REASONS
FOR JUDGMENT
Favreau J.
[1]
These appeals heard on common evidence are
against reassessments dated May 16, 2011 in the case of Al-Karim Murji and
Karima Murji and March 29, 2012 in the case of Wahid Khan, made under the Income Tax Act, R.S.C.
1985 c. 1 (5th supp.), as amended (the “Act”), by the Minister of National Revenue in respect of the appellants’
2009 taxation year.
[2]
In filing his income tax return for the 2009
taxation year, Al-Karim Murji claimed a charitable
donation of $100,358, transferred a donation deduction of $22,763 to his
spouse, Karima Murji and carried forward a donation deduction of $20,879 to future
taxation years. The claim was based on an initial receipt of $144,000 from a
registered charity called “On Guard for Humanity”, consisting of cash in the
amount of $18,000 and gifts in-kind of shares valued at $126,000.
[3]
By way of the reassessment dated May 16, 2011, the
Minister reduced the donation deduction of Al-Karim Murji from $100,358 to
$1,800 and disallowed the amount of $20,879 donation deduction to be carried
forward to future taxation years.
[4]
In filing her income tax return for the 2009
taxation year, Karima Murji claimed a donation deduction of $22,763 which was
transferred from her husband.
[5]
By way of the reassessment dated May 16, 2011,
the Minister disallowed the donation deduction of $22,763.
[6]
In filing his income tax return for the 2009 taxation
year, Wahid Khan claimed charitable donations he made to a registered charity called
“Pilgrim Feast Tabernacle” which consisted of $7,000 in cash and $42,000 as
gifts in-kind of shares valued at $42,000, of which $40,689 was claimed in 2009
and $8,311 was carried forward to future taxation years.
[7]
By way of the reassessment dated March 29, 2012,
the Minister reduced the donation tax deduction from $40,689 to $700 and
disallowed the $8,311 donation tax deduction carried forward to future taxation
years.
[8]
In determining the tax liability of Al-Karim
Murji, the Minister relied on the following assumptions of fact:
a)
in the ten years prior to the 2009 taxation
year, the appellant’s charitable donations totaled $82,780; $80,155 of which
was disallowed by the Canada Revenue Agency and is under objection. The $80,155
is associated with donations claimed in 2007 and 2008 in the amounts of $35,044
and $45,111, respectively, which were related to the appellant’s participation
in the Global Learning Gifting Initiative donation program;
Strategic
Gifting Group
b)
Strategic Gifting Group (“Strategic”) was a sole
proprietorship owned by Abraham Herbert Grossman (aka Al Grossman);
c)
between October, 2009 and February, 2011,
Strategic ran an arrangement that was promoted to allow a participant to claim
in his or her tax return, a charitable donation of four to twelve dollars for
every dollar that he or she contributed (the “Strategic Scheme”);
d)
Strategic and/or its promoters promoted that a
participant who was an Ontario resident would receive a return of approximately
46.41%;
e)
the Minister did not issue a tax shelter
identification number in respect of Strategic;
f)
the appellant did not provide a tax shelter
identification number with respect to the amounts claimed as a result of his
participation in the Strategic Scheme and he did not file a form T5004;
g)
the Strategic Scheme generally operated as
follows:
i) a participating taxpayer would make a cash
payment to a participating charity (a ‘Cash Payment”);
ii) a fictitious non-resident philanthropist
would match the taxpayer’s donation, and donate shares in Dixon Perrot &
Champion Inc. (“Dixon”) to the taxpayer;
iii) during the material time, Dixon was a
Canadian corporation incorporated in Ontario and listed on the Open Market of
the Frankfurt Stock Exchange;
iv) the taxpayer would donate the shares of
Dixon to the charity to which he or she made the Cash payment;
v) the stated fair market value of the Dixon
shares would be four to twelve times the value of the taxpayer’s Cash Payment;
vi) if the taxpayer chose not to donate the
Dixon shares to a participating charity, the shares would be subject to a
compulsory hold period of five years;
vii) the charity would issue the taxpayer a
donation receipt for the Cash Payment and for the predetermined, false value of
the Dixon shares;
viii) the charity would return 90% of the taxpayer’s
Cash Payment to Strategic in payment of Strategic’s fees;
h)
Dixon had negative retained earnings in the
years ended October 31, 2007, 2008, 2009 and 2010;
i)
Dixon made its first public share offering on
the Open Market of the Frankfurt Stock Exchange on May 20, 2008;
j)
the Open Market of the Frankfurt Stock Exchange
is not a designated stock exchange;
k)
there was no market for the Dixon shares and
they had no value;
l)
Strategic received $332,620 from the Strategic
Scheme;
The
appellant’s participation in the Strategic Scheme
m) the appellant entered into the following predetermined series of
transactions in the 2009 taxation year:
i)
the appellant paid $18,000 to the Charity;
ii)
on December 23, 2009, the appellant purported
to donate Dixon shares to the Charity;
iii)
on December 31, 2009, the Charity issued the
appellant a donation receipt in the amount of $144,000 for the 2009 taxation
