Dockets: 2012-423(IT)G
2012-562(IT)G
2013-36(IT)G
2012-1995(IT)G
BETWEEN:
GEORGE
MARKOU
WILLIAM
HENDERSON
SIMONETTA
OLIVANTI
GERRY
PETRIELLO,
Appellants,
and
HER
MAJESTY THE QUEEN,
Respondent.
The Honourable Justice Campbell J. Miller
DETERMINATION PURSUANT TO RULE 58(1) OF THE
TAX COURT OF CANADA RULES (GENERAL
PROCEDURE)
IT
IS HEREBY DETERMINED that:
1.
The Court has the jurisdiction to determine
whether proceeds (“Proceeds”) obtained by the Appellants pursuant to certain Loan Agreements, as
more particularly described in the Reasons attached hereto, are subject to a Quistclose
trust.
2.
The Proceeds were not subject to a Quistclose
trust.
Signed at Ottawa,
Canada, this 1st day of June 2016.
“Campbell J. Miller”
Citation:
2016 TCC 137
Date: 20160601
Dockets:
2012-423(IT)G
2012-562(IT)G
2013-36(IT)G
2012-1995(IT)G
BETWEEN:
GEORGE MARKOU
WILLIAM
HENDERSON
SIMONETTA
OLIVANTI
GERRY
PETRIELLO,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR DETERMINATION
(Determination
heard on May 5 and 6, 2016, in Toronto, Ontario.)
C. Miller J.
[1]
This is a Determination pursuant to Rule 58(1)
of the Tax Court of Canada Rules (General Procedure) (“Rules”)
addressing four Appellants’ Appeals. These Appellants are representatives of
many other Appeals from Appellants represented by Davies, Ward, Phillips and
Vineberg LLP.
[2]
The Parties framed the Determination as follows:
1. The determination of the following questions of law and
mixed questions of fact and law, pursuant to rule 58(1) of the Tax Court of
Canada (General Procedure) (“Rules”):
a) in respect of a purported donation made to the John
McKellar Charitable Foundation (the “Foundation”)
in 2001 by William Henderson (“Henderson”), who
resided outside Quebec at the time he made the purported donation:
i. does this Court have the jurisdiction to determine
whether the proceeds that Henderson obtained in accordance with the Loan
Application, Agreement and Power of Attorney, dated December 17, 2001 (a copy
of which is attached as Schedule A) were subject to a Quistclose trust?
ii. if so, were the proceeds that Henderson contracted in
accordance with the Loan subject to a Quistclose trust?
b) in respect of a purported donation made to the Foundation
in 2001 by Simonetta Olivanti (“Olivanti”), who
resided in Quebec at the time she made the purported donation:
i. does this Court have the jurisdiction to determine
whether the proceeds that Olivanti obtained in accordance with the Loan, dated
December 3, 2001 (a copy of which is attached as Schedule B) were subject to a Quistclose
trust under the law of Ontario?
ii. if so, were the proceeds that Olivanti contracted in
accordance with the Loan subject to a Quistclose trust?
c) in respect of a purported donation made to the Foundation
in 2002 by George Markou (“Markou”), who resided
outside Quebec at the time he made the purported donation:
i. does this Court have the jurisdiction to determine
whether the proceeds that Markou obtained in accordance with the Loan, dated
November 27, 2002 (a copy of which is attached as Schedule C), subject to a Quistclose
trust?
ii. if so, were the proceeds that Markou contracted in
accordance with the Loan subject to a Quistclose trust?
d) in respect of a purported donation made to the Foundation
in 2002 by Gerry Petriello (“Petriello”), who
resided outside Quebec at the time he made the purported donation:
i. does this Court have the jurisdiction to determine
whether the proceeds that Petriello obtained in accordance with the Loan, dated
November 27, 2002 (a copy of which is attached as Schedule C), subject to a Quistclose
trust?
ii. if so, were the proceeds that Petriello contracted in
accordance with the Loan subject to a Quistclose trust?
[3]
I have attached as Exhibit A the Partial Agreed
Statement of Facts provided by the Parties. Although there is considerably more
background than is necessary for the purposes of this Determination it is
expedient to attach the Partial Agreed Statement of Facts in their entirety. I
have used the defined terms in the Partial Agreed Statement of Facts in my
Reasons.
[4]
As well as the Partial Agreed Statement of
Facts, two of the four Appellants testified, and the Parties agreed that the
answers obtained would be substantively similar to the other two Appellants.
The gist of the testimony was that they were not aware of the many preordained
arrangements, but simply believed they were making a donation using borrowed
funds. They also admitted they were not involved in any negotiations but were
aware or indeed had reviewed the lengthy opinions provided by Fraser, Milner,
Casgrain LLP (“FMC”) and BDO Dunwoody. They were introduced to the donation
programs by financial advisors, from whom they obtained packaged materials with
respect to the program.
[5]
I also produce excerpts from the Loan Agreement:
AND WHEREAS the
Borrower has by instrument of pledge of even date (the “Pledge”)
pledged a donation of the sum of $11,000,000 (the “Donation”)
to the Charity, has delivered to the Solicitors for Trinity, Fraser, Milner,
Casgrain LLP, in Trust the sum of $3,520,000 (32% of the Donation) (the “Pledge Deposit”) and wishes to borrow the balance of
$7,480,000 (68% of the Donation) together with the additional sum of
$1,870,000 (17% of the Donation) (the “Expense
Deposit”) (collectively, the “Loan Amount”)
from the Lender in order to fulfill the Pledge;
AND WHEREAS the
Borrower by this Agreement will authorize and direct the Lender to make an
application on behalf of the Borrower for an insurance policy which will, inter
alia, insure the risk that the Security Deposit (as hereinafter defined) does
not increase in value to equal the Loan Amount on the Due Date, as hereinafter
defined (the “Policy”);
…
2.2
If this Loan Application is not accepted, the
Pledge Deposit shall be immediately returned to the Borrower, without interest
or deduction. If this Loan Application is accepted, then the Lender agrees to
advance the Loan Amount to the Borrower and the Borrower hereby irrevocably
authorizes and directs the immediate delivery of the Loan Amount (less the
Expense Deposit, which shall be disbursed in accordance with Section 2.3
hereafter) and the Pledge Deposit to or to the order of the Charity on behalf
of the Borrower, and upon such deliveries the Lender will be deemed to have
advanced to the Borrower the Loan Amount, and Fraser, Milner, Casgrain LLP will
be deemed to have thereby fully discharged its obligations regarding the Pledge
Deposit.
2.3
In the event that this Loan Application is
accepted, the Borrower hereby irrevocably authorizes and directs Fraser,
Milner, Casgrain LLP to make disbursement of the Expense Deposit in accordance
with the provisions of the fourth recital above, and Fraser, Milner, Casgrain
LLP will be deemed to have thereby fully discharged its obligations regarding
the Expense Deposit.
[6]
Finally, I include an excerpt from a letter from
FMC to one of the Appellants dated February 5, 2003:
We advanced, on
your behalf, the sum of $11,000,000.00 as a donation to the Foundation pursuant
to your Pledge. The balance of the funds in the amount of $1,870,000.00 was
disbursed in accordance with your direction in the Loan Agreement as follows:
A. Does the Court have
jurisdiction?
