made a cash donation in any
event and no doubt there may be a few others like him, but the evidence is that
there are huge numbers of participants identified in all the donation receipt
records as having made cash donations.
[46]
The Appellants have argued that unlike the fact
situation in Bandi and Glover, which were similar schemes where
the appellants therein also applied to be considered capital beneficiaries,
were accepted and had software distributed to them which they donated to
another charity together with a cash donation required by the charity as a
condition of accepting the software donation in order to pay off liens attaching
to the software, the Program here had no requirement of cash to pay off a lien
or to be applied for any other purpose. I do not see what difference it makes
whether the cash donations were tied to the donation in kind in that manner or
not. Such a requirement was certainly treated as evidence of the
interconnection of the two donations in those cases, but the decisions in those
cases do not hinge only on that fact. Hogan J, in Bandi, focused
primarily on the manner in which the scheme was marketed to the taxpayer
therein as evidence of the taxpayers’ intention to profit from their
participation therein. At paragraph 15 thereof, Hogan J. stated:
[15] The
marketing material presented to the appellant shows that the Charitable
Technology Gifting Program was promoted on the basis that the appellant would
acquire software licences having a fair market value in excess of the amount of
the appellant’s alleged cash donation. The material also indicates that the
appellant could keep the software for his own use or, as expected, he could
gift it to the Foundation in return for promised enhanced tax credits. The tax
credits were shown to exceed the appellant’s alleged cash donation so that he
was expected to earn a positive after-tax cash benefit. While the appellant did
not reap that benefit because of the promoter’s failure to properly implement
the Program, I conclude that the appellant’s expectation in that regard is
sufficient to nullify his alleged donative intent.
[47]
The Program here was marketed in similar fashion
to its participants, save that the cash donation was made to a different
charity, Millenium, than the donation of the Licences (to CCA). The evidence is
that Millenium donated substantially all the cash it received from participants
of the Program, net of the Promoter’s fees, to CCA. The fact the cash travelled
through an intermediary or was not linked to paying off any lien or other
encumbrance affecting the Licences, the subject matter of the second gift, does
not affect my conclusion that the two donations were connected as part of the
same program nor does it matter whether the participants had no actual
knowledge of the manner in which the cash flowed. The participants knew enough,
as the Respondent has suggested, in that they knew how the Program involving
the two donations worked and the consequences to them of participation therein.
They were even aware their financial advisors were acting as commissioned sales
agents that entitled them to a substantial commission, between 24% and 30% as
Mr. Moshurchak testified, and so they had evidence of the business nature of
the arrangement. As Hogan J. decided in Bandi at paragraph 16, adopting
the Federal Court of Appeal’s decision in Marechaux v the Queen,
2010 FCA 287, “it is inappropriate to separate transactions forming part of an
integral arrangement into their cash and non-cash parts.
[48]
There is no dispute that the Appellants
voluntarily chose to participate in the program and did not do so under any
duress to do so. The fact that one voluntarily chooses to donate cash to a charity
does not mean such person automatically has the donative intent to make a gift.
In answering the crucial question as to whether the Appellants intended to
impoverish themselves, it is clear they participated in a leveraged donation
scheme that was interconnected and all part of the same transaction or series
of transactions, the same program if you will, that was clearly marketed to
them for the purpose of offering to them and from which they expected to
receive, in return for their cash donation, a number of Licences having an
expected value of 3 to 8 times the cash donation to donate to another charity,
all together resulting in a final benefit in the form of tax receipts entitling
them to claim tax credits that would have, if allowed, given them a profit on
their original cash donation, marketed to range from 56% to 89%, depending on
the province of residence of the participant and based on a 3:1 ratio only. The
higher the ratio of gift in kind to cash donation, the higher the profit
percentages. Mrs. Mariano was honest enough to admit it. Mr. Moshurchak hid
under the veil of an honest and philanthropic citizen until his own evidence
and the documentary evidence of the Transactional Documents showed otherwise;
in fact, showing he was negotiating a deal for even greater benefits than his
fellow participants. In fact, based on the Appellants’ province of residence
and the anticipated profit above, the Respondent has calculated that Mrs.
Mariano would have a net tax cash advantage, after deduction of her cash
donation, of $8,863 for 2005 and that Mr. Moshurchak’s net tax advantage for
2004 would have been $4,527 and for 2005, the huge amount of $241,268. When put
in numerical context, the extent of the benefit is staggering, yet the law is
clear that any benefit or consideration will do to find there was no donative
intent.
[49]
In the end, I cannot see how any person
participating in such a scheme, regardless of whether such person had an honest
belief in the value of the Licences he expected to receive or not, can argue,
based on the manner in which the scheme was marketed and in the makeup and
integration of the Transactional Documents that deliver it, that he or she
expected none other than to profit from, be enriched or not be impoverished by,
such participation, and thus not have the requisite donative intent.
[50]
The Appellants did not have the donative intent
to make the gifts of cash or Licences. This is enough to dismiss the appeals of
the Appellants, however I wish to address the other aspects of whether there
was a valid gift as well for failure to meet the other necessary elements of a
gift; namely whether the donor owned or transferred the property.
B. Ownership and Transfer of Gift
[51]
As mentioned above, the Appellants could not
have identified the number and type of Licences they owned, either at the time
they executed the Deed of Gift nor at the time they were purportedly accepted
as beneficiaries, as the number and allocation of the types of Licences, from
the 6 available Licences having different assigned values, were only formulated
after those events in time, as per Mr. Jobin’s testimony; namely, his computer
program used an algorithm to choose and allocate the number and type of Licences
to be distributed to program participants to closely match the requested value
filled in by or on behalf of the Appellants in the Direction. At best, at the
time of executing the Deed of Gift, the Appellants, or any participants in the
program, would only be aware of the expected value of the Licences they
expected to receive and would not have been able to identify the specific
property they purported to own. This is prima facie evidence the Appellants
could not have owned the Licences they say they voluntary gifted and no
evidence supports otherwise at that time. It simply defies common sense to
suggest someone can voluntarily give a property he does not yet know of or otherwise
has any way of specifically identifying.
[52]
The Respondent has also pleaded in its
assumptions that the Trust itself fails at law and that, even if it did not,
the Trustee did not exercise its discretion to accept capital beneficiaries or
distribute capital property to them and accordingly, under both arguments,
there could be no validly approved capital beneficiaries of the Trust nor any
legal distribution of licences from the Trust to any capital beneficiaries, and
hence the Appellants or any other participants in the Program for that matter,
could not give what they did not have. A brief review of the Trust is necessary
before addressing those issues.
(1) The
Trust
[53]
As referred to above, the Trust was settled by
Michael Morris, a resident of Bahamas, pursuant to a Deed of Settlement dated
November 19, 2004 (the “Trust Deed”) made with
Global Learning Trust Services Inc., the corporate Trustee of which Ron
Knechtel was the owner, officer and director. The Trust was settled by five (5)
$20 U.S. bills but, pursuant to paragraph 2.1(a) of the Trust Deed, the Trustee
had the right to receive and accept further property; in this case, including
the Licenses donated to it from Phoenix from time to time, which include the
2,400,000 Licences donated by Phoenix to the Trust during 2004 and 2005,
pursuant to Deeds of Gift dated November 19, 2004 and December 22, 2005
respectively and more in subsequent years; which Phoenix had originally
purchased from Infosource as earlier described.
[54]
While CCA was the only Income Beneficiary of the
Trust entitled to receive such part of the Trust’s annual income as the Trustee
wished to distribute until its Ultimate Distribution Date, the Trust also had
the discretion to distribute any capital of the Trust to any Capital
Beneficiaries of the Trust as defined in Schedule “B” of the Trust. Paragraph
3.1(b) of the Trust Deed empowers the Trustee to make distributions to “Capital Beneficiaries” and reads as follows:
Until the
Distribution Date, the Trustee shall have the right at any time to pay or
transfer such amount or amounts out of the capital of the Trust Fund to or for
the benefit of any one or more of the Capital Beneficiaries from time to time
and to the exclusion of any one or more of them as the Trustee in the exercise
of an absolute discretion determines.
[55]
Schedule B of the Trust Deed defines “Capital Beneficiary” as follows:
“Capital
Beneficiary” at any time means any sui juris individual, other than the Settlor
and any individual who has at any time contributed any property to the Trust
Fund, and who
(i) made one or more charitable donations to
one or more Registered Charities in the calendar year in which the individual
made an application for consideration for inclusion as a Capital Beneficiary or
in the immediately preceding calendar year,
(ii) received from each of those Registered
Charities a receipt in the form prescribed by the Income Tax Act issued in the
name of that individual or their spouse,
(iii) made written application to the Trustee for
consideration for inclusion as a Capital Beneficiary; and
(iv) whose application for consideration was
approved by the Trustee, in the exercise of an absolute discretion prior to
that time.
