FTQ – Tax Court of Canada finds that a “gift” that relieved the taxpayer of an obligation to invest the gifted funds was not a gift
The corporate taxpayer agreed with the City of Chandler that it would no longer use any loan repayment proceeds received by it from a City-owned corporation - that had failed in an costly attempt to restart a paper mill close to the City – to invest in a prospective replacement economic-development LP to be sponsored by the City, but would instead make a “gift” of the loan repayment proceeds (which ended up totalling $9.3 million) to the City, for which it received charitable receipts. From a CRA perspective, what might have been troubling about this was that, broadly speaking, this $9.3 million was not really the taxpayer’s money as, in the absence of its “gift,” it would have been received subject to an obligation to “invest” in what might likely be or become a worthless enterprise with ugly financial statements.
Ouimet J found that there was no “gift” and, thus, no s. 110.1(1)(a) deduction, stating:
Since the payment of the sums … to the City of Chandler had the effect of freeing the appellant of its obligation to negotiate in good faith to create a limited partnership, the consideration received by the appellant in exchange for such payment was the amount by which that obligation was extinguished.
He also rejected the taxpayer’s alternative argument that the payments qualified for current deduction consistently with the s. 18(1)(a) income-producing purpose test given that their purpose instead was to avoid involvement in the proposed LP and to leave to the City alone the responsibility of using the sums to economically develop the region.