[7]
The first issue that the Parties ask me to
determine is whether this Court has the jurisdiction to find there is or is not
a Quistclose Trust. The Respondent argues that the Quistclose
Trust is an equitable remedy only available to a lender in a court of equity,
which the Tax Court of Canada is not. The Quistclose Trust evolved to
provide a priority to a lender over other creditors. This Court cannot make such
an order. I am not, however, being asked to invoke such a remedy. I am
simply being asked if the circumstances are such that that equitable remedy
would have been available to the lender, Capital, as the Appellants are of the
view that such a finding would impact on the issue of whether or not they
received any benefit vitiating a finding of gift.
[8]
The Respondent argues that by making such a
finding, I am in fact making a declaration providing the equitable remedy
itself. The Respondent’s view is that equity does not need to be invoked nor
was intended to be invoked in these circumstances. There was no injustice that
needs addressing; certainly, no injustice to the lender, who is the only proper
Party to seek this remedy. The Respondent referred me to different lines of
authority on this issue of jurisdiction, including my decision in the case of Warren
v The Queen,
former Chief Justice Bowman’s decision in the case of Savoie v R, Justice Webb’s decision in the
case of Darte v R,
and this Court’s and the Federal Court of Appeal’s decisions in case of Hardtke
v R.
There are other cases following one or other of these lines of authority, but I
will address these lead cases only.
[9]
In the Warren decision, in which I relied
to some extent on Justice Bowman’s decision in Savoie, I decided
that it is open to this Court to address both the legalities and the equities
arising from a certain set of facts. Surely that is our role if we are to
correctly assess tax that is exigible based on those circumstances. If the circumstances
suggest a trust, and that finding is necessary to get to a correct assessment,
it would be strange indeed if the Court was precluded from making such a
finding. The Respondent admits that if it were an express trust only, then I am
correct in that thinking, but if it is the equitable remedy of a resulting
trust or constructive trust, I am incorrect in that thinking.
[10]
The Respondent’s counsel referred to Justice
Webb’s decision in Darte as being the leading case in the line of
authority suggesting this Court does not have jurisdiction to make findings of
resulting or constructive trust. Justice Webb went through a detailed review of
the constructive trust, concluding that there had been no finding by a court of
equity that, in the case before him, there was a constructive trust. He rightly
indicated that the Tax Court of Canada is not a court of equity and, therefore,
an equitable remedy of constructive trust could not be granted. However, he
reached an equitable result. In his decision, he made the following statement:
It would be
unfair to not recognize her rights to an interest in the property.
So, without
declaring a constructive trust as such, Justice Webb found the Appellant had a
right to apply to a court of equity for such a declaration and that right had a
value for purposes of the application of section 160 of the Income Tax Act
(the “Act”). In my decision in Warren
I called this an end around: indeed, a clever way of achieving a correct
assessment without, in Justice Webb’s view, doing something he believed this court
had no authority to do.
[11]
With respect, I do not believe it should require
such legal gymnastics.
[12]
In Huppe v R, Justice Webb again had an opportunity
to address this Court’s jurisdiction with respect to equitable remedies. In that
case, he was dealing with the possible equitable remedy of specific
performance. He again confirmed that this Court is not a court of equity and,
therefore, absent some specific authority “cannot grant
the remedy of specific performance”. But Justice Webb again finds a
way to make this right. He indicates:
18. Therefore this Court has been granted the jurisdiction to
determine appeals under the Act and in relation to such appeals has been
granted the power to allow an appeal and to grant the remedies provided in
paragraph 171(1)(b) of the Act including the power to vary the assessment or
refer the assessment back to the Minister for reconsideration and reassessment.
Since the remedy that the Appellant would be seeking (since the Appellant
indicated that the matter was settled) would be to vary the assessment or to
refer the matter back to the Minister for reconsideration and reassessment, and
since this Court has been specifically granted the power to order this remedy
in disposing of an appeal, it seems to me that this Court does have the
jurisdiction to enforce the agreement (by allowing the appeal and varying the
assessment or referring the assessment back to the Minister for reconsideration
and reassessment), if the Appellant can establish that such an agreement was
made in this case. For any of the remedies as provided in paragraph 171(1)(b)
of the Act, this Court does not need to be a court of equity to grant such
remedy as this Court has been granted the power to grant these specific
remedies. If, however, specific performance of the contract would require the
granting of any remedy other than one of the remedies as provided in paragraph
171(1)(b) of the Act, then this Court would not have the jurisdiction to grant
such remedy.
[13]
This hits the nail on the head. This Court’s
role is to determine a correct assessment. As a court of equity, it cannot
order property be delivered to one creditor over another arising from a
constructive trust: it cannot order one spouse to pay another spouse arising
from a resulting trust: it cannot order specific performance. Those are the
remedies courts of equity can grant and this Court cannot.
[14]
The Respondent points to jurisprudence in courts
of equity that refer to a resulting trust as an equitable remedy. It is not
surprising that in a court of equity the jurisprudence refers to the resulting
trust itself as an equitable remedy as it leads to the type of order I have
just described. Frankly, that is not helpful in the context of this Court.
Acknowledging the existence of a resulting or constructive trust in this Court,
cannot lead to the order a court of equity could grant, but it can and it
should allow this Court to determine the correctness of the assessment, with
its eyes wide open to all the circumstances, factual, legal and equitable.
[15]
Respondent’s counsel suggested, albeit
respectfully, that Justice Bowman’s decision in Savoie lacked detailed
analysis of this important issue and that my decision in Warren should
be rethought, and that this was my opportunity to recant. I do not. Justice
Webb’s conclusion in Darte and in Huppe and my conclusion in Warren
are not at odds. Perhaps, he was more circumspect.
[16]
I cannot, nor would I ever be so presumptuous as
to speak for the former Chief Justice. But perhaps the reason he and I did not
go through an extensive analysis that the Respondent seeks, is because,
frankly, it is so apparent that we can consider a taxpayer’s rights, legal,
contractual and equitable in assisting us get to a correct assessment. I am
confirmed in this view by the Federal Court of Appeal’s comment in Hardtke.
At trial, Justice Valerie Miller wrote the following in her decision:
57. Counsel for the Appellant has requested that I declare
that prior to the transfer, the Appellant held 50% of the Property by way of a
constructive trust. It is my opinion that this court does not have the
jurisdiction to grant the equitable remedy of constructive trust. Although the
Tax Court is a superior court, it was created by statute and unlike the
provincial superior courts it does not have inherent equitable jurisdiction. I
agree with Webb J., as he then was, that the Tax Court is not a court of equity
and cannot grant or declare the equitable remedy of a constructive trust: Darte
(supra) at paragraph 21.
58. Even if I had the jurisdiction to declare a constructive
trust, this would require an analysis of the entire relationship between the
Appellant and her spouse; the contributions each made to their assets and their
liabilities; whether there were any agreements, marriage contracts, separation
agreements or in general, any factors the parties would utilize in arguing for
the division of their property rights: Kardaras v Canada, 2014 TCC 135. That
analysis would have been impossible to make in the present case because the spouse
was not a witness at the hearing and the evidence was lacking.