[56]
What is clear from the above provisions is that
the Trustee had to exercise its absolute discretion to both determine the
amount or amounts to be distributed out of the capital of the Trust to Capital
Beneficiaries as well as to approve an individual’s application for
consideration as a Capital Beneficiary having regard to the requirements set
out in the definition above.
(2) Failure to exercise
Trustee discretion
[57]
I am in agreement with the Respondent’s position
that both the Trust Deed and the common and statutory law require a trustee to
exercise its discretion and do not permit a trustee to delegate such powers.
[58]
Article 21 of the Trust Deed provides that the “Deed is established under the laws of Ontario” and “shall be interpreted according to the laws of Ontario”.
The Ontario Public Guardian and Trustee Act, RS0 1990, c. P.51 while
permitting a Trustee to delegate its function of investment of trust property
to the same extent that a prudent investor would pursuant to subsection 27.1
thereof, contains no provision that permits a Trustee to delegate any of its
powers of appointment or distributive powers.
[59]
It is also clear that well‑established
case law in Ontario and other provinces support the Respondents position on
this matter. In Partanen Estate (Re), [1944] 2 DLR 473 at 473 (HCJ) (QL),
the Ontario High Court of Justice refused to sanction a request by the Trustees
to approve their plan to turn over funds to a University to establish a
scholarship fund for students of mining or agriculture when the will left the
gift to two trustees who were charged therein to use their “uncontrolled
discretion” to set up a scholarship fund for students of mining or agriculture.
At paragraph 5 thereof, the Court stated:
… [T]he trustees are under the
will to establish such scholarship and/or other funds as they in their
discretion shall decide. What they propose is not properly to be called the
establishment of scholarship and/or other funds, but, rather, the turning over
to somebody else of the discretion as to what scholarship and/or other funds
are to be set up. … What the Court is asked to do, I repeat, is to
sanction a delegation by the trustees of the discretion which the testator gave
to them …
[Emphasis added]
[60]
The Ontario Court of Appeal upheld the Ontario
Court of Justice decision above in RE Partanen, [1944] 2 DLR 473 at 476
(Ont. CA) (QL) specifically on the grounds that the trustees could not delegate
their discretionary decisions:
… We desire to say this, however, that in dismissing the appeal we base
our conclusion upon the second ground specifically stated by the learned Chief
Justice of the High Court, that is, that the trustees are not really doing what
cl. 3(f) of the will authorizes them to do, but are delegating or
seeking to delegate to someone else the duty that they themselves should
perform.
[Emphasis added]
[61]
This same sentiment was expressed in Bellai v
IWA - Forest Industry Pension Plan (Trustees of), 2003 BCSC 1077,
[2003] BCJ No. 1613 (QL), where the British Columbia Supreme Court refused to
permit the Trustees of a Pension Plan to ratify the decision of a subcommittee
composed of both trustees and non‑trustees without effective
consideration. At paragraph 60, the Court stated:
I have concluded that the evidence does not support the suggestion
that the trustees have in fact exercised their discretion, as they are required
to do under the plan. They were not entitled to simply endorse the decision of
the audit committee which membership consists of people other than trustees,
without actually considering the merits of Mr. Bellai’s claim. The plan does
not specifically authorize a delegation of such responsibility, and makes it
the sole responsibility of the Board of Trustees. …
[62]
In the case at hand, there is no wording in the
Trust Deed that authorizes the Trustee to delegate any power to appoint capital
beneficiaries or the power to determine the amount of distribution of property
to any such validly determined capital beneficiary, and it is clear that
Ontario Law does not specifically permit it. The Appellants have not argued
otherwise on the state of this law, but instead argue that the onus is on the
Respondent to establish such fact since this is not information within the
knowledge of the Appellants and they have not since there is no evidence the
Trustee did not exercise such absolute discretion.
[63]
Regardless of whether the Appellants have the
onus of demolishing this assumption made by the Minister or not, it is clear to
me that the Respondent has, in any event, clearly made a prima facie
case that the Trustee did not give any consideration to reviewing any
application for consideration of approving the Appellants as capital
beneficiaries, nor to determining the amount of property to be distributed to
them, and there was no evidence to the contrary during this trial.
[64]
The evidence, earlier alluded to, was that Mr.
Jobin, of JDS, developed and utilized software that allocated the number of Licences
to be distributed to each Appellant, and any participant for that matter, at
weekly closings, based on an algorithm that matched the appropriate number of
different Licences with established values to approximate the value of Licences
requested by each participant in their Direction and completed both the
Assignment of Licences for signature by the Trustee, which, in 2004, involved
the use of pre-signed Assignments given to him and which, in 2005, involved his
authorized use of the electronic signature of Ron Knechtel as officer of the
corporate Trustee. The Trustee could simply not have exercised any discretion
to determine the amount or amounts of the Licences or property to be
distributed since this was done using Mr. Jobin’s algorithm, and it was he who
notified the Appellants by e-mail that they had been accepted and with what
amounts automatically. He did not send drafts to the Trustee for its
consideration or even deal with the Trustee at any time directly and it is
clear he had no reason or instructions to do so since he was provided
pre-signed documents or given authority to apply the trustee’s signature on the
Assignment documents. Since the Trustee could not have exercised this part of
his discretion, it seems to me prima facie proof as well that he did not
exercise the part to approve the Appellants as capital beneficiaries either.
Why would he do one and not the other?
[65]
The evidence is that Mr. Keslassy of IDI, with
whom Mr. Jobin shared a small office, reviewed the package of Transaction
Documents and instructed Mr. Jobin to proceed with the weekly closing
procedures. Mr. Keslassy did not testify, and the Appellants argue therefore
that the Respondent has no proof of what discussions or procedure occurred
between IDI and the Trustee before Mr. Jobin was given instructions by Mr.
Keslassy to proceed with each closing. While Mr. Jobin conceded, in cross
examination, that he could not say what discussions were held between Mr. Keslassy
and the Trustee, it is clear that, as stated above, there could have been no
discussions, at least concerning the determination of those specific Licences to
be distributed, as their makeup was not yet known. Mr. Jobin testified that Mr.
Keslassy was the only person who determined the completeness of the document
package and as long as the documents were filled out properly, an individual
would be accepted, and if not, the documents would not be processed until
rectified. In my opinion, the process of appointing capital beneficiaries and
distributing Trust property was nothing more than an automatic step, “an automated assembly line” as described by the Respondent
in argument, that the Trustee had no involvement in, other than providing
presigned documents or authority to use his electronic signature, the latter of
which was given to Mr. Kepes, the attorney for the Trust and the Promoter, from
the Trustee and passed on. I agree with the Respondent that the process was
such that the Trustee had no involvement, not even rubber‑stamping the
decision to allocate property in the manner done.
[66]
This position is supported by the documents
admitted into evidence through the Joint Book of Documents, which contains a
letter by Ron Knechtel to the Promoter, dated July 20,2005, pursuant to which
Mr. Knechtel objected to the Promoter’s website material, identifying him
personally as the Trustee and demanded such misleading references be removed
and wherein he effectively stated that the Trustee in effect had no role in
choosing capital beneficiaries and distributing property from the following
excerpt:
It is stated in part that: “Ronald C. Knechtel administers the
Trust.” That statement is not correct. I do not administer the Trust. The
trustee of the Trust is “Global Learning Trust Services Inc.” (hereinafter
referred to as the “Trustee”). I am a director and an officer of this
Corporation. The Trustee of the Trust had entered into a contract with “JDS
Corporation”, (hereinafter referred to as the “Corporation”) to provide all
administrative services to the Trust related to the charitable gifting
initiative. The Trustee deals only with entering into service contracts, paying
for services provided by the Corporation to the Trust and filing income tax
returns for the Trust.”
[Emphasis added”]
[67]
While the Appellants object to this letter as
being hearsay, such letter was admitted into evidence as part of the Joint Book
of Documents, both as to its authenticity and relevance. While I appreciate Mr.
Knechtel had passed away before this trial and could not be called to testify,
his letter is then the best evidence we have from the Trustee itself and was
dated at the beginning of the program, not after the audit had commenced, and
so seems more credible as a result. Moreover, this evidence is consistent with
the evidence of Mr. Jobin above.
[68]
There is also evidence, by way of a few letters
Mr. Knechtel wrote to the CRA in 2006 and 2007, contained in the Joint Book of
Documents as well, supporting the Respondent’s position that the Trustee played
no role in approving capital beneficiaries nor in the allocation of the Licences
to them; particularly, his letter of October 25, 2006 which states:
The process of approving and confirming beneficiaries of the Trust
and the distribution of licences to beneficiaries is handled by JDS on behalf
of the Corporation [the Trustee] following established policies.