year, which represented a Cash Payment in the amount of $18,000 and the
purported fair market value of $126,000 for Dixon shares;
iv)
from the $144,000 donation receipt issued,
the appellant claimed $100,358 as a charitable gift to the Charity in the 2009
taxation year, transferred $22,763 to his spouse, and claimed $20,879 to carry
forward for future taxation years;
n)
on December 23, 2009, the Dixon shares that the
appellant purported to donate to the Charity had no value;
o)
of the appellant’s $18,000 Cash Payment, the
Charity was required to pay, and did pay, $16,200 to Strategic in respect of
Strategic’s fees (the “Fee Portion”);
p)
on March 16, 2011, the Charity cancelled the
donation receipt in the amount of $144,000 and issued a new donation receipt to
the appellant in the amount of $1,800, representing the net cash amount donated
by the appellant;
[9]
To justify the reassessment dated May 16, 2011,
the Deputy Attorney General of Canada further stated that:
a)
the Minister’s assumption that the appellant
paid $18,000 to the Charity is incorrect. He states that the appellant paid
$18,000 to Strategic (the “Participation Fee”);
b)
in exchange for his $18,000 Participation Fee,
the appellant signed the back of a Dixon share certificate;
c)
Strategic electronically deposited the
appellant’s Participation Fee into the Charity’s bank account, then invoiced
the Charity for 90% of the Participation Fee;
d)
Strategic represented to the Charity that a
transfer agent, Select Fidelity Transfer Services Ltd., was in possession of
the Dixon share certificate and would transfer the Dixon shares to the Charity;
e)
Select Fidelity Transfer Services Ltd. was not a
reporting issuer in Ontario and was not a member of the Securities Transfer
Association of Canada;
f)
Christine Hewitt represented to the Charity that
she was the president of Dixon;
g)
Ms. Hewitt was a person authorized to file
documents on behalf of Dixon pursuant to the Corporations Information Act
(Ontario);
h)
Ms. Hewitt was also the president and director
of Z2A Corp. (“Z2A”);
i)
in 2008, Z2A participated in a similar donation
arrangement run by Innovative Gifting Inc.;
j)
the Innovative Gifting Inc. program operated as
follows:
i)
Innovative Gifting Inc. was incorporated in
Ontario on September 8, 2008 as Strategic Gifting Inc.;
ii)
Strategic Gifting Inc. changed its name to
Innovative Gifting Inc. (“Innovative”) on September 10, 2008;
iii)
a participating taxpayer would make a cash
payment to a participating charity;
iv)
a fictitious non-resident Swiss
philanthropist would match the participant’s donation and donate shares in RCT
Global Networks Inc. (“RCT”) to the participant;
v)
RCT was an Ontario corporation that was
listed on the Open Market of the Frankfurt Stock Exchange in June, 2008;
vi)
RCT issued share options to Mobiliare Argenti
Ltd. (“Mobiliaire”);
vii) Z2A purchased the RCT shares from Mobiliare;
viii)
Z2A sold the RCT shares to Innovative;
ix)
participating charities entered into
contracts with Innovative pursuant to which the charities were charged a
fund-raising fee equal to 90% of the cash donations made by the participants;
x)
Z2A and Ms. Hewitt issued RCT share
certificates in the names of the participants;
xi)
participating charities issued to the
participating taxpayers donation receipts for their cash donations and for the
predetermined, false value of the RCT shares;
xii) there was no market for the RCT shares and they had no value;
k)
from its participation in the Strategic Scheme,
the Charity issued donation receipts with respect to the Dixon shares in the
amount of $513,200;
l)
from its participation in the Strategic Scheme,
the Charity received Cash Payments totaling $80,900, paid $67,680 to Strategic
in fees, and withheld $3,600 in fees to Strategic pending delivery
documentation and shares; and
m) charities participating in the Strategic Scheme issued donation
receipts totaling $2.2 million.
[10]
In determining the tax liability of Karima Murji
for the 2009 taxation year, the Minister relied on the following assumptions of
fact:
a)
The Appellant’s spouse paid $18,000 to the
Charity in 2009;
b)
The Appellant’s spouse received a receipt from
the Charity recording a donation of $144,000;
c)
The balance of the amount claimed on the receipt
was for an alleged donation of tradable securities;
d)
The fair market value of the securities was
seven times the value of the cash donation;
e)
The securities had no value and were unsaleable;
f)
The details of the securities allegedly donated
was not included on the receipt;
g)
The amount paid by the Appellant’s spouse was
part of an unregistered gifting tax arrangement, which had no tax shelter
identification number;
h)
The Charity retained 10% of the amount paid by
the Appellant’s spouse;
i)
The remaining 90% of the amount paid by the
Appellant’s spouse to the Charity was paid to a promoter;
j)
The Charity subsequently reissued a receipt to
the Appellant’s spouse for the 2009 year for the 10% of the cash donation;
k)
The initial receipt issued to the Appellant’s
spouse was not valid;
l)
The Appellant’s spouse did not donate an amount
of more than $1,800 to the Charity in the 2009 year;
m) There was no available amount to transfer to the Appellant.