[17]
At the Federal Court of Appeal, Chief Justice
Noël stated:
It suffices to
say in this regard that the question whether the evidence establishes the
existence of a constructive trust is one of fact which must be established on a
balance of probabilities (Hickman Motors Ltd. v. Canada, [1997] S.C.R. 336 at
para. 92), and that no error of a palpable and overriding nature has been
demonstrated with regard to the Tax Court judge’s conclusion that the evidence
fell short of establishing the existence of a constructive trust (reasons,
paras. 58 and 60).
[18]
Respondent’s counsel suggested that the Chief
Justice could not have been addressing this important issue so lightly, and
indicated that he only referred to paragraph 58 and not paragraph 57 of the
trial decision. I do not believe that Chief Justice Noël would have read
paragraph 58 in a vacuum. The issue was squarely before him. The other
possibility is that because the Federal Court of Appeal is a court of equity
(see the Federal Court Act) that the Federal Court of Appeal could make
this determination so it is simply not an issue. That would result in the
unsatisfactory position that a taxpayer could only obtain a thorough review of
its circumstances leading to a correct assessment at an appeal court, and not
at the very court set up to provide it at first instance.
[19]
The Respondent suggests that being a court of
equity must mean something. I agree. She seeks a bright line as to what this court
can and cannot do vis-à-vis equitable remedies. The Tax Court of Canada can
look at a taxpayer’s circumstances and make a determination as to what facts
are true and what legal and equitable rights are available to the taxpayer
where such findings will assist the court deciding the correctness of the
assessment. The Tax Court of Canada cannot order what a court of equity can
order as a result of finding an equitable trust exists. For example, the Tax
Court of Canada cannot order property be paid to one creditor over another and
it cannot order property be paid from one spouse to another. It can, however,
analyze the correctness of an assessment acknowledging any and all rights a
taxpayer may have. Frankly, that is exactly what Justice Webb did in Darte.
[20]
Perhaps, the question on this Determination
would have created less jurisdictional controversy if it had been framed in
terms of what interest, if any, did the Appellants’ have in the funds prior to
delivery to the charity. The Respondent would allow me to take into account an
express trust in making that finding, but not a constructive or resulting
trust. With respect, that amplifies the absurdity of extending the limitations
on this Court of not being a court of equity to cover a simple acknowledgment
of the circumstances of a resulting or constructive trust.
[21]
My answer to the first issue is yes: this Court
has jurisdiction to determine if there was a Quistclose trust.
B. In the circumstances before
me, was there a Quistclose trust?
[22]
I could write a lengthy treatise on what is a Quistclose
trust in Canadian law. I see no need to do that. I recognize considerable work
has gone into arguing this issue and it has, with respect, been somewhat
confusing due to the disagreement between the Parties as to the true nature of
the trust (intentional, constructive, resulting) and whether the law is settled
in Ontario on this point. I conclude this is simply not a Quistclose
situation so I will be relatively brief in examining the many twists and turns
in the development of the so-called Quistclose trust.
[23]
The birth of this concept and its evolution
originated with the Barclays Bank Ltd v Quistclose Investments Ltd. case itself followed by the
case of Twinsectra v Yardley.
Reading those cases and the Canadian jurisprudence following in both British
Columbia and Ontario,
and in reviewing the considerable academic commentary from experts in the trust area, I conclude
that the Quistclose trust is a concept known to Ontario law. It provides
a right to a lender to an equitable remedy in situations where the lender has
loaned funds to a borrower for a specific purpose, and where the lender is
exposed to the risk of other creditors swooping in and snatching those funds
from the borrower before the borrower uses them for the intended purpose. As
put succinctly in Twinsectra, the trust “is
essentially a security device to protect the lender against other creditors of
the borrower pending the application for the money for the stated purposes”.
The underlying rationale being explained by Lord Millett in Twinsectra
is that equity intervenes because “it is unconscionable
for a man to obtain money on terms to its application and then disregard the
terms on which he received it”. In fact, notwithstanding all the
commentary written about this concept, it is relatively straightforward.
[24]
I find, however, that the Appellants and more
appropriately the lender, in this situation, are not in a Quistclose
arrangement. They are in a contractual arrangement where, in Mr. Henderson’s
case for example, on one day a lender puts funds into its law firm’s trust
account, with the lender holding an irrevocable authority and direction from a
borrower to immediately deliver funds to a charity. The funds do not vest in
the borrower prior to delivery to the charity, permitting any possibility of
the funds being held by the borrower in any trust, resulting, constructive or
otherwise. The lender is in no need of the protection of a Quistclose trust,
but is protected by the contractual arrangement already in place and by the
fact the funds never leave its control. They go into their lawyer’s trust
account, not into the borrower’s trust account as was the case in Twinsectra.
[25]
The loan agreement itself deems the loan only to
have taken place upon delivery to the charity. I note specifically in paragraph
32 of the Partial Agreed Statement Facts that it is the lender, Capital, who
directs the law firm to pay the funds to the charity’s law firm, WeirFoulds. I
conclude FMC was never holding funds in trust for the borrower but for Capital,
who was consequently never exposed to risk from the borrowers’ creditors, the
circumstances necessary to give rise to a Quistclose trust in Ontario.
[26]
I acknowledge paragraph 2.3 of the loan
agreement provides power to the borrowers to direct FMC to disburse funds but
that is with respect to the Expense Deposit not the loan amount itself. FMC
were never the Appellants’ lawyers.
[27]
The situation is not unlike the credit card
arrangement Mr. Lubetsky described. For example, a Bank of Montreal Mastercard
holder uses its credit card to donate to a charity. The charity looks to the
Bank of Montreal for payment. The Bank of Montreal and the cardholder have an
agreement which effectively has the cardholder directing the Bank of Montreal
to make the payment. At that point, the time of delivery of funds by the Bank
of Montreal to the charity, there is a loan between the Bank of Montreal and
the cardholder.
[28]
I believe there are parallels to the situation
before me, with the only distinction being the lender puts funds into its
solicitors trust account. That, I conclude, is the only trust, an express
trust or, as Mr. Lubetsky’s preference is, an intentional trust. But, to be
clear, FMC does not hold the funds as any type of purpose trust. The law firm
holds the funds at the direction of its client, the lender, not the borrower. The
borrower and Capital have an agreement that the borrower may direct Capital.
FMC is not part of that loan agreement. It simply gets its client’s money and
waits for its client’s direction, notwithstanding what the agreement between
its client, (the lender) and the taxpayer might say.
[29]
A Quistclose trust requires several
elements, but essential to it, and to any trust, is that property is vested
somewhere: someone has legal title. With the Quistclose trust, the
property is vested with the borrower who has a fiduciary obligation to use funds
for a specific purpose or return the funds to the lender. In cases cited to me,
the property, usually money, vested with the borrower or the borrower’s agent,
such as Mr. Sims in Twinsectra acting for Mr. Yardley.
[30]
Put simply, Capital does not need to turn to the
equitable remedy of a Quistclose trust as I find it never divested
itself of control of the funds. It could always say to FMC give me my money
back based on the terms upon which it deposited funds to FMC’s account, being,
hold the money until I direct you where to send it. Until the funds were
delivered to the charity, or the charity’s lawyers, did the Appellants hold an
interest in the funds? This raises a curious point: was there an instant, a
nanosecond perhaps, before the funds vested with the charity that the funds
were beneficially held by the borrower?