[69]
As mentioned above, the contract between JDS and
the Trust makes no reference to such role to be undertaken on behalf of the
Trust and there is no written contract between the Trustee and JDS at all. Even
if there was, it is clear from statutory law and common law above discussed
that such Trustee duties could not have been delegated to JDS.
[70]
Furthermore, the evidence shows JDS had a
contract with the Trust to design, develop, host and maintain a database
management program and keep records of all capital beneficiaries and the
receipt, acquisition and distribution of Trust property, but did not have a
contract with the Trustee regarding the carrying out of any distributive
powers. When asked why he would use his software to calculate allocated
Licences and prepare the Assignment of Licences and related e-mails notifying
the Appellants they had been accepted as capital beneficiaries and to give them
their password to access the Program website to view the distribution details,
he testified such duties were part of the closing procedure he was paid to
service, lending credence to the assembly‑line description suggested by
the Respondent. The evidence is clear that Mr. Jobin, through JDS, was
exercising discretionary power of a trustee, with its tacit approval, without
even any legal obligation to do so, but something both Mr. Knechtel, the
representative of the Corporate Trustee, and Mr. Jobin of JDS, confirm was the
in essence part of the latter’s administrative duty; all exercised without any
consideration, input or involvement by the Trustee.
[71]
In the circumstances, I do not find the Trustee
exercised its obligation to determine the amount of property to be distributed
to any capital beneficiary, let alone to determine who the capital
beneficiaries were, in violation of its duties under the Trust Deed, as well as
statutory and common law. While the Appellants may not have been directly
involved in matters pertaining to the creation and administration of the Trust,
they are nonetheless affected thereby. The law is also clear and has long been
established that the failure of the required exercise of discretion of a
trustee renders the decisions ineffective. In Re Wilson, [1937] OR 769 (Ont
CA) (QL), a case involving the delegation by a corporate trustee of discretion
to its general manager, rather than consideration of it by its board of
directors, the Ontario Court of Appeal held, at paragraph 31:
By the will of this testator the discretion to delay realization of
assets is given to the company itself, and consequently is to be exercised by
the board of directors as the agent of the company. In such a case the maxim
delegata potestas non potest delegari applies, and the attempted
exercise of the discretion by any authority other than the board of directors
is ineffective.
[Emphasis added.]
[72]
I should also add that the Appellants were at
least aware of or had the ability to be aware of the importance of the Trust
and the exercise of Trustees’ discretion as being an integral part affecting
the validity of the Program and do not appear to have made any effort to obtain
legal advice on same. Mr. Moshurchak, in particular, admitted that he
reviewed the legal opinion of Cassels, Brock found on the Promoter’s website,
wherein such law firm assumed the exercise of the Trustee’s discretion was a
material fact in rendering its opinion that “the distribution of Licenses by
the Trust to the Donors should constitute a distribution of capital by a
personal trust”, found in paragraph 47 of that opinion, and that “these
assumptions [as listed in Part I] are critically important to the opinions
expressed herein.” While I am not suggesting the Appellants or any other
non-lawyer participants in the program should be assumed to know the
intricacies of Trust law, it seems unconvincing to me that someone investing so
much of his money in a program like this would not bother to obtain legal
advice on the legal risks of doing so, particularly in at least confirming that
the distribution of Licences by the Trust would be valid. When one also considers
that the Direction to the Escrow Agent executed by each participant identifies
that 3% of the donated funds, up to a maximum of $750,000, would be set aside
as a legal defence fund which the applicant could access on condition he used
the Promoter’s counsel, that provision should have set off some alarm bells for
even the most unsophisticated participant, who no doubt will not likely ever
see his cash outlay returned.
[73]
Accordingly, neither the Appellants, nor any
other applicants so characterized, were properly approved capital beneficiaries,
nor was there a proper distribution to them of any capital property of the
Trust. Accordingly, they could not own or transfer property to CCA and thus
fail to comply with these requirements of a gift as well.
(3) Validity of a Trust
[74]
There is no dispute between the parties that in
order for a trust to be valid, it must have the “three
certainties”; namely:
1. Certainty
of intention - meaning the settlor must intend to create a trust relationship;
2. Certainty
of property - meaning the trust must hold legal title to a certain amount of
property; and
3. Certainty
of objects - meaning the property must be distributed to certain beneficiaries.
[75]
The main dispute between the parties pertains to
the third certainty, the certainty of objects. The Respondent’s written
argument, at page 305, quotes Eileen E. Gillese, author of The Law of Trusts,
3d ed., (Toronto: Irwin Law, 2014) at pages 44-45, to describe the necessity of
this certainty for all parties:
The requirement
for certainty is necessary for all parties; it is needed by the settlor to
ensure her intentions will be achieved; it is required by the beneficiaries to
ensure that all who are entitled, and none who are not, receive a share of the
property; it is critical for the trustee to know among whom the property is
being distributed; and it is necessary for the court if it is to step into the
role of the trustee.
[76]
The test for certainty of objects of a discretionary
trust, referenced by Gillese at page 45, who cites the well‑known UK
decision of McPhail v Doulton, [1971] 1 AC
424 at 456, is that “it must be possible to say with certainty whether ‘any
given individual is or is not a member of the class.’”
[77]
In addition, McPhail went on to say, at
page 457, that a discretionary trust will also fail and the gift revert back to
the settlor, “where the meaning of the words used is clear but the definition
of beneficiaries is so hopelessly wide as not to form “anything like a class”
so that the trust is administratively unworkable.
[78]
Frankly, notwithstanding the Appellants’
argument that the wording of the definition of Capital Beneficiaries is clear
and unambiguous, common sense would dictate that the Trustee here would not have
been able to know who was in or out of the class of capital beneficiaries at
any time since at no time would the Trustee have had access to confidential tax
information on Canadian taxpayers, let alone any foreign taxpayers, who
complied with the requirement found in Schedule B of the Deed that requires a
member of the class be one who has made a donation to one or more Registered
Charities in the calendar year, or the preceding calendar year, for which they
received a donation receipt in the form prescribed by the Income Tax Act.
The fact that applicants provided this information to the Trust, at the same
time as executing the Transaction Documents, means the Trustee would only know
those members of the class of potential beneficiaries that actually applied. It
would have no way of knowing all the potential capital beneficiaries who could
but had not applied. In addition, the class was subject to change from year to
year, depending on whether those that qualified in one year also qualified in
another. I agree with the Respondent that the open‑ended nature of the
class of capital beneficiaries and the rolling or changing makeup of the class
from year to year is incompatible with the certainty of objects.
[79]
I must also agree that the class of
beneficiaries is so hopelessly wide as to not form anything like a class. If
“all the residents of London” were too wide a group to form anything like a
class, as found in McPhail above, then I must agree that all Canadians
who made a charitable donation and anyone else in the world who made a
charitable donation entitling them to a prescribed tax receipt from Canadian
registered charities is even wider. I accept the Respondent’s argument that I
could take judicial notice of the fact that 84% of Canadians made such a
potential donation in 2004, based on Statistics Canada, Media
Release/Communique 89-652-X: “Volunteering and charitable giving in Canada”,
(March 13,2015), found on its website.
[80]
The impossibility of how the members of the so‑called
class of capital beneficiaries would be able to identify each other to ensure
no one received a benefit they were not entitled to or how a Court could do so
if it had to assume that role highlights the problem even more, let alone for
the Trustee, especially when one considers that paragraph 3.1(c) of the Trust
Deed requires the Trustee to pay and transfer the capital of the Trust Fund
remaining on the final Distribution Date of the Trust to any one or more of the
Capital Beneficiaries who shall then be living, or paragraph 1(l), which
defines the “Time of Division” as a date prior to the Ultimate Distribution
Date as determined by the Trustee in writing and delivered in counterparts to
every adult beneficiary, which term includes capital beneficiaries, living at
the time of signing same. It would be an administratively impossible task to
identify, let alone serve, such potential capital beneficiaries at any of those
times, and such task became more difficult with each year the program continued.
[81]
I conclude that the Trust must also fail for
lack of certainty of objects, given the impossibility of defining and
administering the class of potential capital beneficiaries as defined.
[82]
The Respondent also makes several alternative
arguments pertaining to the legality of the Trust, both in the context of
failure to meet the certainty of intention and the illusory nature of the
Trust, designed to hide its true object of circumventing the provisions of
subsection 248(35), the recent amendments to the Act that effectively
limit the fair market value of donated property to be the donor’s cost, which
in this case would equate to the cost of the Licences to Phoenix from Infosource
at 13 to 26 cents per Licence had it not been for the wording of subsections
69(1)(c) and 107(2) of the Act which bumps the cost up to the
fair market value as argued; all, frankly, connected to its sham argument as
well. I need not address any of those arguments here, as the failure of the
Trust itself on the above grounds alone renders the Program ineffective.