[11]
In determining the tax liability of Wahid Khan
for the 2009 taxation year, the Minister relied on the following assumptions of
fact:
a)
prior to the 2009 taxation year, the appellant
had never claimed a deduction for charitable donations;
Strategic Gifting Group
b)
Strategic Gifting Group (“Strategic”) was a sole
proprietorship owned by Abraham Herbert Grossman (aka Al Grossman);
c)
between October 2009 and February, 2011,
Strategic ran an arrangement that was promoted to allow a participant to claim
in his or her tax return, a charitable donation of four to twelve dollars for
every dollar that he or she contributed (the “Strategic Scheme”);
d)
Strategic and/or its promoters promoted that a
participant who was an Ontario resident would receive a return of approximately
46.41%;
e)
the Minister did not issue a tax shelter
identification number in respect of Strategic;
f)
the appellant did not provide a tax shelter
identification number with respect to the amounts claimed as a result of his
participation in the Strategic Scheme and he did not file a form T5004;
g)
the Strategic Scheme generally operated as
follows:
i) a participating taxpayer would make a cash
payment to a participating charity (a ‘Cash Payment”);
ii) a fictitious non-resident philanthropist
would match the taxpayer’s donation, and donate shares in Dixon Perrot &
Champion Inc. (“Dixon”) to the taxpayer;
iii) during the material time, Dixon was a
Canadian corporation incorporated in Ontario and listed on the Open Market of
the Frankfurt Stock Exchange;
iv) the taxpayer would donate the shares of
Dixon to the charity to which he or she made the Cash payment;
v) the stated fair market value of the Dixon
shares would be four to twelve times the value of the taxpayer’s Cash Payment;
vi) if the taxpayer chose not to donate the
Dixon shares to a participating charity, the shares would be subject to a
compulsory hold period of five years;
vii) the charity would issue the taxpayer a
donation receipt for the Cash Payment and for the predetermined, false value of
the Dixon shares;
viii) the charity would return 90% of the
taxpayer’s Cash Payment to Strategic in payment of Strategic’s fees;
h)
Dixon had negative retained earnings in the
years ended October 31, 2007, 2008, 2009 and 2010;
i)
Dixon made its first public share offering on
the Open Market of the Frankfurt Stock Exchange on May 20, 2008;
j)
the Open Market of the Frankfurt Stock Exchange
is not a designated stock exchange;
k)
there was no market for the Dixon shares and
they had no value;
l)
Strategic received $332,620 from the Strategic
Scheme;
The
appellant’s participation in the Strategic Scheme
m) the appellant entered into the following predetermined series of
transactions in the 2009 taxation year:
i)
the appellant paid $7,000 to the Charity;
ii) on December 31, 2009, the appellant
purported to donate Dixon shares to the Charity;
iii) on December 31, 2009, the Charity issued
the appellant a donation receipt in the amount of $49,000 for the 2009 taxation
year, which represented a Cash Payment in the amount of $7,000 and the
purported fair market value of $42,000 for Dixon shares;
iv) from the $49,000 donation receipt issued,
the appellant claimed $40,689 as a charitable gift to the Charity in the 2009
taxation year, and claimed $8,311 to carry forward for future taxation years;
n)
on December 31, 2009, the Dixon shares that the
appellant purported to donate to the Charity had no value;
o)
of the appellant’s $7,000 Cash Payment, the
Charity was required to pay, and did pay, $6,300 to Strategic in respect of
Strategic’s fees (the “Fee Portion”);
p)
on June 8, 2011, the Charity cancelled the
donation receipt in the amount of $49,000 and issued a new donation receipt to
the appellant in the amount of $700, representing the net cash amount donated
by the appellant;
[12]
To justify the reassessment dated March 29, 2012,
the Deputy Attorney General of Canada further states that:
a)
the Minister’s assumption that the appellant
paid $18,000 to Charity is incorrect. He states that the appellant paid $7,000
to Strategic (the “Participation Fee”);
b)
in exchange for his $7,000 Participation Fee,
the appellant signed the back of a Dixon share certificate;
c)
Strategic emailed the Charity the appellant’s
name, address and the information to include on the donation receipt for the
appellant.
d)
the Charity generated a donation receipt for the
appellant and delivered it, along with donation receipts for other taxpayers
participating in the Strategic Scheme, to Strategic;
e)
Strategic sent the donation receipt to the
appellant;
f)
Strategic deposited the appellant’s
Participation Fee into the Charity’s bank account, then invoiced the Charity
for 90% of the Participation Fee
g)
Select Fidelity Transfer Services Ltd. was purportedly
the transfer agent with respect to the Dixon shares;
h)
Select Fidelity Transfer Services Ltd. was not a
reporting issuer in Ontario and was not a member of the Securities Transfer
Association of Canada;
i)
from its participation in the Strategic Scheme,
the Charity issued donation receipts with respect to the Dixon shares in the
amount of $1,036,000;
j)
from its participation in the Strategic Scheme,
the Charity received Cash Payments totalling $158,500, paid approximately $142,650
to Strategic in fees, and retained $15,850; and
k)
charities participating in the Strategic Scheme
issued donation receipts totalling $2.2 million.