[31]
Dennis Klink in an article, “Recharacterizing the Quistclose trust: Lord Millett’s
obiter dicta in Twinsectra”
provided an intriguing approach to this legally awkward situation. Clearly, to
fulfill the raison d’être of this donation program, the Appellants had to have
something to donate. They entered a loan agreement to be put in funds to
complete their donation. Through the auspices of the FMC trust account and the
construction and operation of the loan agreement itself, funds did not pass
through the Appellants’ or their agents’ hands.
[32]
Although he was addressing parties’ respective
interests in a Quistclose trust, Professor Klink did raise the
possibility of what he called a contingent beneficial interest (in the
borrower) that does not “preclude the presence of the beneficial
interest in the lender”. Could that, however, still be the situation in
the case before me where legal title has not transferred to the Appellants but
they have some type of interest in the funds held by FMC? The loan agreement
(paragraph 2.2) would suggest that at the very least the Appellants had a power
to direct where funds are to go. Does this power, even if this situation is not
considered a Quistclose trust situation (as legal title is not held by
the Appellants), give the Appellants some contingent beneficial interest in the
express trust upon which the funds were held by FMC? I am struck by Professor Klink’s
comment that a “loan for a specific purpose is really a
trust, or at least can be partnered with a trust, as a way of manipulating
legal concepts so as to reach some results”. Is that not what lawyers
do?
[33]
Let us step back for a moment, put aside legal
manipulations and attempt to clearly identify what is truly going on:
1.
The Appellants and Capital have an agreement in
which Capital agrees to lend money to the Appellants.
2.
In that very agreement, the Appellants direct
Capital to deliver the loan funds to a charity on the Appellants’ behalf.
3.
Capital delivered funds to its parent’s law firm
(FMC).
4.
Capital directs FMC to deliver the funds to the
charity’s law firm, and, according to the agreement, this triggers the debt
relationship between Capital and the Appellants.
5.
FMC confirms funds were delivered to the charity
on the Appellants’ behalf.
[34]
I have concluded that no legal title ever vested
in the Appellants that would give rise to the protective Quistclose
trust in Capital’s favour. And, notwithstanding the attractiveness of Professor
Klink’s contingent beneficial interest approach, I have not been referred to
any jurisprudence suggesting such a notion and frankly, it does not make sense
to rely on such a concept in the fact situation before me. The Appellants, in
granting an irrevocable authority to Capital to deliver monies to the charity,
had exhausted any power they might have had while the funds were held by FMC.
Capital, and only Capital, could direct FMC: the Appellants could not, once the
funds were delivered to FMC, direct otherwise. They had no further power at
that stage. There was simply no beneficial interests by the Appellants in the
money held by FMC. What the Appellants had was a right to sue Capital for
breach of contract should Capital have directed FMC not to deliver the funds to
the charity.
[35]
It was discussed at the hearing whether the
Appellants, at the instant funds were delivered to the charity, held an
interest in the funds. This is a beat your head against a brick wall discussion,
which I consider unnecessary. I have concluded that until the funds were
delivered to the charity’s lawyers, the Appellants had no legal or beneficial
interest in the funds. Once delivered to the charity’s lawyers, the Appellants had
a debtor/creditor relationship with Capital. That is all.
[36]
In answer to the questions for the
Determination, I find that yes this Court has authority to consider whether or
not there is a Quistclose trust situation, and no there was no Quistclose
trust in the circumstances before me.
[37]
If the Parties wish to make any submissions on
costs, they shall do so within 30 days of these Reasons, otherwise I make no
award of costs.
Signed at Ottawa,
Canada, this 1st day of June 2016.
“Campbell J. Miller”
EXHIBIT
A
SCHEDULE E
20 l 4-423(IT)G
TAX COURT OF CANADA
BETWEEN :
GEORGE MARKOU, ET AL.
Appellants
and
HER MAJESTY
THE QUEEN
Respondent
PARTIAL AGREED STATEMENT OF FACTS
For the purposes of the appeals
involving purported donations
to the John McKellar
Charitable Foundation (the "Foundation"), where the appellants are currently represented
by Davies Phillips
Ward & Vineberg LLP (the "McKellar Appellants"), the parties admit
the truth of the facts set out in paragraphs 1 and following of this Partial
Agreed Statement
of Facts and agree that they are not precluded,
at the hearing of the motion or at trial, if
there is a trial, from calling evidence
to supplement these facts as long as this evidence
does not contradict these facts and as long as, at the hearing of the motion,
the evidence is
relevant to the questions to be determined.
For the purposes of these appeals,
except as specifically noted, the parties also agree that
the documents referred
to in this Partial Agreed
Statement of Facts may be accepted for their
truth2 and that the copies of the documents appended
in tabs to this Partial Agreed
2 In respect
of the documents, the respondent does not admit
that the McKellar
Appellants made donations to the Foundation or that their
Pledges reflected an intention to make
donations to the Foundation
regardless of whether they received proceeds
from lenders or
that their
Pledges were legally valid or intended as anything other than window dressing.
Statement of Facts are authentic within the meaning of rule 129 of the Tax Court
of Canada Rules (General
Procedure).3
A.
The leveraged-donation program
1.
From
2001 to 2003, Trinity Capital
Corporation ("Trinity") promoted and operated a leveraged-donation program through which participants obtained charitable
donation tax receipts from the Foundation
(the "Program").
2.
In 2001 and 2002,
the Program was known as The Donation
Program for Medical Science and
Technology.
3.
Trinity
was incorporated in 1982 pursuant to the laws of Canada by James Beatty ("Beatty"), and ultimately dissolved in 2013.
A copy of an extract
from the website of Industry Canada is attached as tab Al .
4.
The Foundation is a charity
first registered with the CRA in 1987. A copy of the CRA's
Canadian registered charities
-detail page for the Foundation, printed from the CRA's
website on November 27, 2015 is attached
as tab A2.
5.
John McKellar, CM, QC, a lawyer
with WeirFoulds LLP ("WeirFoulds"),
established the Foundation, and the initial
directors were John D. McKellar, Marjorie McKellar and Barbara
McKellar. The copies of the T3010 Registered Charity Information Form, including
financial statements, filed by the Foundation
with the CRA for 2001 is attached
as tab A3.
6.
In its Registered Charities Information Return
for the fiscal
period ended December 31, 2002, the Foundation reported having received for that period $106,207,809 in tax-receipted gifts (i.e., not received
from other charities) and reported having
made
Nor does the respondent agree with the legal opinions
found in the promotional material for the leveraged-donation program
in issue in these appeals.
3 Apart from hand-written marks and notes found on some copies
of the documents.
for that same period gifts to qualified donees of $103,693,534 as set out in the two tables
found in tab A4.4
7.
The Foundation remains a registered charity and is located
in Toronto, Ontario.
8.
Through
the Program, Trinity
facilitated the transfer
of funds from
the participants to the Foundation.
B.
The 2001 Program
9.
The Foundation issued 118 charitable donation tax receipts
to participants in this
Program in the 2001 year (the "2001 Program").
10.
Generally speaking, Trinity or its agent would contact
a potential participant to make a donation
to the Foundation.
11.
The
2001 Program required
participants to pledge
an·amount to the Foundation, called the Pledge Amount.
12.
Trinity
arranged for the entering into a loan5 for all the participants in the 2001 Program to borrow funds for a substantial portion
of their Pledge Amount from Capital Structures Ltd. ("Capital"), a subsidiary of Trinity.