(4) Alternate Arguments
[83]
As mentioned, the Respondent also takes the
position that if the Court finds the Appellants had donative intent and met the
other requirements of making a gift and if the Trust did not fail for failure
of the Trustee to exercise its discretion and for lack of certainty of objects
and intention, then the Program is a sham or in the further alternative, the
value of the Licences was between 13 to 26 cents per Licence and not the
exponentially larger value as per the Appellants’ appraisals. I will address
the sham argument as well as the valuation issue briefly.
C. Sham
[84]
In light of my conclusions on the first two
issues to be decided, it is not necessary for me to examine the sham argument
in large detail, notwithstanding that I may be swayed by many of the arguments
of the Respondent in that regard, but shall address a few of such arguments.
[85]
It is clear that the Promoter, either directly
or through its subcontractors or agents, undertook the duties of both the
Trustee and the Escrow Agent, above discussed, so that any participant in the
Program was deceived into thinking these parties were active and independent
when they were not.
[86]
It is also clear to me that the Transaction
Documents, particularly the Directions to the Escrow Agent, were also a sham
since the Escrow Agent conducted no activity. Since the evidence shows that
Alan Beach, the solicitor who prepared the precedents for the Transaction
Documents, was also the principal of the Escrow Agent, whom he acknowledged
played no active role in correspondence with the CRA, then it is clear that
even solicitors for the Promoter were aware of the deceit intended to be
perpetrated upon any applicants and the public at large. When one considers the
Promoter obtained and published on its website a legal opinion on the Program,
which focused on the necessity of the validity of the Trust and the exercise by
the Trustee of its discretionary powers, which the Promoter knew was nothing
more than window dressing, not reality, then it is self-evident that the
Promoter went to great lengths to perpetrate this sham, aided by its advisors
and subcontractors.
[87]
As the Respondent has ably set out in its
argument, there are numerous other examples of deceit of the Promoter or its
agents and subcontractors, including other attempts to legitimize the Program
by publishing unsupportable valuations of the Licences, not disclosing that
over 90% of the total cash donated did not stay with any charities and thus
masking the true business of the Promoter, and even proffering fraudulent
customs invoices to substantiate conversions of Licences into CDs, let alone
creating an inventory of CDs ex post facto the accuracy and existence of
which is truly unsupportable. There appears to be no length the Promoter or its
accomplices were not prepared to go to further their deceit but it is just not
necessary to detail such actions any further in this decision.
[88]
While the Appellants, or most applicants for
that matter, who participated in the Program did not create the Program, so
could not be said to have directly perpetrated the sham of the Program, there
is no doubt they signed Directions and Deeds of Gift of Licences that refers to
a Schedule ”A“ describing the software that was not prepared or attached at
that time and thus would have known they were gifting something that was not
identified even to them until some later date in time and so can be said to
have agreed to be wilfully blind, if not complicit, in perpetrating this sham.
The Appellant, Mrs. Mariano, signed the documents and left it to her agent to
complete while the Appellant, Mr. Moshurchak, even negotiated a kickback
of commissions from his financial agent selling the Program, and both
understood the nuances of the Program; namely, that for making a cash donation
they expected to receive some asset for re‑donation to another Charity
that would result in a net cash advantage to them. They also understood that their
cash cheques would not be cashed, as part of the “security” of the Program Mr.
Moshurchak referred to, until they were accepted as capital beneficiaries or
received a distribution of assets from the Trust, Licences generally, while Mr.
Mariano thought they involved computers. They were also aware of the legal
defence fund identified in the Direction to the Escrow Agent, which should have
set off alarm bells but did nothing to obtain legal advice notwithstanding.
When otherwise good people turn a blind eye to the obvious reality surrounding
them, they cannot lay blame on others for the consequences that follow from the
fraud or sham of others. They certainly should not expect the Canadian public
to fund their losses.
[89]
In any event, the law is clear that the deceit,
as a necessary element of a sham, is trite law confirmed in 2529-1915 Quebec
Inc. v The Queen, 2008 FCA 398, 2009 DTC 5023, at paragraph 59, and
numerous other appellate decisions, need not be perpetrated by the Appellants
in order to find a sham, as their participation in the sham is sufficient to
invalidate their purported gifts of cash and property to the charities as was
the case in Bonavia v The Queen, 2010 FCA 129, 2010 DTC 5114.
D. Valuation of Licences
[90]
About half the trial dealt with the valuation of
the Licences. There was no dispute between the parties that the onus was on the
Appellants to demolish the assumption made by the Minister that the value of
each Licence was 35 cents. Each of the parties had an expert witness, with
clear disagreement between them as to the value and method of valuation. In
general, the Appellants’ expert witness, one Mr. Dobner of PricewaterhouseCoopers
(“PWC”), valued the Licenses using the Market Approach, effectively using the
sale of CD Roms and On‑line sales, in final form, by Infosource to its
educational market clients over the period of 2004 and 2005, based on a 2003
Price List and calculating a range of relevant discounts based on those
transactions for each of the 6 courseware items and applying such discounted
prices to the selected Licenses distributed to each of the Appellants as at the
date of such distribution. Mr. Dobner did not use the transaction between
Infosource and Phoenix reflected in the Master Licence Agreements earlier
described, the original transactions that produced the licences that were
assigned eventually via the Trust to the Appellants for donation to CCA on the
grounds he assumed those two parties were not at arm’s length based on that
information provided by one Mr. Williams, a former employee of Infosource and
on the grounds the Master Licence Agreements had a philanthropic purpose and
not a commercial one. Likewise, he assumed the transactions of sale of some of
the Licences by Phoenix to the Trust were also not appropriate to consider as,
in paragraph 108 of his opinion, he considered them “to be conducted in the
spirit of philanthropy and with no expectation of compensation”.
[91]
In general, the Respondent’s expert witness, one
Mr. Mizrahi of FTI, valued the Licenses using a purported Cost Approach,
effectively taking the position that the cost to Phoenix of the Licences was as
the Minister assumed because it was an arm’s length business transaction and
reflected the only comparable asset transaction available to consider, the sale
of a courseware licence, which contained the right to convert it into CD Rom
format at the holder’s expense and not the converted product as valued by
Dobner.
[92]
As mentioned, there was great disagreement
between the experts on many levels, including the asset to be valued, the
market for such asset to be utilized, what methodology best reflects the
highest and best price, on the underlying assumptions presumed by each of the
expert witnesses and even the credibility of the factual foundations for such
assumptions.
[93]
There is, however, no dispute between them that
the fundamental goal of a valuation was to determine the “Fair Market Value” of an asset or as to the law
applicable to same.
[94]
Mr. Dobner defined Fair Market Value in
paragraph 6 of his Expert Report, dated December 9, 2014:
…. we have used
the concept of fair market value (“FMV”), which is defined as “the highest
price available in an open and unrestricted market between informed, prudent
parties acting at arm’s length and under no compulsion to act, expressed in
terms of money or money’s worth.”
which was almost identical to the definition
used by Mr. Mizrahi in his report.
[95]
There is no dispute such definition is founded
on well‑established case law. The well-accepted definition of Fair Market
Value is found in the decision of Cattanach J. in Henderson Estate and Bank
of New York v M.N.R., 73 DTC 5471, as referenced in the Federal Court of
Appeal’s decision in Canada v Nash, 2005 FCA 386, at paragraph 8 thereof:
The statute does
not define the expression “fair market value”, but the expression has been
defined in many different ways depending generally on the subject matter which
the person seeking to define it had in mind. I do not think it necessary to
attempt an exact definition of the expression as used in the statute other than
to say that the words must be construed in accordance with the common
understanding of them. That common understanding I take to mean the highest
price an asset might reasonably be expected to bring if sold by the owner in
the normal method applicable to the asset in question in the ordinary course of
business in a market not exposed to any undue stresses and composed of willing
buyers and sellers dealing at arm’s length and under no compulsion to buy or
sell. I would add that the foregoing understanding as I have expressed it in a
general way includes what I conceive to be the essential element which is an
open and unrestricted market in which the price is hammered out between willing
and informed buyers and sellers on the anvil of supply and demand.
[96]
The premise for determining the FMV of the
donated Licences was expressed by Mr. Dobner in paragraph 9 of his report:
Our premise for
determining the FMV of the Donated Licences at the respective Valuation Dates
reflects a notional transaction between an education customer (i.e. a non profit
organization that provides or oversees the provision of education services,
such as district school boards) and a supplier of such Donated Licences (e.g.