[13]
Pursuant to the Tax Court of Canada’s Order
dated February 2, 2016, rendered in the context of a pre-trial case management
conference call, counsel for the respondent served the appellants with affidavits
from:
(a)
Mr. Alberto de Sousa Costa, President and Chief
Executive Officer of On Guard for Humanity (“On Guard”), sworn on March 10,
2016 with exhibits A to OO attached thereto;
(b)
Ms. Chionyeduc Opia-Evans, the Executive
Director of Pilgrim Feast Tabernacle (“Pilgrim”), sworn on March 17, 2016 with
exhibits A to S attached thereto;
(c)
Ms. Bette Ann Speers, a Canada Revenue Agency
(“CRA”) chartered business valuator, affirmed on April 8, 2016 with exhibit A
attached thereto;
(d)
Mr. James Moon, President and Chief Executive
Officer of All Group Financial Services Inc. (“All Group”), a stockbroker,
affirmed on April 1, 2016 with exhibits A to J attached thereto; and
(e)
Mr. Edmund Teelucksingh, formerly a mutual fund
salesperson with GP Wealth Management Corporation, affirmed on April 8, 2016
with Exhibit A attached thereto.
[14]
The appellants were given an opportunity to
cross-examine the affiants. These affidavits were filed and counsel for the
respondent relied on these affidavits in the hearing of the appeals pursuant to
section 122 of the Tax Court of Canada Rules (General Procedure).
[15]
Mr. Murji testified at the hearing. He explained
that he donated the share certificate of Dixon Perrot & Champion Inc.
(“Dixon”) to On Guard who accepted the transfer of shares and issued a tax
receipt. He said that the onus was on On Guard to determine the value of the
shares. Mr. Murji does not maintain that the shares had a value but he alleged
that On Guard should not have issued a tax receipt if the shares had no value.
[16]
During cross-examination of Mr. Murji, counsel for
the respondent filed on consent, a book of documents in relation to the appeals
of Mr. Murji and his spouse (Exhibit R-1). Mr. Murji also confirmed that he has
seen the affidavits of Mr. Alberto de Sousa Costa, Mr. James Moon and Ms. Bette
Ann Speers.
[17]
Mr. Murji stated that he made a donation of $144,000
(e.g. $18,000 in cash and $126,000 in shares) to On Guard three or four days
before the end of the year. He said that his donation was tax-motivated and
that he knew nothing about On Guard and its charitable activities. He simply
checked the CRA website to ensure that On Guard was a registered charity.
[18]
Mr. Murji confirmed that the ratio of shares to
cash was seven to one in the case of his 2009 donation and the said ratio could
vary from four to one to eight to one depending on the time of the year when
the donation is made.
[19]
Mr. Murji explained that the Dixon shares were
given to him by a non-resident philanthropist who wanted to make a donation to
On Guard. The Dixon shares were traded on the Frankfurt Stock Exchange.
[20]
Mr. Murji also confirmed that he made his
donation by sending a $18,000 cheque to Strategic Gifting Group (‘SGG”) which
processed his donation and took care of the required documentation including
the gifted share certificate and the Deed of Gift of Securities Transfer
Authorization form.
[21]
Mr. Murji stated that he has never seen the
invoice from SGG dated December 24, 2009 to On Guard by way of which a charge
of $16,200 was made in respect of Mr. Murji’s donation of $18,000.
[22]
Mr. Murji recognized having received a letter
from On Guard dated March 16, 2011 (read 2010 as the exact year) whereby
he was informed that his tax receipt in the amount of $144,000 issued on
December 31, 2009 was revoked and replaced by a tax receipt of $1,800
representing the net cash value of the cash component of his donation made
through SGG less their fees of $16,200 charged to On Guard. This letter was
followed by a letter dated April 26, 2010 from the CRA which referred to
the revoked tax receipt of $1,800 and to an adjustment from $100,358 to $1,800 to
his charitable donation claim in 2009 and that his unclaimed amount from the
tax receipt has been reduced to nil. As a result of those letters, Mr. Murji
did not file an amended tax return for 2009 and simply filed his notice of
objection and his notice of appeal to this Court.
[23]
In his tax return for 2009, Mr. Murji reported a
taxable income of $144,322.96, claimed donation tax credits of $100,358,
transferred donation tax credits in the amount of $22,763 to his spouse and
carried forward donation tax credits in the amount of $20,879.
[24]
After Mr. Murji’s testimony, Mr. Gary Huenemoeder
was called at bar. He is a team leader of the CRA’s charities audit group
located in Kitchener, Ontario. Mr. Huenemoeder was involved in many files
similar to this one with SGG, one of them being Innovative Gifting Inc. which
became IGI on September 10, 2008.
[25]
Mr. Huenemoeder referred the Court to the
settlement agreement that intervened in March 2011 between the staff of the
Ontario Securities Commission and Innovative Gifting Inc. and Terence
Lushington which described the IGI’s charity gifting program that was in operation
between September 2008 and January 2009 inclusively.