13.
Capital
was created for
the sole purpose
of providing loans for the Program. Attached as tab B1 is a photocopy of the promotional material that outlines
the 2001 Program.
4 The use to which one of the qualified
donees, The McKenzie
Institute, put the funds that it
received from the Foundation is an issue for trial.
The reason the Foundation made the
reported gift to the McKenzie
Institute is an issue for trial.
5 With respect to the Quebec appellants, it is not admitted that the contracts
entered into are characterized as loans pursuant
to Quebec civil law, despite
how the contracts were initially named. The Quebec appellants reserve the right to argue the characterization of such contracts under Quebec law.
14.
Capital
was incorporated pursuant
to the laws of Ontario
on October 12, 2001.
Previously named 1496490
Ontario Inc., then Trinity Capital
Debt Corp., it was
renamed as Capital by Articles
of Amendment, dated
December 28, 2001.
15.
Where the participant chose to participate in the 2001 Program:
a)
the participant completed a Loan Application, Agreement, and Power of
Attorney;6
b)
the participant issued a cheque for an amount equal to his or her 30%
contribution toward the Pledge Amount,
called the Pledge
Deposit, to Fraser Milner Casgrain LLP ("Fraser Milner"), in
trust;
c)
the participant obtained
proceeds in accordance
with a Loan for the
remaining 70% of the Pledge Amount and an additional 10% of the Pledge Amount, for a total
equal to 80% of the Pledge Amount;
7
d)
the Loan had a term of 20-years and was interest-free;
e)
the additional 10% of the Pledge
Amount, which the participant borrowed, went toward an Expense
Deposit;
f)
part of the Expense Deposit
was paid to Capital as a Security Deposit (an amount equal to 8% of the Pledge Amount);
6 In the interest of simplicity, this type of contract shall hereinafter be referred to as a
"Loan".
7 Originally, Trinity permitted all participants to borrow 80% of their
Pledge from Capital
by way of non-interest bearing loan with a 20-year
term, open to pre-payment at any time after
January 15, 2002. Participants were to pay
the remaining 20% of their
Pledge with their
own resources, and also were to pay
an amount equal to 10% of their Pledge to Capital for fees,
insurance and a Security Deposit.
Attached as marked as tab B2 is a photocopy
of the promotional material
that outlines the 2001 Program
once the original terms of the 2001
Program were altered.
g)
the rest of the Expense
Deposit (2% of the Pledge
Amount) was applied toward a loan transaction fee (1.2% of the Pledge Amount), charged by Capital, and a
premium for an insurance policy,
called a Deposit Accretion Insurance policy, for the participant for which Capital
would apply (0.8% of
the Pledge Amount); and,
h)
the participant provided a Promissory Note as evidence
of the Loan.
16.
The
insurer was Gettysburg National Indemnity
(SAC) Ltd. ("Gettysburg"),
having an address in Bermuda.
17.
The 2001 Program provided that all
participants could assign the Deposit Accretion
Insurance policy and the Security
Deposit to Capital
as full payment of the Loan at any time after January 15, 2002, and Capital was obligated to accept the assignment
of the Security Deposit and the Deposit
Accretion Insurance Policy as payment in full of the Loan.
18.
The Pledge Deposit and the borrowed 70% of the Pledge Amount would be directed to or to the order of the Foundation.
19.
The Foundation would issue a tax receipt
to the participant for the full Pledge Amount.
20.
From the 2001 Program, and through
lawyer's trust accounts,
the Foundation recorded receipt of $18,305,000 of Pledge Amounts
from 118 participants in 2001, of which
approximately 70% represented the Loan amounts. Marked as tab B3 is a copy of the Foundation's record showing payments received.
21.
The Foundation directed
substantially all of these funds to: the Mackenzie Institute for the Study of Terrorism ("Mackenzie"), a Canadian registered charity; and Cornell
University ("Cornell"), a University in the United
States of America
which is a prescribed university under Schedule VIII,
s 1(s 3503) of the Income Tax Regulations.
22.
The Foundation directed
$12,479,024 to Mackenzie
and $5,643,000 to Cornell. It received $182,976 for its own purposes.
Marked as tab B4 is a photocopy of the Foundation's record showing the
directed funds recorded in 2001.
23.
In 2001 Trinity also acted as a fundraising agent for Mackenzie. Marked as tab B5 is a photocopy of the Fundraising Agreement.
24.
Pursuant to an Exclusive License Agreement, dated December 31, 2001, and an
Amending Agreement dated January 15, 2002, Charterbridge Holdings International Ltd. ("Charterbridge"),
a British Virgin Islands corporation, acquired from Osteopharm Inc. ("Osteopharm"), a Canadian
corporation, an exclusive
license to discover, develop, obtain regulatory approval for, manufacture and sell certain products described in the license agreement
(the "Osteopharm Intellectual Property"). Marked as tabs B6 and B7 are copies of the Agreement and Amending
Agreement.
25.
Trinity
arranged for Mackenzie
to be the recipient of $12,479,024 of the Pledge Amounts from the Foundation, and so Mackenzie agreed to enter into an Agreement
of Purchase and Sale, dated December 31, 2001, to purchase from Charterbridge a 5%
interest in the commercial exploitation of the Osteopharm Intellectual Property for
$65,000,000. Pursuant to its Agreement, Mackenzie agreed to direct $11,628,887 of the Pledge Amounts
receivable from the Foundation to Charterbridge for a 0.9% interest in the commercial exploitation of the Osteopharm Intellectual Property. Marked as tabs BS,
B9 and B 10 are photocopies of the Purchase Agreement between Mackenzie and Charterbridge, a Direction from The Foundation to WeirFoulds to pay
$11,628,887 to Charterbridge, and an acknowledgment letter from Charterbridge.
26.
Mackenzie also had $725,274
of the funds receivable from the Foundation directed to Charterbridge. The amount of $748,741
was then directed by Charterbridge, on Mackenzie's instructions, to Trinity as per Mackenzie's Fundraising Agreement.
27.
LifeTech Corporation ("LifeTech") is a public Canadian
biotechnology company, whose
chairman of the board is Beatty, which was subsequently renamed IATRA Life Sciences
Corporation.
28.
Pursuant to an Agreement
dated December 31, 2001, Charterbridge acquired from
LifeTech two level III biocontainment laboratories (the "Laboratories"), together
with all relevant patents and all the intellectual property
relating to the inventions of an ozone generator
and a bolus flow apparatus, and a number of working
models of such inventions (the "LifeTech Intellectual Property"). The consideration for this transaction included
the payment of $600,000 to LifeTech, and the provision to LifeTech of the exclusive
right to develop and commercialize in Canada a proprietary diagnostic test for kidney
disease (which was later changed to the exclusive right to
develop and commercialize a proprietary diagnostic test for osteoporosis) upon the
acquisition by Charterbridge, if any, of such a right. Marked as tab B11 is a photocopy of the Agreement
along with associated documentation including press releases.
29.
Trinity
arranged for Cornell to be the recipient
of $5,643,000 of the Pledge Amounts
from the Foundation, and so Cornell agreed to enter into two Agreements, both dated December 31, 2001, to acquire the Laboratories and the LifeTech Intellectual Property from Charterbridge, all for the purchase price of $5,643,000, and to direct all of the
funds receivable from the Foundation to Charterbridge. Marked as tabs B12 and B13
are photocopies of the Agreements.