Infosource). Such transaction is assumed to have been consummated at the
relevant price list at the relevant time, less a discount which is consistent
with the common method under which such licences were sold in the ordinary
course of business during the relevant time.
[97]
In my opinion, the Appellants have failed to
demolish the assumptions of the Minister on the fair market value for a number
of reasons, the most significant of which I will address in the context of why
I consider the Expert Report of Mr. Dobner to not be reliable.
1. Mr.
Dobner valued the wrong asset
[98]
The Appellants also relied on the Federal Court
of Appeal’s decision in Nash above for the proposition that the first
step in applying the fair market value definition is to accurately identify the
asset. Rothstein J.A. as he was then, stated at paragraph 17:
In applying the
Henderson definition of fair market value, the first step is to accurately
identify the asset whose fair market value is to be ascertained. It is only
once the asset is identified that the market in
which the asset is normally sold in the ordinary course can be determined.
[99]
While the Dobner report specifically purports to
value the 233 and 4,321 courseware Licences issued to Mr. Moshurchak in 2004
and 2005 and the Licences issued to Mrs. Mariano in 2005, it is clear that the
comparable transactions reviewed by Mr. Dobner were the Infosource transactions
of Courseware that were delivered on CD Rom format or On‑line format. In
fact, the notional transaction he based his transaction choices on were between
an educational customer and a vendor of Donated Licences such as Infosource,
but only reviewed transactions where Infosource sold the converted licences;
ones that had been already transferred onto usable format, either in CD Rom or
On‑line form. He, in fact, assumed such Donated Licences had been
converted and that there was a market for them.
[100] I agree with Mr. Mizrahi’s comments in his opinion that the
Licences, i.e, the courseware with an option to convert to CD Rom format as
provided for in the Master Licence Agreements, could not have the same value as
the converted products sold by Infosource. Mr. Dobner’s valuation did not
reduce the values of the comparable asset transactions of Infosource, either by
the cost of their conversion to CD Rom format, or by the cost an arm’s length
party would incur in marketing, selling and distributing such products, let
alone taking the risk of doing same in the market. It is clear from the
Financial Statements of Infosource entered into evidence that Infosource had
expenditures for rents, salaries, commissions and other business expenses, all
of which play a role in marketing, selling and distributing their finished
products. The fact it lost money in its 2004 taxation year suggests there is
risk in doing so. Mr. Dobner simply did not address any such adjustment to the
value of the formatted Licences used in the transactions he compares, rendering
his valuation suspect and unreliable.
[101] I should also like to comment on the Appellants’ assertion in
argument that in fact Mr. Mizrahi valued the wrong assets by only valuing the
underlying intellectual property of the Licence and not the corresponding right
a holder had to convert it to CD Rom or other usable format. In my opinion,
there is simply no foundation for such a position. Mr. Mizrahi defined the
Licences (actually using the term Sublicenses) separately from Products, the
latter of which was effectively defined as the converted licence. In his
description of the Licences he makes reference to the fact it carried the
ability to convert. Moreover, the comparable assets he used for his valuation
were the Licences transferred pursuant to the Master License Agreements between
Infosource and Phoenix, which contain the right to convert, so it is clear that
if he valued such Licences, then he valued the right asset. The facts are clear
on this, notwithstanding the Appellants’ attempt to frame them as otherwise
based on inconsistent terminology. I must also agree with the Respondent that
in no way was there a transfer of any underlying intellectual property by
anyone here. The transfer was only a license to use the underlying property
together with a right to convert it.
[102] The Appellants also suggest that only Mr. Dobner valued the actual
gifts made by the Appellants and one other person who did not proceed to this
trial, namely the specific number of courseware Licences donated only by them,
while Mr. Mizrahi valued all the Licences, the 3 million licences in total,
created by the Master Licence Agreements. I would agree he did, but I do not
agree this makes Mr. Dobner’s valuation more preferred and will deal with this
issue in more detail shortly.
2. Mr.
Dobner considered the wrong market
[103] Mr. Dobner relied on a notional transaction between an educational
customer (i.e., a non‑profit organization that provides or oversees the
provision of education services, such as district school boards) and a supplier
of Donated Licences (e.g. Infosource). No real explanation was given as to why
an educational market was used. It is clear from the evidence and the transactions
Mr. Dobner relied upon, that the buyers in those transactions were school
boards and similar entities that clearly paid and were able to pay for the
products purchased. The Licences distributed by both the Appellants to CCA and
by CCA to end users, were all charitable transactions, in which no payment was
received nor expected.
[104] The only arm’s length market transaction in evidence of which the
element of philanthropic gifting is potentially present is the transaction
between Infosource and Phoenix pursuant to the Master Licence Agreements, which
Mr. Dobner did not use, partially on account of its purported
philanthropic element.
[105] What is clear to me is that the market most relevant to valuing the
donations would not be a retail market but rather the charitable donation market,
a market created by the Program, which produced millions of licences over a few
years for distribution to charitable recipients and a market recognized by the
Appellants’ own witness, Mr. Williams, a former employee of Infosource who
testified that one of the reasons Infosource was willing to sell the Licences
to Phoenix at the low price was because they recognized the Licences would be
ultimately distributed in Canada to persons who would otherwise be unable to
purchase same and thus would not impact their own market; effectively, would
not compete with their business.
[106] Mr. Dobner himself referenced this charitable market in paragraph 38
of his report where he made reference to ICAN, defined as CCA in this decision,
as receiving “… donations-in-kind of food, household
goods and other items including educational materials and licenses for the use
of educational software programs for use directly in the charitable activities
it carried on and for distribution to other organizations for use in their
charitable activities. …”.
[107] In determining what market would be relevant to this situation, this
Court in Lockie v the Queen, 2010 TCC 142, 2010 DTC 1121, a case
involving a buy‑low, sell‑high donation scheme of school supplies,
considered what market would be relevant to the charity that had received the
donations. Webb J., as he was then, stated at paragraph 41 that:
…. it seems to me that the relevant market would be the market which
In Kind Canada would have acquired products if the products would not have been
donated by the donors to In Kind Canada [if it had to acquire the assets had
they not been donated]. … It seems to me that the identification of the market
in which In Kind Canada would have purchased such products is critical to the determination
of the fair market value of the products donated … However, the critical
question is whether the retail market is the correct market in this case.
[108] Webb J. found that the retail market was not the appropriate market
to use and determined the more appropriate market would have been the
“wholesale” market, wherein the charity would have bought from the initial
suppliers who would have been indifferent as to whether to sell to the middle
man or the charity directly. At paragraph 55 and 56, Webb J. stated:
[55] It seems to me that the retail market is not the appropriate
market to use in determining the fair market value of the products donated to
In Kind Canada. The donors were a conduit in the pipeline for the products that
flowed from the manufacturer to CEI (or a related company) to the donors to In
Kind Canada. John Groscki described the role of the donors as:
So at the end of the day we were
basically making donors into wholesale distributors or distributors of
products, one way or the other to charities.
[56] It seems to me that if In Kind Canada were to acquire the
products from someone other than the Appellant, that it would acquire these
products directly from CEI (or a company related to CEI). …
[109] It seems to me that, in this matter, we also have a conduit or
pipeline where the same Licences transferred by Infosource to Phoenix found
themselves travelling down to the Trust, the Appellants and other participants
in the program and ultimately to CCA, making CCA or even the Appellants and
other donors the effective distributors or wholesalers of the Licences at best.
[110] Moreover, in the case at hand, Infosource was in the business of
selling Licensed Products in final format or selling Licences where the
purchaser would pay the cost of conversion. There is no evidence before me to
suggest Infosource would not have been willing to sell directly to CCA and I
find there is evidence Infosource and Phoenix were at arm’s length and had a
business relationship first and foremost so that there appears to be no reason
why it would have made any difference to it whether it sold to CCA directly or
through the conduit of Phoenix down the pipe eventually to CCA.
[111] Accordingly, the price paid by Phoenix to Infosource would appear to
be the best price, consistent with the Court’s finding in Lockie, at
paragraph 59, that the price paid by the appellant to CEI was the fair market
value as “[i]n effect, the Appellant was acquiring these products on behalf of
and for the benefit of In Kind Canada.” Phoenix, likewise, acquired these
products ultimately on behalf of CCA, passing them through the pipeline and I
would think its price would be the relevant transaction to value.
[112] Earlier decisions of this Court also recognized that the magnitude
of donation programs can, in effect, create their own market for an asset, either
in the context of looking at the totality of the donations in play, as did
Bowman ACJ, as he was then, in Klotz v The Queen, 2004 TCC 147, 2004 DTC
2236, at paragraph 40(b), or in the more general sense of recognizing the sheer
volume of assets in play affect the market through supply and demand
considerations on fair market value which I will deal with shortly.