[26]
Mr. Huenemoeder also referred the Court to a
decision of the Ontario Superior Court of Justice dated May 18, 2010 by which
Innovative Gifting Inc. was ordered to return to three registered charities 90%
of the fees it demanded for the cash donated because the agreements in that
respect were against public policy and were accordingly void and voidable.
[27]
The witness also referred the Court to the
promotional material used by SGG to attract clients. Contrary to what the
material say, there was no non-resident philanthropist who wanted to give
shares to Canadian registered charities.
[28]
The sole proprietor of SGG, Mr. Abraham Herbert
Grossman, was sentenced in 2011 to 57 months in prison for various securities
offences and fraud and on August 13, 2012, was sentenced to an additional six-month
term for trading in securities (the shares of Dixon) without being registered
with the Ontario Securities Commission. In the agreed statement of facts referenced
to in the latter Court decision, it is mentioned that SGG delivered the Dixon
shares to the donors and provided information to the donors that they could
then donate these shares to a charity and get a tax receipt between four to
twelve times the value of the cash donation. SGG received $332,620 and tax
receipts in the amount of $2.2 million were issued. Some of these receipts have
been revoked and receipts for the true amount received by the charities (10% of
the cash donation) were reissued. The shares of Dixon may have no market but
SGG stated to donors that the shares were trading for a value between .40 and
1.27 euro.
[29]
Mr. Huenemoeder also explained the role played
by Mr. Edmund Ancil Teelucksingh between September and December 2009 by
selling, recommending, referring or facilitating the sale of shares of Dixon,
an investment that was not approved for sale by him as a mutual fund
salesperson with GP Wealth Management Corporation, a member of the Mutual Fund
Dealers Association of Canada, to 30 clients and 17 other individuals.
[30]
Mr. Teelucksingh admitted his misconduct in the
disciplinary proceeding against him in respect of which the Reasons for
Decision were rendered on August 8, 2013.
[31]
When cross-examined by Mr. Murji, Mr. Huenemoeder
explained that there are about 60 000 charities registered for tax purposes and
approximately 1,800 to 2,100 of them are audited annually which represents
between .75% to 1% of all charities. Complaints from the public are the origins
of about 40% of the audits. CRA does not necessarily seek to revoke the
registration of the charities being audited and its mandate is normally limited
to checking the reasonableness of the fees imposed by the promoters in order to
collect the funds. The CRA has issues with organizations which impose a fee of 25%
or more of the donations. Charities are required by the Act to use all
or substantially all of the funds they receive to charitable activities. Mr. Huenemoeder
confirmed that On Guard has been audited since the beginning of its operations
and that it uses the majority of its cash on legitimate charitable activities.
[32]
Mr. Wahid Khan also testified at the hearing. He
explained that he made his donation to Pilgrim, a registered charity which
seems to support a good cause. His primary motivation was the tax benefit, a
good return on investment (180% in his case).
[33]
When cross-examined, Mr. Khan explained that he
heard from someone at work that Pilgrim was providing medicine to sick African
children. Counsel for the respondent pointed out to him that at paragraph 3 of
his affidavit, Ms. Chionyeduc Opia-Evans, the executive director of Pilgrim,
described the charitable activities of Pilgrim in the following terms: the
Charity runs a food bank, provides wellness programs for seniors, helps new
immigrant seniors, provides seminars and after school programs for youths aged
seven to thirteen. Mr. Khan explained that he has not seen that affidavit
although it was sent to his agent in April 2017.
[34]
Mr. Khan could not recall if and when he
received the Dixon share certificate, if he signed it and to whom he sent it.
He also stated that he had no clue of the value of the Dixon shares that he
donated to Pilgrim and he did not make an attempt to determine the value of the
said shares.
[35]
Mr. Khan confirmed that his tax return for 2009
showed a taxable income of $78,374 and a total eligible amount of charitable
donations of $49,000 and a net federal tax of nil. Mr. Khan filed with his 2009
tax return, a tax receipt from Pilgrim showing a cash donation of $7,000 and a
stock donation valued at $42,000, for a total donation amount of $49,000. Mr.
Khan also confirmed that he had not made any donation in the ten preceding
years.
[36]
Mr. Khan confirmed that a new receipt dated June
6, 2011 was issued to him by Pilgrim showing an eligible amount of gift of $700
in replacement of the original receipt which became null and void. After the
testimony of Mr. Khan, Mr. Huenemoeder was called at bar again to explain that
the new receipt from Pilgrim was issued because Pilgrim was charged a fee of
$6,300 by SGG in respect of the $7,000 cash donation made by Mr. Khan. A copy
of such invoice was included as Exhibit E in the affidavit of Ms. Chionyeduc
Opia-Evans.
[37]
The issues to be decided in the appeal of Mr.
Murji are:
(a)
whether the appellant transferred Dixon shares
to On Guard in December 2009;
(b)
whether the appellant transferred an amount in
excess of $1,800 to On Guard in December 2009:
(c)
if the appellant did transfer Dixon shares and
an amount in excess of $1,800 to On Guard in December 2009, whether the
appellant made a charitable gift in making the transfers; and
(d)
if the appellant made a charitable gift of Dixon
shares to On Guard, how many Dixon shares did the appellant donate and what was
the fair market value of the Dixon shares on December 23, 2009?