30.
Capital
did not have sufficient funds to make Loans to the participants in the combined amounts of $14,644,000, and so it borrowed the sum of $14,052,000 from Trilon
Financial Corporation ("Trilon"), a Canadian
financial services corporation, by way of daylight loan, and $592,000
from Trinity. Marked
as tabs B14, B15 and Bl6 are the
promissory note, the General Security
Agreement, and a Direction from Capital to Trinity.
31.
Capital
directed Trilon and Trinity to pay the amounts it borrowed from them to the
order of Fraser Milner, in Trust (see, e.g., tab B16).
32.
Capital
directed Fraser Milner,
in Trust, to pay a portion of the Loan proceeds,
representing 70% of the purported donation,
to WeirFoulds, in Trust for the credit of
the Foundation (in the case of the amount borrowed
from Trilon) or to the Foundation
directly (in the case of the amount borrowed from Trinity).
33.
Charterbridge directed at least $14,052,000 of the $17,997,161 receivable from Mackenzie and Cornell, to Capital, on the terms and conditions set out in a promissory note dated December 31, 2009, provided
by Capital to Charterbridge. Marked
as tab B 17 is a photocopy of the promissory note from Capital
to Charterbridge.
34.
Capital
directed the $14,052,000 receivable from Charterbridge to Trilon, to repay the daylight loan used to finance
the loans.
35.
The transfer
of funds between
the relevant entities
occurred on the following dates:
Transaction Date
Trilon, via daylight loan, provided December 31, 2001
Capital with $14,052,000 of the Loan funds
Trinity provided
Capital with December 31, 2001
$592,000 of the Loan funds
Capital directed
the Loan funds to the December 31, 2001
Foundation (as per the participant’s
Pledge)
The Foundation directed the payments, December 31, 2001
less than an amount retained by it, to Cornell and Mackenzie
Cornell and Mackenzie directed
$14,052,000 of the Loan funds from
the Foundation to Charterbridge
December 31, 2001
Charterbridge directed
$14,052,000 of December 31, 2001
the Loan funds from Cornell and Mackenzie to Capital
Capital
used the funds from
Charterbridge to repay the daylight loan to Trilon
December 31, 2001
36.
Most of the participants in the 2001 Program assigned
their Security Deposits
and Deposit Accretion Insurance policies to Capital
in full satisfaction of their Loan in 2002.
37.
Pursuant to the loan agreement between
Capital and Charterbridge, the funds were repaid over a period of time by Capital assigning to Charterbridge the Security
Deposits and Deposit Accretion Insurance
policies it received
from the participants.
38.
All of the above steps, including the disputed Loans to the participants, the purchase of the Laboratory Equipment and LifeTech Intellectual Property, and the flow of funds in the series
of transactions that occurred in the 2001 Program, were pre
determined and interconnected.
39.
Gettysburg consented to the assignment of the Deposit
Accretion Insurance policies to Capital.
40.
Most of the participants in the 2001 Program claimed
charitable donation tax credits for their 2001 taxation year using the receipts issued by the Foundation.
C.
The 2002 Program
41.
There were over 400 individuals who participated in the Program
in 2002 (the
"2002 Program").
42.
Generally speaking, Trinity or its agent would contact
a potential participant to make a donation
to the Foundation.
43.
The 2002 Program
required that a participant sign a Pledge
for the total amount of the
donation, also called the Pledge
Amount.
44.
Trinity
arranged for the entering into a Loan for all the participants in the 2002
Program to borrow funds for a substantial portion of their Pledge Amounts
from one
of a number of subsidiaries of Trinity, including
Capital Structures 2002 Ltd.
(the "Lender" or in referring to more than one of these subsidiaries, the "Lenders").
45.
Capital
Structures 2002 Ltd. was incorporated pursuant to the laws of Ontario on
February 14, 2002.
46.
Where the participant chose to participate in the 2002 Program:
a)
the participant completed a Loan;
b)
the participant issued a cheque
for an amount equal to his or her 32% contribution toward the Pledge Amount, called the Pledge Deposit, to Fraser
Milner, in trust;
c)
the participant obtained
proceeds in accordance with a Loan for the remaining 68% of the Pledge Amount
and an additional 17% of the Pledge Amount, for a total equal to 85% of the Pledge Amount;
d)
the Loan had a term of 25-years and was interest-free;
e)
the additional 17% of the Pledge Amount,
which the participant borrowed, went toward an Expense Deposit;
f)
part of the Expense Deposit
was paid to Capital Structures 2002 Ltd. as a
Security Deposit (an amount equal to 12% of the Pledge Amount);
g)
the rest of the Expense
Deposit (5% of the Pledge Amount) was applied
toward a loan transaction fee (2.4% of the Pledge
Amount), charged by Capital
Structures 2002 Ltd., and a premium for an insurance
policy, called a Deposit Accretion Insurance
policy, for the participant for which Capital Structures 2002 Ltd. would apply (2.6% of the Pledge Amount);
and,
h)
the participant provided
a Promissory Note as evidence of the Loan.
47.
The insurer was British Indemnity
Corporation ("British Indemnity"), having an address in Bermuda.
48.
Generally speaking, the Lender borrowed the funds needed to make the Loans to
the participants in the 2002 Program and directed that those borrowed
funds be paid to
the order of Fraser Milner,
in Trust.
49.
Generally speaking, if the Lender approved
the Loan to a participant, the Lender directed Fraser Milner, in Trust, to pay a portion of these funds,
representing 68% of the purported donations, to WeirFoulds, in Trust, for the credit
of the Foundation. 8
50.
The Pledge Deposit
and the borrowed 68% of the Pledge Amount
would be directed to or to the order
of the Foundation.
51.
The Foundation would issue a tax receipt
to the participant for the full Pledge Amount.
52.
Most of the participants in the 2002 Program assigned their Security
Deposits and Deposit Accretion Insurance policies to the Lenders
in full satisfaction of their Loan.
53.
British
Indemnity consented to the assignments of the Deposit
Accretion Insurance policies to the Lenders.
C. The circular
flow of funds
54.
In the 2001 and 2002 Programs, the lender to the participant, whether Capital, Capital Structures 2002 Ltd. or another Lender,
knew in advance of entering
into the Loan with each participant that, through a series of directions and pre-arranged
transactions with third parties (i.e.,
including the Foundation but not the
8 This applies
to the Loans into which George
Markou and Gerry Petriello entered.
participants 9 , the proceeds
advanced to the participant would be returned
to it on the same day, or shortly
thereafter.
D.
William Henderson
("Henderson")
1)
Transactions involving Henderson
55.
Henderson participated in the 2001 Program by making a purported donation
of
$100,000 to the Foundation.
56.
Henderson did so by:
a)
signing
a Pledge, dated
December 17, 2001, to donate
$100,000 to the Foundation. A copy of the Pledge is found in tab D1
;
b)
providing $30,000 (equal to 30% of his purported donation) to Fraser Milner, in Trust. A copy of a cheque,
dated December 21, 2001, in this
amount is found in tab D2;
c)
signing
a Loan, dated December 17, 2001, to and in favour of Capital for proceeds of $80,000 (equal to 80% of his purported donation). A copy of this
document is found in tab D3. The copy is not signed
by Capital, but the
parties agree that the Loan was approved by Capital;
d)
signing
a Non-Negotiable Promissory Note, dated December
14, 2001, to pay to or to the order of Capital the amount of $80,000. A copy of this
Promissory Note is found in tab D4; and,
e)
obtaining a Deposit Accretion Insurance
policy from Gettysburg. The insurance policy is substantially in the form found in tab D5.