[113] As the Respondent has also pointed out, Mr. Dobner’s report assumes
that the Appellants had access to the retail market that Infosource conducted
its business in. The Appellants, or any participant in the program, unless they
were also in the business of selling software, did not have the ability to
access or play in that market. In Russell v The Queen, 2009 TCC 548,
2009 DTC 1371, which involved an art donation program where the appellant
therein argued that in accordance with the Henderson definition of fair
market value, the Court should consider the retail market, in that case the
sale of art by a gallery, as being the market in which the appellant could
obtain the highest and best price, C. Miller J. stated, at paragraph
25:
… The flaw in this approach is that it ignores the reality that the
buyers/donors have no access to that retail market, other than through a
gallery. There was no evidence, expert or otherwise, to suggest there was any
market for an individual to dispose of large quantities of individual pieces of
art. That is what galleries do, not what individuals do. In effect, there is no
market for individuals to dispose of art in bulk. …
[114] By the same token, there is no evidence, from Mr. Dobner or
otherwise, to suggest there is a retail market available for the Appellants to
access and sell their Licences, let alone any evidence they had the structure,
asset base and access to clients to do so in the manner Infosource did.
3. Dobner
failed to consider effect of supply of Licences in the market
[115] Dobner’s report values only the specific Licences received by the Appellants
and one other, LB, totalling 5,451 Licences. The evidence is clear that on the
dates each of the Appellants received Licences pursuant to the respective
Assignment of Licences documents, that there were hundreds of other accepted
capital beneficiaries that received thousands of Licences that were donated to
CCA. The evidence is that closings occurred every week during the relevant
period, resulting in thousands of Licences flowing to CCA. Moreover, the Master
Licence Agreements provided for 3 million Licences that were available for
distribution and travelling down the pipeline in the Program by the end of 2005
and over 5 million by 2007.
[116] Notwithstanding the sheer number of Licences actually donated to CCA
at the same time as the Appellants donated theirs, and throughout the period of
2004 and 2005 from which Dobner drew his comparables from Infosource sales to
educational customers, Dobner did not consider the impact of such large supply
and potential supply in the market place other than to incredibly suggest it
was irrelevant due to the potential infinitesimal number of Licences Infosource
could have issued.
[117] The obvious fact is that there were thousands, if not millions, of Licences
that were in play and no effort was made by Mr. Dobner to consider their impact
on the fair market value of the donated Licences he valued for the Appellants.
[118] It is well accepted law, evident from the definition of fair market
value in Henderson Estate, that supply and demand is a factor. I repeat
the dicta of that Court:
… I would add
that the foregoing understanding as I have expressed it in a general way
includes what I conceive to be the essential element which is an open and
unrestricted market in which the price is hammered out between willing and
informed buyers and sellers on the anvil of supply and demand.
[119] In cases such as Malette v Canada, 2004 FCA 187, 2004 FCJ No.
867, the Federal Court of Appeal confirmed the need to consider the volume of
art works of an artist to determine a bulk discount and, at paragraph 16,
stated:
The need to apply such a discount is a function of supply and
demand. When, for any reason, a large number of personal property items come on
the market at the same time, a depressive effect on the value of the individual
items can occur due to the fact that the number of items offered for sale
exceeds the number of willing buyers. …
[120] And, at paragraph 22, Noel J.A., as he was then (now CJA), stated:
Rather, the respondent’s argument appears to be that in enacting
section 118.1, Parliament contemplated a “fair market value” that differs from
that notion as it is commonly understood by directing, in effect, that the fair
market value of gifted cultural property be determined without regard to the
depressive effect of volume on the relevant market.
[121] The learned, now Chief Justice, concluded that a block discount is
not precluded by the Act and that the Tax Court judge erred in holding
otherwise, contrary to the accepted meaning of fair market value.
[122] Similar approaches were adopted by the Federal Court of Appeal in Nash
and by this Court in Klotz and Nguyen v The Queen, 2008 TCC 401,
2008 DTC 4390, as well, where, in the latter, Campbell J. stated at paragraph
27:
… The same analysis as applied in the cases of Nash and Klotz
is the correct yardstick to be used in these appeals. … Without evidence to the
contrary, the best evidence of FMV will be the purchase price of the group of
assets.
[123] In my opinion, Mr. Dobner failed to consider the effect of such a
vast supply of Licences already available in the market, from the thousands of
already donated Licences to CCA, in valuing the Licences. Moreover, he made no
mention of the impact possible competitors to Infosource would have had on his
valuation. His approach was contrary to the definition of fair market value,
where buyers and sellers would be informed and supply and demand would be an
essential element, an omission fatal to his valuation in my opinion.
4. His
valuation is “devoid of
common sense”
[124] As former Chief Justice Bowman stated in Klotz, at paragraph
46, relied upon by Nguyen, dealing with an appellant who purchased 250
art prints from an art dealer at $300 per print, who had acquired them for
between $5 to $50 each, and donated them to charity for $1000:
… The problem with the claim here, whereby property is acquired for
$5 to $50, sold to the appellant for $300 and claimed to have a fmv two days
later of $1,000, is that it is devoid of common sense and out of touch with
ordinary commercial reality.
[125] In the case at hand, Licences were purchased by Phoenix for between
13 and 26 cents each during the relevant period of the Appellants’
donations, the same Licences that the Appellants would have had to donate which
they received through the pipeline, and somehow their value increased
exponentially in a very short period of time. Mr. Moshurchak for example,
donated 4,321 Licences in 2005, for which Phoenix would have paid Infosource a
maximum of $1,123.46, based on the highest price paid of 26 cents per licence,
yet Mr. Dobner values them at $423,057, while that Appellant had received an
actual donation receipt for $812,051, based on the valuation of EMC partners,
on whose values the Program was based.
5. His assumption that
Infosource and Phoenix were not dealing at arm’s length is unfounded
[126] As set out in the Supreme Court of Canada’s decision in The Queen
v J.L.J , 2000 SCC 51, [2000] SCJ No. 52, at paragraph 59:
Before any weight at all can be given to an expert’s opinion, the
facts upon which the opinion is based must be found to exist. …
[127] Mr. Dobner assumed such fact solely on the basis of information he
received from Mr. Williams, a former employee of Infosource. There is no
evidence Mr. Dobner attempted to contact the owners of Infosource to determine
its shareholdings or other facts relevant to determining the issue. Since
Mr. Williams was not a shareholder of Infosource and admitted he had
little knowledge of its financial statements, being the development manager for
the resale division, his testimony is, at best, hearsay. Moreover, the general
testimony of Mr. Williams was just inconsistent and generally not credible, to
put it kindly, for a number of reasons , including:
1. Mr.
Williams testified in chief so as to suggest he did not know Mr. Lewis
well, the owner of the Promoter, yet in cross examination disclosed he had
worked for Mr. Lewis, as vice president of Canadian International Technology
Training Inc. (“CITTI”), a corporation Mr. Williams testified was owned by Mr.
Lewis involved in the previous GLS program.
2. Mr.
Williams denied he had received or reviewed Mr. Dobner’s report, suggesting he
had no involvement in its production, yet the evidence of Mr. Dobner is that he
was the main point of contact for Infosource and, on cross-examination, Mr.
Williams admitted he was forwarded correspondence relating to the matter that
asked for his opinion on whether it passed the “smell test” from Mr. Dobner’s
colleague and he admitted reviewing the report on cross‑examination after
being confronted with a letter he wrote to PWC.
3. Mr.
Williams had, in fact, suggested to PWC that they consider looking at Infosource’s
2002 sales of the Microsoft‑related courseware because they were at
higher prices; evidencing he was attempting to influence a higher price. In
fact, I found the tenor of his evidence to be one of advocating for the
Promoter, who Mr. Dobner agreed was the party paying for his report,
rather than of an objective and impartial witness.
4. Mr.
Williams denied attending a promotional conference for the Program in 2011
while the Respondent presented evidence he was listed on the program as a
presenter; something he continued to deny notwithstanding the documentary
evidence showing otherwise.
5. Mr.
Williams received substantial commissions for the sale of Licences by
Infosource to Phoenix as the salesperson of record as well as continued to be
involved with the Program after leaving Infosource through his corporation,
Summit Knowledge Systems LLC, and earned substantial commissions in both 2014
and 2015, evidencing he had a long and continuing financial interest in working
with Mr. Lewis or entities with which he was involved and hence had a personal
stake in the outcome of this matter.
6. Mr.
Williams testified Infosource had little or no reseller presence in Canada but
later evidence showed it accounted for 3 to 5% of Infosource’s sales revenue.