[38]
The issue to be decided in the appeal of Ms.
Karima Murji is whether the Minister correctly disallowed the charitable
donation non-refundable tax credit of $22,763 claimed in the 2009 taxation
year?
[39]
The issues to be decided in the appeal of Mr.
Wahid Khan are:
(a)
whether the appellant transferred Dixon shares
to Pilgrim in December 2009;
(b)
whether the appellant transferred an amount in
excess of $700 to Pilgrim in December 2009;
(c)
if the appellant did transfer Dixon shares in
excess of $700 to Pilgrim in December 2009, whether the appellant made a
charitable gift in making the transfers; and
(d)
if the appellant made a charitable gift of Dixon
shares to Pilgrim, what was the fair market value of the Dixon shares on
December 31, 2009?
Legislative
Provisions
[40]
The provisions of the Act that are
relevant for these appeals are paragraph 118.1(2)(a), subsection
237.1(1) (definitions of “gifting arrangement: and “tax shelter”), subsections
237.1(2), (3), (4) and (6), subsection 248(1) (definition of “designated stock
exchange”) and sections 3500 (definition of “official receipt”) and subsection 3501(1)
of the Income Tax Regulations (the “Regulations”). They read as
follows:
118.1(2) Proof of gift. A gift shall not be included in the total
charitable gifts, total Crown gifts, total cultural gifts or total ecological
gifts of an individual unless the making of the gift is proven by filing with
the Minister
(a) a
receipt for the gift that contains prescribed information;
. . .
237.1(1)
Definitions
“gifting
arrangement” − means any arrangement under
which it may reasonably be considered, having regard to statements or
representations made or proposed to be made in connection with the arrangement,
that if a person were to enter into the arrangement, the person would
(a) make a gift to a qualified donee, or a contribution referred to in
subsection 127(4.1), of property acquired by the person under the arrangement;
or
(b) incur a limited-recourse debt, determined under subsection
143.2(6.1), that can reasonably be considered to relate to a gift to a
qualified donee or a monetary contribution referred to in subsection 127(4.1).
“tax shelter” – means
(a)
a gifting arrangement described by paragraph
(b) of the definition “gifting arrangement”; and
(b)
a gifting arrangement described by paragraph
(a) of the definition “gifting arrangement”, or a property (including any right
to income) other than a flow-through share or a prescribed property, in respect
of which it can reasonably be considered, having regard to statements or
representations made or proposed to be made in connection with the gifting
arrangement or the property, that, if a person were to enter into the gifting
arrangement or acquire an interest in the property, at the end of a particular
taxation year that ends within four years after the day on which the gifting
arrangement is entered into or the interest is acquired,
(i)
the total of all amounts each of which is
(A)
an amount, or a loss in the case of a
partnership interest, represented to be deductible in computing the person's
income for the particular year or any preceding taxation year in respect of the
gifting arrangement or the interest in the property (including, if the property
is a right to income, an amount or loss in respect of that right that is stated
or represented to be so deductible), or
(B)
any other amount stated or represented to be
deemed under this Act to be paid on account of the person's tax payable, or to
be deductible in computing the person's income, taxable income or tax payable
under this Act, for the particular year or any preceding taxation year in
respect of the gifting arrangement or the interest in the property, other than
an amount so stated or represented that is included in computing a loss
described in clause (A)
would equal or exceed
(ii)
the amount, if any, by which
(A)
the cost to the person of the property acquired
under the gifting arrangement, or of the interest in the property at the end of
the particular year, determined without reference to section 143.2,
would exceed
(B)
total of all amounts each of which is the amount
of any prescribed benefit that is expected to be received or enjoyed, directly
or indirectly, in respect of the property acquired under the gifting
arrangement, or of the interest in the property, by the person or another
person with whom the person does not deal at arm's length.
237.1(2)
Application. A promoter in respect of a tax
shelter shall apply to the Minister in prescribed form for an identification
number for the tax shelter unless an identification number therefor has
previously been applied for.
237.1(3)
Identification. On receipt of an application under
subsection (2) for an identification number for a tax shelter, together with
prescribed information and an undertaking satisfactory to the Minister that
books and records in respect of the tax shelter will be kept and retained at a
place in Canada that is satisfactory to the Minister, the Minister shall issue
an identification number for the tax shelter.
237.1(4) Sales
prohibited. No person shall, whether as a
principal or an agent, sell or issue, or accept a contribution towards the
acquisition of, an interest in a tax shelter before the Minister has issued an
identification number for the tax shelter.
237.1(6) Deductions
and claims disallowed. No amount may be deducted
or claimed by a person in respect of a tax shelter unless the person files with
the Minister a prescribed form containing prescribed information, including the
identification number for the tax shelter
248(1) Definitions
“designated
stock exchange” designated stock exchange means a
stock exchange or that part of a stock exchange, for which a designation by the
Minister of Finance under section 262 is in effect;
Regulations
3500.