57.
Henderson did not deposit the proceeds
obtained in accordance with the Loan to a personal bank account.
9 There are some exceptions. Those participants are not McKellar
Appellants.
58.
Henderson's purported donation to the Foundation was made on December 31, 2001.
59.
On January 21, 2002, the Foundation issued a charitable
donation tax receipt
to Henderson in the amount of $100,000. A copy of the tax receipt is found in tab D6.
60.
Henderson assigned his Security Deposit
and Deposit Accretion
Insurance policy to Capital
in full satisfaction of his Loan.
61.
To this end, Henderson
and Capital signed
the following undated
documents:
a)
a Quit Claim, in respect of the Security
Deposit; and,
b)
an Assignment, in respect of the Deposit
Accretion Insurance policy.
A copy of the Quit Claim is found in tab D7 and a copy of the Assignment is found
in tab D8.
62.
Henderson's Pledge
was not made under seal.
63.
At the time of making
the purported donation,
Henderson resided in Mississauga,
Ontario.
2)
Filing and assessing history
for Henderson
64.
In his return of income for the 2001 taxation
year, Henderson claimed
a federal charitable donation
tax credit of $29,000 in respect of a purported
donation of
$100,000 to the Foundation.
65.
In his return of income
for the 2001 taxation year, Henderson also claimed a provincial charitable donation tax credit of $11, 160 in respect
of his purported donation to the Foundation. This had
the effect of reducing Henderson's Ontario tax payable by $17,409.
66.
The Minister of National Revenue
(the "Minister") reassessed Henderson and denied the entire tax credit claimed.
Notice of this
reassessment was dated May 20,
2005. In reassessing Henderson,
the Minister took the position
that Henderson had not
made a gift to the Foundation; that the loan Henderson had received was not
bona fide; and that the general anti-avoidance rule ("GAAR") applied in the
circumstances.
67.
On August
1, 2005, Henderson served a notice of objection in respect of the
reassessment.
68.
The Minister confirmed
this reassessment on November 8, 2011 on the basis that
there was no gift.
69.
In her Reply,
the Minister takes the position
that, if the purported donation
were a valid gift, then the GAAR
applied to deny the charitable donation tax credit.
E.
Simonetta Olivanti
("Olivanti")
1) Transactions involving
Olivanti
70.
Olivanti participated in the 2001 Program by making a purported
donation of
$50,000 to the Foundation.
71.
Olivanti did so by:
a)
signing
a Pledge, dated December 3, 2001, to donate $50,000
to the Foundation. A copy of the Pledge is found in tab El ;
b)
issuing
a cheque, dated
December 3, 2001, in the amount of $15,000 (or 30% of her purported donation) to Fraser Milner,
in Trust. A copy of the
cheque in this amount is found in tab E2;
c)
signing
a Loan, dated December 3, 2001, to and in favour of Capital for proceeds of $40,000 (equal to 80% of her purported donation). A copy of this document is found in tab E3. The copy is not signed by Capital, but the
parties agree that the Loan was approved
by Capital;
d)
signing
a Non-Negotiable Promissory Note, dated December
3, 2001, to pay
to or to the order of Capital
the amount of $40,000.
A copy of the Promissory Note in this amount is found in tab E4; and,
e)
obtaining a Deposit Accretion
Insurance policy from Gettysburg. The insurance policy is substantially in the form found in tab D5.
72.
Olivanti did not deposit the proceeds
obtained in accordance
with the Loan to a personal bank account.
73.
Olivanti's purported donation to the Foundation was made on December 31, 2001.
74.
On January 21, 2002, the Foundation issued
a charitable donation
tax receipt to Olivanti in the amount
of $50,000. A copy of the tax receipt is found in tab E5.
75.
Olivanti assigned her Security
Deposit and insurance policy to Capital
in full satisfaction of her Loan.
76.
To this end, Olivanti
and Capital signed
two documents dated January 16, 2002:
a)
a Quit Claim, in respect of the Security
Deposit, and
b)
an Assignment, in respect of the Deposit
Accretion Insurance policy.
A copy of the Quit Claim is
found in tab E6 and a copy of the Assignment (without Schedule A) is found in tab E7.
77.
Olivanti's Pledge
was not made under seal.
78.
At the time of making the purported donation,
Olivanti resided in Laval, Quebec.
2) Filing and assessing history for Olivanti
79.
In her return
of income for the 2001 taxation year,
Olivanti claimed a federal
charitable donation tax credit of $11,979.23 in respect of $41,397.34 of her
purported donation of $50,000 to the Foundation, and transferred the rest to her
spouse.
80.
Olivanti also claimed a provincial charitable donation tax credit in
respect of her purported donation for the 2001 taxation year.
81.
The Minister reassessed Olivanti and denied the entire tax credit claimed. Notice
of this reassessment was dated May 2, 2005. In reassessing Olivanti, the Minister took the position
that Olivanti had not made a gift to the Foundation; that the loan Olivanti had received was not bona fide; and
that the GAAR applied in the
circumstances.
82.
On July
15, 2005, Olivanti served a
notice of objection in respect of
the reassessment.
83.
On October 11, 2012, the Minister confirmed
the reassessment on the basis that
there was no gift.
84.
In her Reply, the Minister
takes the position
that, if the purported donation
were a valid gift, then the GAAR
applied to deny the charitable donation tax credit.
F.
George Markou ("Markou")
1) Transactions
involving Markou
85.
Markou participated in the 2002 Program by making a purported donation
of
$11,000,000 to the Foundation.
86.
Markou did so by:
a)
signing
a Pledge to donate $11,000,000 to the Foundation, dated November 27, 2002.
A copy of the Pledge is found in tab F1 ;
b)
providing a bank draft, dated November
28, 2002, for $3,520,000 (equal to
32% of his purported donation) to Fraser Milner,
in Trust. A copy of the
bank draft is found in tab F2;
c)
signing
a Loan dated November 27, 2002, to and in favour of Capital
Structures 2002 Ltd. for a proceeds of $9,350,000 (equal to 85% of his purported donation). A copy of this document is found in tab F3;
d)
signing
a Non-Negotiable Promissory Note, dated November
27, 2002, to pay
to or to the order of Capital Structures 2002 Ltd. the amount of
$9,350,000. A copy of the Promissory Note is found in
tab F4; and,
e)
obtaining a Deposit Accretion Insurance policy, dated December 12, 2002, from British Indemnity. A
copy of the insurance policy is found in tab F5.
87.
Markou
did not deposit the proceeds
obtained in accordance
with the Loan to a personal bank account.
88.
Markou's
purported donation to the Foundation was made on December 5, 2002.
89.
On December 11, 2002, the Foundation issued a charitable donation tax receipt
to Markou in the amount of $11,000,000. A copy of the tax receipt is found in tab F6.
90.
By letter dated February
5,
2003, Fraser Milner reported
to
Markou on his transactions. A copy of the letter
is found in tab F7.
91.