[128] The only other evidence of whether the two were at arm’s length is
the report of Mr. Mizrahi which assumed they were at arm’s length because he
investigated same with the owner of Infosource, who provided correspondence in
writing that not only was Mr. Williams not authorized to speak on behalf of
Infosource, but that Infosource was not related to Phoenix and had conducted
its transactions with Phoenix on an arm’s length basis as a business deal.
While I appreciate Mr. Warner, an owner of Infosource, was not called to
testify, the Appellants were aware of Mr. Mizrahi’s assumptions and did not
call him to rebut them either. Moreover, if it were a matter of weighing only
hearsay evidence, I found Mr. Mizrahi’s evidence and the written correspondence
from Infosource to be far more credible than the testimony of Mr. Williams on
the matter, and Mr. Mizrahi at least made independent inquiry of the owners of
Infosource, something I cannot understand why Mr. Dobner failed to do.
[129] Frankly, even Mr. Williams’ testimony would lead me to conclude the
two were operating at arm’s length, regardless of any ownership tests. Mr.
Williams testified in such a manner as to suggest the transfer of 1.5 million
Licences in 2004, pursuant to the Master Licence Agreement, was a good deal for
Infosource in that Infosource did not have to duplicate CDs, Infosource knew
the Licences were to end up in the hands of charitable recipients in Canada
that could not otherwise afford to buy them and hence posed no competition to
its predominantly U.S. market and the distribution of such Licences in Canada
would give Infosource more exposure in the Canadian market. These are all
business justifications for making the deal with Phoenix, regardless of the philanthropic
language used in the Master Licence Agreement suggesting otherwise. Mr.
Williams’ testimony suggests the fee paid to Infosource was very profitable. I
give no weight to the arguments that the transfer was to effect a sole
philanthropic purpose as the evidence is clear that Infosource’s standard
agreement was used, save that the philanthropic language was inserted at the
request of Cassel’s Brock, the Canadian lawyers who, oddly enough, appear to be
advising a Bahamian Corporation on entering into a U.S. contract.
[130] I also note that even though the $400,000 fee in the first Master
Licence Agreement was expressed to be a fee to help Infosource defer expenses,
there was, in fact, a substantial fee each time Infosource transferred Licences
to Phoenix, namely an additional $200,000 in the 2005 Schedule “B”, an
additional $550,000 fee pursuant to a further agreement dated April 19, 2006
and an additional $200,000 pursuant to an amendment of same dated November 7, 2006.
Each time there was a transfer of any Licences by Infosource to Phoenix, there
were substantial sums involved which, as Mr. Williams earlier alluded to, did
not require Infosource to bear any cost of replication and which evidence shows
constituted a significant portion of Infosource’s sales revenue. On sales of
$3,500,000 in 2004, the $400,000 fee would represent 11% of its sales, and
logically, a larger contributor to the bottom line if, as Mr. Williams
suggested, there were very little costs related to it. Common sense suggests
this was a good business deal for Infosource, consistent with the information
obtained by Mr. Mizrahi from the owners of Infosource on the relationship
with Phoenix.
7. Mr.
Dobner assumed the Licences were received and used without foundation
[131] There is no dispute that Mr. Dobner assumed, in paragraph 38 of his
report, that the Licences were received and used directly in the charitable
activities of CCA and distributed to other organizations for use in their
charitable activities. Mr. Dobner testified that he relied on the information
received from Mr. Wall that “practically all the CD’s
were distributed to charities” as the basis for his assumption. He
admitted in cross-examination that if the Licences were not, in fact, converted
and used then they would have no value.
[132] No independent steps were otherwise taken by Mr. Dobner to verify
his assumptions. There is no evidence that he contacted even one recipient to
determine if even one, single CD, of the thousands he assumed were distributed
as a result of the Appellants’ donation, was received and was usable.
[133] Again, as set out in the Supreme Court of Canada’s decision in J.L.J,
above, at paragraph 59:
Before any weight at all can be given to an expert’s opinion, the
facts upon which the opinion is based must be found to exist. …
[134] The evidence of Mr. Wall, as reflected in his report to M.L., the
Executive Director of CCA, is that during the period between 2003 and 2007, CCA
received 6,256,905 Licences, distributed 1,710,815 and had an ending inventory,
as at Dec 31, 2007, of 4,546,088 Licences, which ending inventory consisted of
3,250,363 of actual Licenses in stock, 500,000 unused portal or on‑line
applications in stock and 795,726 which were stored with Infosource, to be
totally unreliable and cannot support the factual basis for Mr. Dobner’s
assumptions, for many reasons including:
(a) Mr. Wall
was employed by Mr. Lewis through the Promoter as a contractor both during his
time with and after leaving CCA after its charitable registration was revoked
in 2008 right up to 2014 and participated in the Program himself in the years
2005 to 2013, without making any cash donations, but claiming receipts for
donations in kind ranging from $20,000 to $60,000 during those years, averaging
about $31,000 which transactions are also under review by the CRA; thus he has
a clear, vested, financial interest in the Program and the outcome of these
appeals.
(b) Mr. Wall
was based in Halifax and although he testified he travelled to the CCA
warehouse in Toronto a few times a month, he had no role in the financial
reporting or inventory controls of CCA and had no accounting background on
which to assume he was even competent to undertake such roles. Yet, without an
accounting background, Mr. Wall is remarkably called upon to prepare an
inventory report for CCA with a view to satisfying the CRA that CCA made
appropriate charitable distributions and thus should not have its charitable
registration revoked.
(c) Mr. Wall
admitted that CCA had no system for tracking the receipt and distribution of Licences,
a fact confirmed by the testimony of M.L., the executive director of CCA at the
time, and that his task was to create an ex post facto inventory report
in March of 2008, for the period ending December 31, 2007, to track inventory
received and distributed from 2003 to the end of 2007, based on the most
complete available information, which he admitted was not solely based on facts,
but required him to make many assumptions, which have no factual foundation,
including:
i) Mr. Wall assumed that the Licences received were based solely
on the donation receipts issued by CCA, without having any actual knowledge of
receipt;
ii) Mr. Wall calculated the Licences distributed throughout the
period were in both CD and On-line portal format, without any explanation or
proof of CCA having the right to convert Licences to On-line format, contrary
to the express wording in the Master Licence Agreements that called for only CD
Rom format. Moreover, Mr. Wall assumed that each on‑line customer had
access to 100 Licences so that the 5,000 on‑line charitable recipients he
recorded actually got 500,000 Licences, notwithstanding the Master Licence Agreement
limiting conversion to one Licence per CD;
iii) There is no evidence of Infosource storing another 795,726
Licences for them. The evidence is that Infosource would issue a master Licence
disc for duplication by its approved replicators, not store any Licences for
anyone;
iv) With respect to the hard inventory counts, the report showed
3,250,363 licences in the warehouse, as per Mr. Wall’s count sheets, which Mr.
Wall indicated was confirmed by WIS, an independent inventory contractor, who
did not testify. The evidence is that a few of the skids of CDs contained only
product from the previous GLS program, only one could have contained GLGI
courseware and the others could have been either GLS or GLGI, with no actual
proof of either, and that Mr. Wall assumed there were multiple licenses
per CD disc, up to 65, resulting in grossly overinflated Licence counts;
v) There is doubt as to whether there was even any CD Rom disc
inventory during the relevant period and a suggestion the pallets of disc boxes
were brought into the warehouse only after the audit started. M.L, the
executive director of CCA, testified she walked through the plant every day to
get to her office and only noticed the skids one day after which Mr. Wall
appeared to take inventory. While she admitted, on cross-examination, that such
skids could have been elsewhere in the plant without her knowing, I am inclined
to believe her since if the skids of discs were already in the plant, then CCA
would have been able to provide CRA with the discs on earlier occasions after
CRA had demanded proof of same on several prior occasions, according to the CRA
auditor who was investigating that charity;
vi) Mr. Wall calculated the number of Licences distributed
according to the courier or shipping invoices he found, effectively on the
basis of a multiple number of Licences per disc as well as assuming there was
so many sets of discs and so many discs per pound of weight where disc numbers
were not present, without any factual foundation for same and multiplying those
by a factor as well, ranging from 1 in 2004, 10 in 2005 and 2006 and 28 in
2007. In one example, Mr. Wall calculated there were 10,200 Licences
shipped, when documentary evidence showed the recipient received 50 Licences,
and all pertaining to the previous GLS program to boot. In another, Mr. Wall
equated the weight of a shipment to represent 900 Licenses when the customer e‑mail
confirmed 40 were received;
vii) Mr. Wall relied on customs invoices for shipments received
from English Lake, the approved replicator for Infosource, to establish the
conversion of Licences into CD’s, yet there was much confusion as to whether
the customs invoices referred to CD’s or Licence numbers and Mr. Wall admitted
he did not know which on cross‑examination. Moreover, there was evidence
Mr. Wall relied on two fabricated customs invoices after the Respondent put
into evidence the actual invoices containing the customs bond barcode
designated for CCA that would have been on all customs invoices and that was
not on those relied upon by Mr. Wall. The difference between the two was
significant, resulting in about 50% of the Licences claimed. The evidence also
established that the product referred to in the 2004 customs invoice related
only to the previous GLS program product;
viii) Mr. Wall testified that Licences were distributed on a first‑in,
first‑out basis. The evidence shows that at the beginning of 2004, there
were more than 287,000 undistributed GLS program Licences, having a value of
over $93,000,000 and that a total of 333,000 Licences were distributed
throughout all of 2004 and 2005. As the Program did not start until October
2004, it would appear that any such distributions of Licences would have likely
been from the GLS program only, having regard to the first‑in, first–out
approach and, as above mentioned, there was evidence many of the recipients
from the shipping invoices were found to have received GLS product; and
(ix) Even if Mr. Wall’s figures that CCA received 6,256,905
Licences and distributed 1,710,815 during that period are correct, this would
demonstrate that only 27% of the received Licences were ultimately distributed,
a far cry from the substantially all assumed by Mr. Dobner.
