REASONS
FOR JUDGMENT
Campbell J.
Introduction
[1]
The Appellant did not attend the hearing of his
appeal. His agent, Raymond Wiseman, who was responsible for recommending the
tax donation arrangement to Mr. Glover, provided testimony on his behalf. Mr.
Wiseman provided the Appellant’s affidavit to the Court authorizing his agent
to present evidence on his behalf. Due to Mr. Glover’s age and health, I
permitted the appeal to proceed in this manner.
[2]
The Appellant claimed a charitable donation tax
credit in the 2003 taxation year pursuant to subsection 118.1(3) of the Income
Tax Act (the “Act”). The tax credit
related to the Appellant’s participation in a gifting arrangement which
involved the donation of software licenses to a registered Canadian charity,
Canadian Single Adult Ministry Inc. (“CSAM”). Donors
applied to become capital beneficiaries of a trust and if accepted, the trust
distributed software to those beneficiaries who could donate them to a
registered charity. Pursuant to the CSAM Plan, the Appellant donated $29,952 in
cash and applied for 64 software licenses that had a purported retail value
of $1,499 per license. Forty‑eight donors, including the Appellant, were
required to pay $468 per license, allegedly to discharge a lien on the
software. Each donor received a receipt for the cash payment and a receipt for
the fair market value of the license less the lien amount.
[3]
In written submissions received subsequent to
the hearing, the Appellant abandoned the issue relating to the in-kind donation
of the software licenses and advanced an argument relating only to the
Appellant’s cash payment of $29,952. Consequently,
the within reasons will not address whether the trust was properly constituted,
whether the software existed or had value or whether the receipts relating to
the software were deficient.
The Issue
[4]
The issue in this appeal is whether the Appellant
is entitled to the non‑refundable tax credits in respect to the cash
payment and more specifically:
(a)
whether the gifting arrangement that the
Appellant participated in was a properly registered tax shelter; and
(b)
whether the Appellant’s cash payment was a valid
gift.
The Evidence
[5]
The Appellant’s agent, Raymond Wiseman,
testified in respect to the donor’s application process, his communications
with promotors and the due diligence he performed in reviewing the various
documentation and overall process. He obtained legal and valuation opinions
concerning the gifting arrangement and introduced them in evidence (Exhibits
A-8 to A-10) to support his due diligence argument as the Appellant’s agent.
However, the tax shelter legislative provisions contained in the Act make
no reference to a due diligence defence or to an evaluation of the
reasonableness of the gifting arrangement.
[6]
The facts in this appeal are substantially the
same as those contained in the decision of Bandi v The Queen, 2013 TCC
230, 2013 DTC 1192. However, the taxpayer in that case had donated to the Aurora
Foundation (“Aurora”) rather than CSAM. Mr. Wiseman acknowledged that Aurora
was the original registered charity. In 2003, its directors established a tax
shelter gifting arrangement known as the Charitable Technology Trust Gifting
Program (the “Gifting Plan”). Wolf Ventures marketed and sold this plan to the
public. Individuals who wished to participate in the Gifting Plan had to apply
to become capital beneficiaries of this trust before they could purchase
software licenses in a computer software program known as eComdata Office Suite
Pro, owned by Multisolve Networks Corporation
(“Multisolve”). Each license had a retail value of $1,499 but Multisolve agreed
to sell each one to the settlor of the trust for a bulk wholesale price of $468
and to assume a vendor take-back charge in respect to each license in that same
amount. Upon receipt of the licenses, the donors made cash donations of $468
per license to Aurora in order to discharge the lien as well as a donation of
the licenses themselves. In return, Aurora issued a receipt for the cash
donation which discharged the lien and a receipt for the net value of the
license, that is, its full retail value of $1,499 less the lien amount of $468.
Aurora paid Multisolve to discharge the lien and the licenses were to be used for
charitable purposes.
[7]
On September 19, 2003, the Canada Revenue Agency
(“CRA”) issued the Gifting Plan a tax shelter identification number. All
donations made through the Gifting Plan were directed to Aurora which issued
the tax receipts. On December 15, 2003, Aurora withdrew its participation in
the Gifting Plan. Wolf Ventures attempted to locate another charity to replace
Aurora and continued to market the plan to the public. Between December 15 and
31, 2003, Wolf Ventures contacted CSAM to participate in the gifting
arrangement as its registered charity. A new trustee was appointed and the CSAM
Plan was marketed to the public.