On March 16, 2003,
Markou assigned his Security
Deposit and Deposit
Accretion Insurance policy to Capital Structures 2002 in full satisfaction of his Loan.
92.
To this
end, Markou and Capital Structures 2002 signed the following
two documents dated March 16, 2003:
a)
a Quit Claim, in respect of the Security
Deposit, and
b)
an Assignment, in respect of the Deposit
Accretion Insurance policy.
A copy of the Quit Claim is found
in tab F8 and a copy of the Assignment (without Schedule A) is found in tab F9.
93.
Markou's Pledge
was not made under seal.
94.
At the time of making
the purported donation, Markou resided in Unionville,
Ontario.
2) Filing and assessing history
for Markou
95.
In his return of income
for the 2002 taxation year, Markou claimed
a federal charitable donation
tax credit of $3,192,900 in respect of a purported donation of
$11,000,000 to the Foundation.
96.
In his return
of income for the 2002 taxation year, Markou also claimed a provincial
charitable donation tax credit
of $1,227,600 in respect of his purported
donation to the Foundation. This had the effect of reducing Markou's Ontario tax payable by
$1,915,055.
97.
The Minister reassessed Markou and denied the entire
tax credit claimed.
Notice of this reassessment was dated May 5, 2006.
In reassessing Markou,
the Minister took the
position that Markou
had not made a gift to the Foundation; that the loan Markou had received was not bona
fide; and, that the GAAR applied in the
circumstances.
98.
On May 23, 2006, Markou served a notice of objection m respect of the
reassessment.
99.
The Minister confirmed
this reassessment on October 24, 2011 on the basis that
there was no gift.
100.
In her Reply, the Minister
takes the position
that, if the purported donation
were a valid gift, then the GAAR
applied to deny the charitable donation tax credit.
G.
Gerry Petriello
("Petriello")
1)
Transactions
involving Petriello
101 . Petriello participated in the Program
by making a purported donation
of $50,000 to the Foundation.
102.
Petriello did so by:
a)
signing
a Pledge, dated December 16, 2002, to donate $50,000
to the Foundation. A copy
of this document is found
in tab G1;
b)
providing a certified cheque or bank draft for $16,000 to Fraser Milner, in
Trust (32% of his purported
donation);
c)
signing
a Loan to and in favour of Capital Structures 2002 Ltd. for a
proceeds of $42,500 (equal to 85% of his purported donation);
d)
signing
a Non-Negotiable Promissory Note (to pay to or to the order of Capital Structures 2002 Ltd. the amount
of) $42,500; and,
e)
obtaining a Deposit Accretion Insurance policy from British
Indemnity that would insure the risk that his Security
Deposit failed to grow in value, over the
term of the Loan, to an amount
equal to the principal of the proceeds.
103.
Some of the documents described
in the preceding paragraph have not been produced. However:
a)
his Loan is substantially in the form of Markou's
Loan found in tab F3;
b)
his Non-Negotiable Promissory Note is substantially in the form of
Markou's Promissory Note found
in tab F4; and,
c)
his Deposit Accretion
Insurance policy is substantially in the form of Markou's Deposit Accretion Insurance policy found in tab F5.
104.
The Loan of $42,500 had a 25-year
term, was interest
free and was extinguishable
by the assignment of the Deposit Accretion Insurance policy and the Security Deposit to Capital Structures 2002 Ltd.
105.
A portion of the
proceeds obtained in accordance with the Loan, equal to 17% of the
purported donation, covered
the Expense Deposit
and went toward the Security Deposit, insurance premium and "loan transaction fee".
106.
Petriello's Security
Deposit was $6,000 (equal to 12% of the purported donation).
107.
Petriello did not deposit the proceeds
obtained in accordance
with the Loan to a personal
bank account.
108.
Petriello's purported donation to the Foundation was made on December 20, 2002.
109.
On January 6, 2003, the Foundation issued
a charitable donation
tax receipt to Petriello in the amount
of $50,000. A copy of the tax receipt
is found in tab
G2.
110.
Petriello entered into the Loan in return for making his purported donation
to the Foundation.
111.
Petriello assigned his Security
Deposit and Deposit
Accretion Insurance policy to
Capital Structures 2002 Ltd. in full satisfaction of his Loan.
112.
To this end, Petriello and Capital Structures 2002 Ltd. signed the following
two documents:
a) a Quit Claim, in respect of the
Security Deposit, and
b) an Assignment, in respect of the Deposit
Accretion Insurance policy.
Petriello has not produced
these documents. His Quit Claim is
substantially in the form
of Markou' s Quit Claim found in tab F8 and his Assignment is substantially
in the form of Markou's Assignment found in tab F9.
113.
Petriello's
Pledge was not made under seal.
114.
At the time of making the purported
donation, Petriello resided
in Dollard-Des Ormeaux, Quebec.
2)
Filing and assessing history
for Petriello
115.
In his return of income for the 2002 taxation year, Petriello claimed
a federal charitable donation
tax credit of $14,499 in respect of a purported
donation of
$50,000 to the Foundation.
-- 30 --
116.
Petriello claimed a provincial charitable donation tax credit in respect of his
purported donation for the 2002 taxation year.
117.
The Minister reassessed Petriello and denied the entire tax credit
claimed. Notice
of this reassessment was dated April 13, 2006. In reassessing Petriello, the Minister
took the position
that Petriello had not made a gift to
the Foundation; that the loan Petriello had received was not bona fide; and that the
GAAR applied in the
circumstances.
118.
Petriello served a notice of objection in respect of the reassessment on July 4, 2006.
119.
The Minister confirmed
this reassessment on February 23, 2012 on the basis that
there was no gift.
120.
In her Reply, the Minister
takes the position
that, if the purported donation
were a
valid gift, then the GAAR applied to deny the charitable donation tax. credit.
H. Additional matters
121.
The law of Ontario applies
to the question of whether
the proceeds that Olivanti
and Petriello obtained in accordance
with each of the Loans to which they were a
party were subject
to a Quistclose trust.
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CITATION:
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2016 TCC 137
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COURT FILE
NOS.:
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2012-423(IT)G, 2012-562(IT)G,
2013-36(IT)G,
2012-1995(IT)G
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STYLE OF
CAUSE:
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GEORGE MARKOU,
WILLIAM HENDERSON,
SIMONETTA OLIVANTI,
GERRY
PETRIELLO AND HER MAJESTY THE QUEEN
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PLACE OF
HEARING:
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Toronto,
Ontario
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DATE OF
HEARING:
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May 5 and 6,
2016
|
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REASONS FOR
ORDER BY:
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The
Honourable Justice Campbell J. Miller
|
|
DATE OF
ORDER:
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June 1, 2016
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APPEARANCES:
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Counsel for
the Appellants:
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Guy Du Pont,
Michael H. Lubetsky, Paul Prokos, Reuben Abithol (May 5 only)
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Counsel for
the Respondent:
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Lorraine
Edinboro, John Grant, Arnold H. Bornstein
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COUNSEL OF RECORD:
For the Appellants:
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Name:
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Guy Du Pont, Michael H. Lubetsky,
Paul Prokos, Reuben Abithol (May 5 only)
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Firm:
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Davies, Ward, Phillips & Vineberg LLP
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|
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For the Respondent:
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William F. Pentney
Deputy Attorney General of Canada
Ottawa, Canada
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|
|
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