Citation: 2013 TCC 230
Date: 20130725
Docket: 2011-688(IT)I
BETWEEN:
HARI K. BANDI,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Overview
[1]
The directors of the Aurora
Foundation (the “Foundation”), a registered charity, established a gifting
arrangement known as the Charitable Technology Trust Gifting Program (the
“Charitable Technology Gifting Program” or “Program”). The appellant,
Hari K. Bandi, participated in the Program and claimed a charitable
donation tax credit in respect of an alleged gift made to the Foundation in his
2003 taxation year.
[2]
The alleged gift
totalled $5,996 and consisted of a cash payment of $1,872 and a purported gift
of four software licences having an alleged fair market value of $4,124. The
Minister of National Revenue (the “Minister”) initially allowed the credit but
subsequently reassessed the appellant to disallow it. The issue in this appeal
is whether the appellant is entitled to claim a tax credit in respect of all or
part of the alleged donation.
II. Factual Background
[3]
The facts relied on by
the Minister in denying the appellant’s tax credit claim are summarized in the amended
reply to the appellant’s notice of appeal, as follows:
Relevant
Parties
(a)
the Foundation was incorporated pursuant to the Canada
Business Corporations Act on December 13, 1996;
(b)
at all material times, the Foundation was a
registered Canadian charity for purposes of the Income Tax Act;
(c)
at all material times, the Foundation’s
directors were Greg Carrington, Richard Gozdek and John Bruder, all residents
of British Columbia;
(d)
Carrington was the Foundation’s Executive
Director;
(e)
6103316 Canada Ltd. (the “Promoter”) was
incorporated pursuant to the Canada Business Corporations Act on June 3,
2003;
(f)
the Promoter was incorporated primarily to act
as the promoter of a tax shelter charitable gifting arrangement known as the
“Charitable Technology Trust Gifting Program” (the “Gifting Plan”);
(g)
the shareholders and directors of the Promoter
were Carrington and Jacques Denomee, also a resident of British Columbia;
(h)
Wolf Ventures Corp. (“Wolf Ventures”) was
incorporated pursuant to the laws of British Columbia on September 19, 2002;
(i)
Gozdek and Denomee were the shareholders of Wolf
Ventures, and Gozdek was its director;
(j)
Multisolve Networks Corporation (“Multisolve”)
was incorporated pursuant to the laws of Barbados on November 17, 2003;
(k)
the shares of Multisolve were held by a trustee
in the Cayman Islands;
(l)
Multisolve owned the eComdata Office Suite Pro
computer software program (the “Software”), which software was intended to be
the subject of the Gifting Plan;
(m) Michael King, a resident of British Columbia, developed the Software
and was the sole director of Multisolve;
(n)
the Charitable Technology Trust (the “Trust”)
was intended to be a trust used in the Gifting Plan;
(o)
Bruder was intended to be the Trustee of the
Trust and its sole income beneficiary;
(p)
the class of capital beneficiaries of the Trust
was intended to be open;
(q)
capital beneficiaries of the Trust were intended
to be a class of individuals who indicated a willingness to support charitable
organizations, as demonstrated either by past donations or services to
charities, or by a willingness to do so in the future;
(r)
as Trustee, Bruder was intended to have
discretion to appoint individual capital beneficiaries of the Trust;
(s)
as Trustee, Bruder was also intended to have
discretion to make distributions of capital to capital beneficiaries of the
Trust as he saw fit;
Outline of the Gifting
Plan
(t)
on September 18, 2003, the Promoter applied to
the CRA for a tax shelter identification number for the Gifting Plan;
(u)
on September 19, 2003, the CRA issued the
Gifting Plan the tax shelter identification number TS 068411;
(v)
the Promoter intended to implement the Gifting
Plan in the following manner:
i)
Jeffrey King, the son of Michael King and a
resident of Grand Cayman Island, would settle the Trust by transferring $100 to
Bruder and executing a trust deed;
ii)
individuals who wished to participate in the
Gifting Plan (the “Donors”) would be required to apply to become capital
beneficiaries of the Trust;
iii)
in their applications, the Donors would indicate
how many software licenses (the “Licenses”) they would like to receive from the
Trust if accepted;
iv)
Bruder would appoint prospective Donors to be
capital beneficiaries of the Trust;
v)
before the end of 2003; Michael King would cause