[8]
The Appellant
applied for 64 licenses under the CSAM Plan and donated cash of $29,952 plus
the licenses, which had a purported net value of $65,984. The Respondent agreed
that the Appellant did pay the cash amount to CSAM (Assumption of Fact, paragraph
11(uu) contained in the Reply to the Notice of Appeal).
[9]
The CSAM Plan was marketed and sold, after
Aurora withdrew from the gifting arrangement, utilizing the same tax shelter
identification number that was originally assigned to the arrangement in which
Aurora had participated as the registered Canadian charity.
[10]
Mr. Wiseman testified that he had been notified
that Aurora had stopped accepting applications but that a sister charity, CSAM,
would accept applications from donors in respect to the same software donation
program. He believed, from his review of the relevant materials, that the only
difference from the original promotional materials was the change of charities
from Aurora to CSAM (Transcript, Volume 1, page 42). Mr. Wiseman recommended to
the Appellant that he make a cash donation on the understanding that he might
not be approved as a capital beneficiary of the trust and might not receive the
software.
[11]
Paul Stepto, CRA Audit Team Leader, outlined the
donation scheme program. His testimony was largely hearsay and much of it
unnecessary because the Appellant abandoned the issue respecting the in-kind
donation.
Appellant’s Position
[12]
The change in the named charities from Aurora to
CSAM was the only fundamental difference from the Gifting Plan that was
originally submitted to CRA. The Appellant contends, that when CRA issues a tax
shelter identification number, there is no requirement under the Act for
taxpayers to advise CRA of changes to the arrangement. The cash and software
transactions can be separated and therefore the cash donation should be viewed as
a gift given for a community service, education and to benefit the poor. The in‑kind
donation of software was a separate transaction relating to the Appellant’s
participation in the trust.
Respondent’s Position
[13]
Since the arrangement is not a registered tax
shelter as required pursuant to section 237.1 of the Act, a taxpayer may
not deduct any amount in respect to it. The original plan had been assigned a
tax identification number but the CSAM Plan was simply an undisclosed
modification of the original arrangement and therefore remained an unregistered
tax shelter. The CSAM Plan differed in so many aspects from the original plan
that it was a fundamentally different plan.
[14]
The Respondent also argued that the Appellant
did not make a valid gift because it is not appropriate to separate the
transaction into separate components. The scheme was fully integrated and
therefore the cash payment was made in order for the Appellant to participate
in the entire scheme and to enable him to profit by receiving enhanced federal
and provincial tax credits.
Analysis
[15]
After a review of all of the evidence, I
conclude that the Appellant is not entitled to claim a charitable donation tax
credit in respect to the cash payment because the Appellant did not make a
valid gift, as required by the definition of “total
charitable gifts” contained in subsection 118.1(1) of the Act. Although
the term “gift” is not defined in the Act, its meaning has been
established in caselaw. The Federal Court of Appeal in The Queen v Friedberg,
92 DTC 6031, at page 6032, described a gift as:
… a voluntary transfer of property owned by a donor to a donee, in
return for which no benefit or consideration flows to the donor (see Heald J.
in The Queen v. Zandstra [74 DTC 6416] [1974] 2 F.C. 254, at p. 261.)
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.
[16]
Justice Bowie in Webb v The Queen, 2004
TCC 619, at paragraph 16, stated that a donor’s intent in making a charitable
donation must be entirely donative:
[16] Much has been written on the
subject of charitable donations over the years. The law, however, is in my view
quite clear. I am bound by the decision of the Federal Court of Appeal in The
Queen v. Friedberg, among others. These cases make it clear that in order
for an amount to be a gift to charity, the amount must be paid without benefit
or consideration flowing back to the donor, either directly or indirectly, or
anticipation of that. The intent of the donor must, in other words, be
entirely donative.
(Emphasis added)
[17]
Justice Woods in Maréchaux v The Queen, 2009
TCC 587, 2009 DTC 1379, discussed the idea of separating a transaction into its
component parts at paragraphs 48 and 49:
[48] In some circumstances, it may be
appropriate to separate a transaction into two parts, such that there is in
part a gift, and in part something else.