Interpretation. In this Part,
“official
receipt” means a receipt for the purposes of subsection 110.1(2) or (3) or
118.1(2), (6) or (7) of the Act, containing information as required by
section 3501 or 3502.
3501(1) Every official
receipt issued by a registered organization shall contain a statement that it
is an official receipt for income tax purposes, and shall show clearly, in such
a manner that it cannot readily be altered,
(a)
the name and address in Canada of the
organization as recorded with the Minister;
(b)
the registration number assigned by the
Minister to the organization;
(c)
the serial number of the receipt;
(d)
the place or locality where the receipt was
issued;
(e)
where the gift is a cash donation, the day
on which or the year during which the donation was received;
(e.1) where the donation is a gift of
property other than cash
(i) the day on which the donation was received,
(ii) a brief description of the property, and
(iii) the name and address of the appraiser of
the property if an appraisal is done;
(f)
the day on which the receipt was issued
where that day differs from the day referred to in paragraph (e) or (e.1);
(g)
the name and address of the donor including,
in the case of an individual, the individual's first name and initial;
(h)
the amount that is
(i) the amount of a cash donation, or
(ii) where the donation is a gift of property
other than cash, the amount that is the fair market value of the property at
the time that the gift was made;
(i)
the signature, as provided in subsection (2)
or (3), of a responsible individual who has been authorized by the organization
to acknowledge donations; and
(j)
the name and Internet website of the Canada
Revenue Agency.
Analysis
[41]
The evidence from the appellants’ testimonies
and documents and other relevant circumstances clearly suggest the appellants
did not have an intention to impoverish themselves but, rather, to profit from
their participation in the program promoted by SGG.
Definition of
a gift
[42]
Under section 118.1 of the Act, a
taxpayer can claim a tax credit for gifts made to registered charities in order
to offset his or her income tax payable for a year.
[43]
The definition of what constitutes a “gift” is
not found in the Act, but jurisprudence has established that a “gift” is
“a voluntary transfer of property owned by the donor to a donee, in return for
which no benefit or consideration flows to the donor (see Friedberg v. R.,
1991 CarswellNat 669 (FCA) and affirmed by the Supreme Court of Canada, 1993
CarswellNat 959).
[44]
The three requisite elements of a gift are:
(a) there must be a voluntary transfer of property;
(b) the property must be owned by the donor; and
(c) there must be no benefit or consideration to the donor, which means
that the donor must have “donative intent”. It is well established in law that
in order to have a donative intent, a donor must intend to impoverish himself
or “grow poorer” from making the gift (see Mariano v. R., 2015
CarswellNat 5133 (TCC – General Procedure), paragraph 19).
[45]
The subjective intention of the taxpayer must be
considered but his or her stated intention is not determinative and must be
based in objective reality. A taxpayer who intends to enrich himself by making
use of an inflated donation receipt does not intend to impoverish himself or
herself.
[46]
Jurisprudence has established that “a benefit
received in return for making a gift will vitiate the gift, whether the benefit
comes from the donee or another person” (See Kossow v. R., 2013
CarswellNat 4557 (FCA) paragraph 25) and that false documents that allow a
taxpayer to obtain a profit can constitute a benefit that vitiate a gift (see Berg
v. R., 2014 FCA 25).
No Donative
Intent
[47]
Mr. Murji and Mr. Khan had no donative intent as
they did not intend to impoverish themselves.
[48]
In exchange for making a cash donation of
$18,000 to On Guard through SGG, Mr. Murji received a share certificate with a
multiplier of seven and he received a tax receipt for his cash donation and for
the donation of the shares. Mr. Murji participated in the arrangement in order
to enrich himself.
[49]
Prior to 2009, Mr. Murji claimed charitable
donations of $80,155 with respect to his participation in the Global Learning
Gifting Initiative donation program, which was disallowed by the CRA. Other
than this, in the ten years prior to 2009, Mr. Murji claimed charitable
donations totaling $2,625. In the circumstances, it is unrealistic to think
that, in 2009, Mr. Murji would have donated to On Guard $322 less than his
total taxable income for the year.
[50]
Similarly, Mr. Khan did not intend to impoverish
himself. He paid $7,000 to either SGG or one of SGG’s promoters in order to
obtain a tax receipt in the amount of $49,000.
[51]
In the ten years prior to 2009, Mr. Khan did not
claim any charitable donation. In the circumstances, it is totally unrealistic
to think that in 2009, he would have donated more than 60% of his taxable
income for the year to a charity that he did not know.
[52]
By making gifts of cash to On Guard and to
Pilgrim, respectively, Mr. Murji and Mr. Khan acted as “investors”. They
each received a significant benefit by doing so, which vitiates any cash gift
they may have made. Mr. Murji’s benefit was the receipt of the Dixon share
certificate that was falsely valued at $126,000 and enabled him to receive a
221% return on his investment of $18,000. Mr. Khan’s benefit was the receipt of
the Dixon share certificate that was falsely valued at $42,000 and enabled him
to receive a 180% return on his investment of $7,000.