Multisolve to convey Licenses, equal to the total number of Licenses requested
by Donors, to Jeffrey King;
vi)
each License would convey the right to install
the Software on one computer and to use it for an unlimited amount of time;
vii)
the Licenses would be transferable;
viii)
each License would have a retail value of
$1,499;
ix)
Multisolve would sell the Licenses to Jeffrey
King for a bulk wholesale price of $468 each;
x)
Multisolve would agree to defer payment by
Jeffrey King and instead to take vendor take-back charges over the Licenses in
the amount of $468 per license (the “Liens”);
xi)
the terms of the Liens would be limited-recourse
in that Multisolve’s only recourse upon default would be to cancel a License
and disable the associated copy of the Software;
xii)
after purchasing the Licenses, Jeffrey King
would gift them to Bruder, subject to the Liens, to be added to the capital of
the Trust;
xiii)
before the end of 2003, Bruder as Trustee would
distribute the Licenses – still subject to the Liens – to the Donors as capital
beneficiaries of the Trust, as gifts for no consideration;
xiv)
upon receipt of the Licenses, the Donors would
make two donations to the Foundation:
1) cash donations of $468 per License in order to discharge the Liens
held by Multisolve, and
2) donations of the Licenses themselves, still subject to the Liens;
xv)
the Foundation would issue the Donors two
donation receipts per License:
1) a receipt for $468, and
2) a receipt for $1,031, being the $1,499 retail value of the License
less the Lien of $468;
xvi)
the Foundation would transfer $468 per License
to Multisolve in order to discharge the Liens;
xvii)
the Foundation would then use the Licenses for
charitable purposes;
Marketing and Sales of
the Gifting Plan
(w) Wolf Ventures marketed the Gifting Plan to the public, for which it
received commissions from Multisolve out of Lien payments received from the
Foundation;
(x)
the Gifting Plan was marketed as giving Donors
an after-tax cash benefit that significantly exceeded the cash donation, in
rangethe of 25-26% depending on a Donor’s province of residence;
(y)
at the time of applying to become beneficiaries
of the Trust, Donors were required to pay cash of $468 per License to the
Foundation;
(z)
at the time of applying to become beneficiaries
of the Trust, Donors were also required to complete two different Deed of Gift
forms:
i)
a “Deed of Gift (Cash)” providing for a
purported gift of $468 per software license to the Foundation, and
ii)
a “Deed of Gift (Asset)” providing for a
purported donation of Licenses to the Foundation;
(aa) the Deed of Gift forms presented to Donors were pre-printed with the
Foundation as the recipient of the purported Gifts;
(bb) Donors were advised that the cash payments to the Foundation were
required to be made because the Foundation would not accept gifts of property
that might expose it to financial liabilities like the Liens;
(cc) the Gifting Plan marketed to the public from October to December,
2003;
(dd) the Gifting Plan stopped accepting new Donors on December 15, 2003;
(ee) during that period, 109 Donors, including the Appellant,
participated in the Gifting Plan;
The Appellant’s
Participation in the Gifting Plan
(ff) the Appellant applied for four Licenses pursuant to the Gifting
Plan;
(gg) pursuant to the Gifting Plan, the Appellant purported to donate $1,872
in cash plus the four Licenses to the Foundation in 2003;
(hh) the Appellant did actually pay the Foundation $1,872 pursuant to the
Gifting Plan;
(ii)
in his 2003 income tax return, the Appellant
reported charitable donations of $5,996 ($1,499 x 4);
(jj)
in the 2003 taxation year, the Appellant claimed
total federal and provincial non refundable tax credits of $2,576.95, giving a
“return on cash” of 37.66% ([$2,576.95 - $1,872) ÷ $1,872] x 100%);
The Gifting Plan was
not a Registered Tax Shelter
(kk) the Gifting Plan as the Promoter actually implemented it was a tax
shelter within the meaning of section 237.1 of the Income Tax Act;
(ll)
the Gifting Plan as the Promoter actually
implemented it was not the gifting arrangement for which the Promoter had
obtained a tax shelter identification number from the CRA;
(mm) the Gifting Plan as the Promoter actually implemented it differed
from the Gifting Plan for which the Promoter had obtained a tax shelter
identification number in the following fundamental ways:
|
|
Proposed
|
Implemented
|
|
Software Company
|
eComdata Solutions Ltd.