[135] Considering all the concerns related to the inventory report, I
cannot possibly find that it was in any way accurate or credible regarding
whether GLGI discs were converted, received by CCA or distributed to anyone
during the period, if at all. I note that the accountants for CCA were of the
same view, as they expressly inserted notes to the financial statements of CCA
advising the reader that they were not able to verify the inventory figures
therein recorded.
8. The
Dobner report is not impartial
[136] Mr. Kiki Anadu, a PWC employee from Mr. Dobner’s office, sent an e‑mail
dated May 2, 2012 to Mr. Williams, copied to Mr. Dobner, which e‑mail
letter reads in part:
Hello Richard,
As discussed,
here is a summary of our very preliminary results for a “smell test”.
…
Please let us
know if you think this looks reasonable/not reasonable, and if you have any
comments that you think might be helpful to tweak our analyses as needed.
We have not
shared these results with any other parties as we are still fine tuning our
analysis and will ask you to keep confidential until we have done so.
Once we have the
draft report ready, we will send you the complete draft report for your review,
which will have detailed explanations of how we arrived at these results.
[137] This e‑mail confirms that Mr. Williams was actively advocating
for higher prices and had a large role in the preparation of the expert report,
in fact, as the point man for the Promoter who commissioned the report, and
would have received it, contrary to his initial testimony. More importantly,
this e‑mail casts doubt on the credibility of the expert report;
suggesting the expert was tailoring his report to meet the needs of his client
and not being an impartial report, contrary to the obligation of expert witnesses
to this Court. Absolutely no attempt was made by the Appellants to otherwise
explain this e‑mail and I am satisfied it speaks clearly for itself.
9. Other
Deficiencies
[138] There were a multitude of other potential deficiencies in
Mr. Dobner’s report which were at issue in the trial; all of which cast
some doubt on the reliability of Mr. Dobner’s report; ranging from evidence he
considered some transactions that were clearly corporate and not educational
customers, to considering mostly transactions for products that were delivered
to customers via On-line format products instead of CD format, to ignoring that
many of the educational customers were multi users who paid a flat fee and not
a fee from the 2003 Price List relied upon; which, frankly, I need not address
in further detail.
[139] It should also be mentioned that Mr. Mizrahi’s report was not
without doubt on many levels as well, particularly with respect to his reliance
on certain tests of reasonableness to support his Cost‑approach results;
namely his total reliance on Cost of developing the Courseware from the analyses
of a Mr. Scott, who was not qualified as an expert witness, or his reliance on
the limited financial statements of Infosource to suggest the developments
costs of Infosource were low and hence the costs of developing the courseware
would be low for an informed buyer. I agree these arguments were neither
determinative nor persuasive to support his arguments.
[140] However, I must find his conclusions as to the fair market value of
the Licences to be more persuasive for one very basic reason, evident from the
definition of Cost Approach, not in dispute, and found in both expert reports.
The Appellant described the Cost Approach in paragraph 17 of Appendix “D” of its expert report as follows:
The Cost Approach
uses the concept of replacement cost as an indicator of Fair Market Value. The
premise of the Cost Approach is that a prudent investor would pay no more for
an asset than the amount for which the asset could be replaced with a new one.
Replacement cost new refers to the cost incurred to replace the asset in like
utility using current material and labour rates. To the extent that the asset
will provide less utility than a new one, the value of that asset is less than
the replacement cost new.
[141] It is clear that the concept of replacement cost is the key element.
The definition does not, per se, require that the person replacing it
must be the person who undertakes to manufacture or create it himself from
scratch. That would be illogical and commercially unfeasible, having regard to
well‑known practices of large manufacturers, like automobile
manufacturers for instance, of purchasing element parts for the vehicle they
ultimately produce from parts manufacturers that are independent from them. To
such automobile manufacturer, the cost of such part is the price it pays to
acquire it on the open market.
[142] In similar fashion, Mr. Mizrahi has equated the Cost of replacing
the Licence to the cost it can acquire it on the open market, using the arm’s
length transaction between Infosource and Phoenix as evidence of the cost one
could acquire it at. I appreciate this is also consistent with the Market
Approach, defined generally by both experts, as “using
one or more methods that compare the subject asset to similar assets that have
been sold”, as expressed in paragraph 20 of Mr. Dobner’s report -
Appendix “D” above, which, as expressed in paragraph
21 thereof, includes the Precedent Transaction Method under which “… valuation ratios are derived from open-market transactions
of assets which are considered to be the same or similar as the subject asset”.
[143] The point being, that although Mr. Dobner criticized the use of the
Cost Approach of Mr. Mizrahi as being the actual use of the Market Approach,
the definitions of both approaches in these circumstances would frankly seem to
apply and overlap. The transaction between Infosource and Phoenix was both the
comparable open-market comparable transaction for the Licences that should have
been used by Mr. Dobner, as well as the basis for replacement cost in Mr. Mizrahi’s
Cost Approach. I might also add that in this comparable transaction, there was
no price differential between the various courseware as a matter of fact. Each
of the 6 courseware products were treated the same and I see no basis on which
to distinguish them, regardless of the fact that as a finished product, they
might attract a higher price on the open market if sold individually, but not
necessarily when valued as a large group of assets due to the depressive effect
of a large supply in the market.
10. Conclusion as to FMV
[144] In any event, the expert witnesses are there for the benefit of the
Court; to inform, advise and help the Court reach a conclusion. Based on my
analyses of both reports and the testimony of the expert witnesses, I am
satisfied that the conclusions of Mr. Mizrahi are valid, that the Licences have
a value of between 13 cents and 26 cents each. I appreciate Mr. Mizrahi’s
argument that once an additional 1.5 million Licences became available in 2005
for $200,000, pursuant to the Schedule “B” amendment
to the initial Master Licence Agreement dated September 16, 2005, that any Licences
issued and not distributed pursuant to the initial agreement of October 20, 2004
lost value down to such 13 cents, all in U.S. dollars. Accordingly, any
participant who assigned Licences to CCA prior to September 16, 2005 could
reasonably claim a fair market value of 26 cents, and any afterward of 13 cents.
In the case at hand, each of the Appellants purportedly donated their Licences
prior to September 16, 2005 and so would be accorded a value of 26 cents per Licence
had they otherwise been found to make a valid gift; however, as the Minister
assumed a value of 35 cents in its assumptions, such value would have to be
applied to these Appellants.
[145] Having found that, at best, the value of each Licence would range
from 13 cents to 26 cents, next-to-nothing compared to the valuations
utilized by the Promoter during its program and the value attributed by Mr.
Dobner of PWC, I do not see it necessary to determine the last legal issue on
the table: whether the workings of subsections 248(30) to (32) apply so as to
reduce the eligible amounts of the gifts to Nil.
V. Conclusion
[146] Having regard to all the foregoing, I find that the Appellants did
not have the donative intent to make any of their gifts, did not own or
transfer the property that is the subject matter of the gift in kind, i.e. the
Licences, and that the Program was a sham; however even if I am wrong on those
issues, I find the value of each Licence donated by the Appellants would
actually only be 26 cents per Licence but for purposes of these appeals would have
to be set at 35 cents per License based on the Minister’s assumptions in
its Reply of that amount.
[147] Accordingly, the appeals are dismissed, with costs to the
Respondent. The parties shall have 30 days to make submissions as to costs if
they are not satisfied with the above order as to costs.
Signed at Ottawa,
Canada, this 23rd day of November 2015.
“F.J. Pizzitelli”
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