The Donation
Amounts are Limited to the Replaced Donation Receipts
[53]
Mr. Murji and Mr. Khan are not entitled to claim
amounts greater than the amounts specified on their replaced donation receipts.
[54]
Pursuant to subsection 118.1(2) of the Act,
an eligible amount of a gift is not to be included in a taxpayer’s total
charitable gifts unless the making of the gift is evidenced by a receipt that
contains the information specified in the Regulations. Paragraph 3501(1)(h)(i)
of the Regulations requires a receipt specifying the amount of the cash
donation.
[55]
These requirements are mandatory. A receipt that
incorrectly sets out the amount of a cash donation is deemed to be spoiled
which means that the donor is precluded from claiming a tax credit with respect
to the donation (see R. v. Castro, 2015 CarswellNat 5180 (FCA)).
[56]
Mr. Murji did not transfer $18,000 to On Guard.
He paid $18,000 to SGG as consideration for participating in the gifting
arrangement. SGG transferred only $1,800 to On Guard by depositing $18,000 in On
Guard’s bank account and invoicing On Guard for $16,200. On Guard cancelled Mr. Murji’s
donation receipt in the amount of $144,000 and reissued a replacement receipt in
the amount of $1,800. The Minister’s reassessment allowed the amount of $1,800.
[57]
Mr. Khan did not transfer $7,000 to Pilgrim. He
paid $7,000 to SGG as consideration for participating in the gifting
arrangement. SGG transferred only $700 to Pilgrim by depositing $7,000 into
Pilgrim’s bank account and invoicing Pilgrim for $6,300. Pilgrim cancelled Mr.
Khan’s donation receipt in the amount of $49,000 and reissued a replacement
receipt in the amount of $700. The Minister’s reassessment allowed the amount
of $700.
The Dixon
shares had no fair market value
[58]
The testimony and documentary evidence support
the conclusion that the Dixon shares had no fair market value. Ms. Speers gave
her expert opinion that the fair market value of the Dixon shares was nominal.
Mr. Moon stated that All Group made a determination that the Dixon shares had no
value. Mr. Huenemoeder testified that after considering a number of
factors, the CRA concluded that the Dixon shares had no value. Mr. de Sousa
Costa testified as to On Guard’s unsuccessful efforts to sell the Dixon shares
through three brokerage firms, how he tried unsuccessfully, to obtain
information directly from Dixon and how he tried unsuccessfully to create a
market for the Dixon shares. Ms. Opia-Evans also testified as to Pilgrim’s
unsuccessful efforts to sell the Dixon shares through three brokerage firms.
[59]
As per an agreed statement of facts filed in the
Ontario Court of Justice in the matter of R. v. Grossman, the presiding
judge found as a matter of fact that the Dixon shares had no market.
[60]
The appellants did not provide any evidence as
to the value of the Dixon shares.
The gifting
arrangement offered by Strategic Gifting Group was an unregistered tax shelter
[61]
Pursuant to the Act, a tax shelter
includes a gifting arrangement that is promoted as an arrangement under which a
taxpayer acquires property, gives the property to a charity and claims a
deduction from his income in an amount that exceeds his cost to acquire the
property.
[62]
Section 237.1 of the Act sets out the requirements
for promoters and participants in tax shelters. A promoter in respect of a tax
shelter shall apply to the Minister in prescribed form for an identification
number for the tax shelter. Before accepting consideration in respect of a tax
shelter, a promoter must have received an identification number in respect of the
tax shelter. The promoter shall then make reasonable efforts to provide to
participants with the tax shelter identification number. In order to be able to
deduct or claim an amount in respect of a tax shelter, the participant must
file with the Minister a prescribed form containing prescribed information
including the identification number of the tax shelter.
[63]
The promotional materials of SGG set out that
participants make donations to a charity, acquire shares from a non-resident
philanthropist and give the shares to the charity. By doing so, the
participants could claim deductions in their income tax returns of four to
twelve times the amount of their cash donation and obtain inflated tax credits.
Clearly, the gifting arrangement offered by SGG qualified as a tax shelter as
defined in the Act.
[64]
Considering the fact that the gifting
arrangement offered by SGG was an unregistered tax shelter and that Mr. Murji
and Mr. Khan did not file the prescribed form, no amount may be claimed by them
with respect to the gifting arrangement of SGG, including the amounts allowed
by the Minister.
[65]
Since the Court cannot increase the amounts of
tax reassessed, the reassessments must stay as they are.
Conclusion
[66]
As Mr. Murji and Mr. Khan have not met their
burden of proving that they made charitable gifts to On Guard and to Pilgrim
respectively and did not provide any evidence that the value of the Dixon
shares was in excess of nil, they have not met their burden of proving that the
Minister’s reassessments are incorrect. Furthermore, the Minister correctly
disallowed the non-refundable tax credit of $22,763 claimed by Ms. Murji in her
tax return for the 2009 taxation year.
[67]
For all these reasons, the appeal of Mr. Murji
is dismissed with costs and the appeals of Ms. Murji and Mr. Kahn are dismissed
without costs.
Signed at Ottawa, Canada, this 9th day
of January 2018.
“Réal Favreau”
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