|
Multisolve
Networks Corp.
|
|
Location of
software company
|
Belize
|
Barbados
|
|
Software program
|
eComdata Office Suite Pro version 5.0
|
eComdata Office Suite Pro version 6.0
|
|
Nature of
the tax shelter property
|
Copies of the
software
|
Licenses to
use the software
|
|
Settlor of
the Trust
|
Jerry Coats
|
Jeffrey King
|
|
Residence
of the Settlor
|
Mexico
|
Cayman Islands
|
|
Relationship
of the settlor to the software vendor
|
Arm’s length
|
Non-arm’s
length
|
|
Cost of the
tax shelter property
|
$999
|
$1,499
|
|
Financing arrangements
|
Settlor to pay vendor $678 cash plus promissory note for $312
|
Settlor to pay
nothing but give lien for $468
|
|
Trust
property
|
Settlor to
contribute copies of software plus notes owing
|
Settlor to
contribute software licenses subject to liens
|
|
Cost to
Donors
|
Donate
software plus $312 to repay note
|
Donate
software license plus $468 to extinguish lien
|
|
Disposition
of software
|
To be donated
to other charities
|
Never acquired
by Foundation; alternate software acquired from other supplier
|
(nn)
the Promoters did not amend the application for
a tax shelter identification number for the gifting arrangement to reflect any
of the differences between the arrangement originally described to the Minister
and the arrangement actually implemented;
The
Gifting Plan as Implemented was not Effective
(oo) the Deed of Settlement intended to constitute the Trust was never
executed;
(pp) no property was actually settled upon Bruder;
(qq) Jeffrey King did not have the requisition [sic] intention to
create the Trust;
(rr)
the Trust was not validly constituted;
(ss) under the intended terms of the Trust, no beneficiary would have had
any interest in the Trust property until being appointed by the Trustee;
(tt)
the potential class of capital beneficiaries was
unlimited and could not possibly be identified;
(uu) under the Gifting Plan, Donors who received Licenses from the Trust
could have retained the Licenses for their own use absolutely;
(vv) the purpose of the Trust was not a charitable purpose, but instead
was merely to benefit persons who support charities;
(ww) the
Software did not actually exist;
(xx) if the Software did exist, Jeffrey King did not at any time acquire
ownership of any Licenses and he did not at any time convey any such Licenses
to Bruder;
(yy) neither Bruder, as Trustee, nor the Donors, as beneficiaries, ever
acquired ownership of any Licenses;
(zz) if any Donors did acquire ownership of any Licenses, that
acquisition did not occur until after the 2003 year;
(aaa) the Foundation did not at any time acquire ownership of any
Licenses;
(bbb) the
Foundation did not distribute any Licenses to other registered charities;
(ccc) in 2004, the Foundation purchased replacement software from a
different supplier;
(ddd)
there was numerous inconsistencies in the
documents prepared to implement the Gifting Plan, including:
i)
the documents purporting to transfer Licenses to
capital beneficiaries of the Trust referred to a different individual than
Jeffrey King as the settlor of the Trust;
ii) the documents purporting to transfer Licenses to capital
beneficiaries of the Trust stated that the Trust property consisted of 2,041
Licenses, whereas Multisolve, the purported vendor, claimed to have sold only
1,349 Licenses to Jeffrey King;
iii) the documents purporting to transfer Licenses to capital
beneficiaries of the Trust stated that the Licenses were issued by eCom
Software Company, a division of Redfox Isles Limited, a company resident in the
Isle of Man, UK, rather than by Multisolve, the purported vendor of the
Software;
iv) the License certificates issued to the Donors identified Redfox
Isles Limited, not Multisolve, as the issuer of the Licenses;
v) the License certificates issued to the Donors differed in form from
the Licenses issued by Multisolve;
vi) the Lien certificates provided to the Donors identified eCom
Software Company, rather than Multisolve, as the secured party holding the
Lien;
vii) the
Foundation made Lien payments to Multisolve and a Lien Payment Agreement
between the Foundation and Multisolve was prepared, even though the actual
License and Lien certificates state that Redfox Isles Limited held the Liens;