[49] On the
particular facts of this appeal, it is not appropriate to separate the
transaction in this manner. There is just one interconnected arrangement here,
and no part of it can be considered a gift that the appellant gave in
expectation of no return. In this regard, I found assistance from the following
decision referred to by counsel for the respondent: Hudson Bay Mining and
Smelting Co. v. The Queen, 89 DTC 5515 (FCA).
[18]
Justice Hogan’s conclusions, at paragraphs 15 to
19 in Bandi regarding the gift of cash in that appeal, are equally
applicable to the facts before me:
[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,[3] 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.
[19]
While the Appellant’s agent submitted that the
decision in Bandi was not applicable (Appellant’s Written Argument,
paragraphs 40 to 52), his arguments were circular. For example, at paragraph 42,
he argued that the marketing materials that were before Hogan J. in Bandi,
were substantially different from the promotional materials in the present
appeal. Yet, at paragraph 51, he concedes that the same brochure materials were
relied upon.
[20]
The Federal Court of Appeal in Kossow v The Queen,
2013 FCA 283, 2014 DTC 5017, at paragraph 29, concluded that cases similar in
nature should receive the same treatment:
… In my view,
the relevant facts of this case are so similar to the facts of Maréchaux
that the judge did not err in law in reaching the same conclusion. Where
cases are similar in nature, it is fundamental to the idea of justice that they
receive the same treatment.
[21]
Based on the evidence in this appeal, the
Appellant relied on a gifting arrangement that was marketed to participants on
the basis that software licenses, worth substantially more than the cash
payment, would be distributed. As a result of participating in the arrangement,
the Appellant received federal and provincial tax credits that exceeded the
cash donation by at least 23 percent. The expectation in making this cash
donation, which was earmarked to discharge the software liens, was based on the
promise of an acquisition of software licenses that could be then gifted to the
registered charity resulting in the receipt of an enhanced after-tax credit.
The cash donation was required in order for the Appellant to be accepted as a
capital beneficiary in the program. The Appellant intended to enrich himself by
making use of inflated charitable donation receipts in respect to the software
and consequently to profit from the inflated tax credit claims. The Appellant’s
intent was not entirely donative in nature because he anticipated a benefit or
consideration to flow to him as a result of his participation in this gifting
arrangement.
[22]
In cross-examination, the Appellant’s agent was
questioned respecting the Appellant’s donative intent. Mr. Wiseman’s responses
support my conclusions respecting the Appellant’s intent. At page 60 of the transcript,
Mr. Wiseman confirmed that both he and the Appellant understood that a
cash donation had to be made to CSAM in order to become entitled under the
capital beneficiary application to receipt of the software.
A His intent and my intent was to
make the donation of the cash to the charity and become entitled to being a
capital beneficiary, and receiving additional tax benefit related to whatever
would be received as a capital beneficiary under the trust.
(Transcript,
Volume 1, page 60, lines 23 to 27)
[23]
Although the Appellant’s agent argued
that the intent was to make a cash donation to the registered charity “… and hope to be entitled to software that would also have
charitable donation value.” (Transcript, Volume 1, page 62, lines 4 to 5), the
testimony presented in this regard is dubious and contained many
inconsistencies.
[24]
Mr. Wiseman also
insisted that the entire transaction could be separated and that the cash
donation could be considered apart from the alleged gift of software licenses.
In Maréchaux v The Queen, 2010 FCA 287, 2010 DTC 5174, the Federal Court
of Appeal concluded that it is inappropriate to separate transactions that form
part of an integrated arrangement into their cash and non-cash components.
Based on the evidence before me, the Appellant would not have paid the cash
amount without the assurance that he would receive software licenses which
could then be gifted for an enhanced tax benefit. In fact, parts of Mr.
Wiseman’s testimony in cross-examination support my conclusion:
A Well, I
would certainly agree that he made the payment… So, his intent was -- his
interest in the situation was to have these two components…
He's not isolating just the cash component from the software
component. He definitely wants to make the cash donation, and hoped to be
entitled to receiving the software so that he could donate that as well….
(Transcript,
Volume 1, page 61, lines 14 to 25)
Although the Appellant’s agent argued that the
cash donation was intended to impoverish the Appellant in a material manner, he
also admitted that the possibility of being accepted to the program was a “portion of the reason for the cash donation.” (Appellant`s
Written Argument, paragraph 90).