The Purported
Donations were not Valid Gifts
(eee) the documents prepared to implement the Gifting Plan were prepared
in advance and the Donors were required to sign them at the time of applying to
become beneficiaries of the Trust;
(fff) Donors were not able to become beneficiaries of the Trust without
making cash payments to the Foundation;
(ggg) Donors
expected to receive benefits for making cash payments to the Foundation by
receiving Licenses for no consideration upon becoming beneficiaries of the
Trust;
(hhh) the Donors
did not make the cash payments to the Foundation voluntarily because the
payments were pre-ordained by the Promoter;
The Fair Market Value
of the Licenses was Nil
(iii) if the Software did in fact exist, the fair market value of the
Software at all times was nil;
(jjj) the fair market value of the Licenses purportedly acquired by the
Donors and donated to the Foundation was at all times nil; and
(kkk) accordingly, the fair market value of a valid donation made pursuant
to the Gifting Plan, if any were made, is nil.
III. Respondent’s Position
[4]
The respondent argues
that the appellant is not entitled to a tax credit for the following reasons:
(a)
According to the
respondent, the promoters of the Charitable Technology Gifting Program obtained
a tax shelter identification number and then proceeded to implement a totally
different plan that amounted to an unregistered tax shelter. Therefore, no one
can claim a tax credit in respect of gifts made to the Foundation.
(b)
There is no evidence
that the software that was allegedly gifted to the Foundation existed.
(c)
There is no evidence
that the trust through which the appellant was to acquire the software licences
for the purpose of gifting them to the Foundation existed.
(d)
The appellant’s cash
payment to the Foundation cannot be treated as a separate transaction because of
the interconnection between it and the proposed acquisition of the software
licences by the appellant for no consideration. This expected benefit nullified
the appellant’s donative intent.
IV. Appellant’s Position
[5]
The appellant takes the
contrary position.
V. Analysis
(a) Tax Shelter
[6]
The respondent argues
that the Charitable Technology Gifting Program is a tax shelter within the
meaning of subsection 237.1(1) of the Income Tax Act (the “ITA”).
The appellant does not dispute this claim. The parties disagree, however, on
whether the Program was properly registered as a tax shelter by the promoters.
The respondent claims it was not. The appellant takes the opposite view.
[7]
The respondent argues
that the promoters of the Charitable Technology Gifting Program implemented an
arrangement that is materially different from the gifting arrangement described
in their application for a tax shelter identification number. The respondent
observes that the two arrangements differ in the following particulars: (a) the
identity and residence of the software vendor; (b) the identity and residence
of the settlor of the trust; (c) the nature of the property to be acquired and
donated; (d) the value of the property; (e) the participants’ cost of participating
in the arrangement; and (f) the ultimate use of the software by the registered
charity.
[8]
The purpose of the tax
shelter rules is to ensure that the promoter of a tax‑sheltered
investment registers the arrangement and obtains a tax identification number
before the investment is marketed to potential investors. In addition, the
promoter must provide the Canada Revenue Agency (the “CRA”) with a list of
investors or participants, including their names, social insurance numbers and
other prescribed information. A participant in a tax shelter is required to
disclose the identification number in his or her tax return, failing which the
participant will be denied the tax benefit. It is clear that the registration
scheme does not constitute a pre-clearance of the arrangement by the CRA. The
registration in and of itself does not entitle the participants to any of the
benefits that are claimed by the promoters to be associated with the tax
shelter. The objective of the registration scheme is to facilitate the audit by
the CRA of all taxpayers who have participated in the same tax-sheltered
arrangement.