[25]
As a result, the Appellant did not have
the requisite donative intent for the purposes of section 118.1 of the Act.
The Appellant’s intent was to enrich himself by applying to become a capital
beneficiary of the trust with the objective of obtaining and using inflated
charitable gift receipts in order to profit from inflated tax credits. Based on
the facts before me, the cash component cannot be separated from the software
transaction as they are part of one interconnected arrangement where the
Appellant’s agent admitted that the cash donation was required in order to
apply to the program. The onus or burden of proof is on the Appellant to rebut
the assumptions of fact contained in the Reply to the Notice of Appeal. These
assumptions are presumed to be factually correct unless the Appellant is able
to bring evidence that would support a conclusion that the critical assumptions
of fact are not correct. The Appellant has not been successful in presenting a prima
facie case that would convince me that the Minister of National Revenue’s
(the “Minister”) assumptions of fact are incorrect or
cannot be supported. On this basis I am dismissing the appeal because the cash
payment is not a valid gift.
[26]
Because the parties spent some time addressing the modifications to the original
registered plan and the unregistered tax shelter issue, I will comment briefly
although I have disposed of the appeal on an entirely different basis. Section
237.1 outlines a detailed regime respecting tax shelters as well as the associated
tax credits. The Respondent argued that on a plain reading of the section “each separate arrangement will be a distinct tax shelter.” (Respondent’s
Written Argument, paragraph 27). The CSAM Plan did not obtain its own identification number.
The Minister assumed that the CSAM Plan differed substantially from the Aurora
gifting arrangement contained in the original application for a tax shelter
identification number in more than a dozen ways ranging from the identity and
residence of both the vendor of the software and the settlor of the trust to
the nature and value of the property acquired and donated, the identity of the
trustee, the financing arrangements and the destination charity (Assumptions of
Fact, paragraph 11(ddd) of the Reply to the Notice of Appeal). The Appellant’s
evidence was unsuccessful in demolishing those assumptions. Therefore, the
issue is whether the modifications to the original registered tax shelter can
invalidate all associated tax credits. Hogan J. in Bandi did not accept
the Respondent’s argument in this regard but the Respondent noted that the
original charity, Aurora, was actually used in that case enabling the Minister
to continue to track taxpayers’ donations. The shift in charities from Aurora
to CSAM should have alerted the Appellant to a potential problem with the tax
shelter registration. The Respondent argued that an identification number
assigned by CRA attaches to a particular arrangement and cannot be used for
other arrangements (Respondent’s Written Argument, paragraph 31). I agree with
the Respondent’s view. However, this may not mean that minor changes concerning
an arrangement would require a completely new and different tax identification
number. So what constitutes a material change? Hogan J. in Bandi noted
that there is no dynamic reporting system in which a taxpayer can verify with
CRA whether changes have been reported. Section 237.1 does not address this
issue. However, one interpretation may be that modifications to an arrangement
should be dealt with under subsection 237.1(7.4) penalty provision. From the
Minister’s perspective, it may be false or misleading to implement an
arrangement different than that which has been disclosed to the CRA. If a
penalty is issued pursuant to subsection 237.1(7.4), all credits could be denied
under subsection 237.1(6.1). Unless subsection 237.1(6.1) is triggered in
relation to the modified plan, when an identification number exists, the
original number is sufficient to satisfy provision 237.1(6). There was no evidence
presented to me in respect to an alternative reading of this section. On the
other hand, the change in registered charities from Aurora to CSAM, together
with the Appellant’s knowledge of that change, is likely sufficient to deny
credits related to the CSAM arrangement on the basis that it was an
unregistered tax shelter. The Respondent points out that while taxpayers who
participate in tax shelters qualify for significant benefits, the registration
system permits the Minister to track and audit tax shelters and verify the benefits
claimed. Permitting promotors to tinker with the original registered
arrangement and in particular permitting promotors to use an identification
number for an arrangement where the Minister has issued that number to a
separate program, defeats the purpose of the registration system and impedes
the Minister’s ability to track, audit and verify such arrangements. This
explains in part Parliament’s intent when enacting those provisions.
Signed at Summerside,
Prince Edward Island, this 6th day of August 2015.
“Diane Campbell”
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