[9]
I understand that in
the present case the registration scheme worked as intended, as the CRA was
able to audit all of the participants in the Charitable Technology Gifting Program.
A literal interpretation of the provisions relied on by the respondent would
impose on promoters of tax shelters an obligation to abandon an existing
registration and reapply for a new number each time a change was made to the
arrangement. At the hearing, I asked counsel for the respondent how a taxpayer can
ascertain that all changes made to the tax-sheltered investment have been
properly disclosed to the CRA. Counsel admitted that the registration forms are
not posted online. The only information a taxpayer can obtain is the fact that
the tax shelter number disclosed to the taxpayer by the promoters corresponds
to a number issued by the CRA. In my opinion, if Parliament had favoured a
dynamic reporting regime, it would have introduced a registration system that
affords taxpayers the possibility of determining whether changes have been
properly disclosed to the CRA by promoters.
VI. Gift of Software
[10]
According to the
promotional material presented to him, the appellant was to acquire the
software licences in the following manner:
(a) The appellant would become a capital
beneficiary of the Charitable Technology Trust (the “Trust”).
(b) Multisolve Network Corporation would
transfer the licences to Jeffrey King.
(c) Jeffrey King would transfer the
licences to the Trust.
(d) The appellant would acquire those licences as
a capital beneficiary of the Trust.
[11]
It is well established
that, in assessing tax within the normal assessment period, the Minister is
entitled to make assumptions of fact. On appeal the assumptions are taken to be
accurate unless the appellant leads evidence to establish a prima facie case
that the assumptions are wrong. As noted above, the appellant led no evidence
to establish that the software existed and/or that he gifted it to the Foundation.
[12]
The appellant
acknowledged that he did not receive any software licences or a copy of the
software. He admitted that he had no knowledge whether the software existed.
The appellant led no evidence to rebut the Minister’s assumptions that the
software did not exist and that the Charitable Technology Gifting Program was
not properly implemented in the appellant’s 2003 taxation year. While this alone
is sufficient for the respondent to defend the Minister’s assessment, the
respondent presented compelling evidence to show that the software licences
were not acquired by the appellant, which made it impossible for him to have
gifted the licences to the Foundation in his 2003 taxation year.
VII. Gift of Cash
[13]
The appellant maintains
that he is entitled to a tax credit for his alleged cash gift made to the
Foundation in 2003. The respondent counters that the appellant did not make a
valid gift of cash to the Foundation because he gifted the cash as part of an
integrated scheme under which he was to receive valuable software licences.
[14]
I note that the term
“gift” is not defined in the ITA. It is however well established that “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”.
[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.
[16]
The appellant insists
that his cash donation should be considered separately from the alleged gift of
the software licences. I disagree. In Maréchaux v. The Queen,
the Federal Court of Appeal agreed that it is inappropriate to separate
transactions forming part of an integral arrangement into their cash and non-cash
parts.
[17]
Considering the
evidence as a whole, I find that the appellant would not have paid the cash to
the Foundation without the understanding that he would receive software licences
from the Trust which he could then gift to the Foundation for an enhanced tax
credit. The marketing material relied on by the appellant makes it clear that
his cash donation was earmarked for the discharge of the liens on the software,
a step that was required in order for him to transfer his software to the Foundation.
[18]
In summary, the
evidence shows that the appellant’s goal was not to enrich himself. Rather, he intended
to profit by participating in the Program through the acquisition of software
that could be gifted to a charity for an enhanced tax benefit.
[19]
The appellant’s expectations
in this regard nullified his donative intent. His alleged cash gift cannot be
considered in isolation from the overall plan, which the evidence shows was not
properly implemented.
[20]
For all of these
reasons, the appellant’s appeal is dismissed.
Signed at Magog,
Quebec, this 25th day of July 2013.
"Robert J. Hogan"
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