Docket:
A-442-12
Citation: 2013 FCA 283
CORAM:
EVANS J.A.
GAUTHIER J.A.
NEAR J.A.
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BETWEEN:
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KATHRYN KOSSOW
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Appellant
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and
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HER MAJESTY THE QUEEN
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Respondent
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REASONS
FOR JUDGMENT
NEAR J.A.
[1]
Kathryn Kossow appeals from the September 14, 2012
judgment issued by Justice Valerie Miller of the Tax Court of Canada (Kossow
v. Canada, 2012 TCC 325), which dismissed the appeal of Ms. Kossow from
reassessments made under the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.) for the 2000, 2001, and 2002 taxation years. The reassessments
concerned Ms. Kossow’s participation in a leveraged charitable donation program
and the Minister of National Revenue’s decision to deny her claim for tax
credits based on payments made to the program.
[2]
For the reasons that follow, I would dismiss Ms.
Kossow’s appeal.
I. Facts
[3]
In 2000, 2001, and 2002, Ms. Kossow participated in a leveraged
charitable donation program on the basis that the money would be used to
finance the purchase of art for a registered charity.
[4]
I will set out first how the donation program relevant to this appeal
operated, and then Ms. Kossow’s participation in the program.
How the Donation Program Worked
[5]
The charitable donation program was promoted by Berkshire Funding
Initiatives Limited and Talisker Funding Limited. Berkshire organized the
fundraising program and Talisker provided loans to participants so they could
make payments that it was hoped would entitle them to
charitable donation tax credits. Talisker itself borrowed money from a
Canadian lender in order to provide these loans and then borrowed from an
offshore lender to repay the original Canadian lender. The program’s
participants, including Ms. Kossow, would then combine their own cash with the
proceeds of a loan from Talisker to make a payment to a registered charity,
Ideas Canada Foundation. Ideas Canada Foundation was structured to flow money
through to other charities, rather than carrying on its own charitable
activities.
[6]
Fully 88% of the total money paid to Ideas (the remainder covered
fundraising fees and administrative costs) flowed through an escrow account
with a law firm pursuant to a series of directions. The money was used to
purchase art for the MacLaren Art Centre. MacLaren had no control over 87.5%
of the money, receiving only 0.5% free of the direction of others. The art, and
the price that the MacLaren would pay for the art, was decided upon by the promoters
of the program and their associates. A considerable amount of evidence was led
at trial with respect to the acquisition of these various art works and whether
the prices paid for these works were reasonable and whether these transactions
were in fact legitimate. It is unnecessary for the purposes of this appeal to
summarize this evidence in any detail.
[7]
It is fair to say that money transferred quickly between the promoters,
companies, financial institutions, and charities in order to finance the
program. The judge set out the complicated chain of transactions undertaken by
the promoters as follows:
(a)
The advances from Standard [the Canadian lender] were deposited to the bank
account of Irwin Singer (“Singer”), in trust, who directed the TD Bank to
credit the advances to the bank account of Talisker.
(b) Talisker
directed the TD Bank to combine the advances from Standard with the amounts
paid to it “as agent” and issue bank drafts to Ideas in the names of each of
the Participants for 100% of their Donation. Talisker gave the TD Bank a list
of the Participants’ names with the Donation made by each Participant.
(c)
Ideas directed the TD Bank to deposit the proceeds of the bank drafts to its
bank account. It then authorized the TD Bank to debit its account for 88% of
the Donations and deliver a cheque or bank draft for this amount to Fasken on
account of a gift to be made by Ideas to MacLaren.
(d) Ideas
directed Fasken to deposit 88% (on some occasions 86%) of the Donations to an
escrow account held in trust for the MacLaren. (Ideas paid Berkshire 11% of the
Donations for its fundraising services. The remaining 1% of the Donations was
used by Ideas to pay its expenses and salaries and to make donations to
charities chosen by Sanderson [the Executive Director of the Ideas
Foundation].)
(e)
The MacLaren authorized and directed Fasken to pay all amounts received from
Ideas, except 0.5%, to Jennings Art. The 0.5% was paid to the MacLaren for its
building fund.
(f)
Jennings Art directed Fasken to pay amounts to GSG. I assume that Jennings Art
received a commission but the percentage was not put into evidence.
(g)
GSG directed Fasken to pay “the amounts as may from time to time be requested”
in writing by Wigmore Investments Limited (“Wigmore”).
(h) Wigmore
directed Fasken to pay Talisker those amounts which Fasken had received on its
behalf from GSG. According to the evidence, I conclude that GSG received at
least 80% of the Donations and it directed that the Loan Amounts be paid to
Wigmore who directed that they be paid to Talisker. Elizabeth Sumption in Barbados gave directions for both GSG and Wigmore. According to Beach, these amounts were
Wigmore’s advances to Talisker under their loan agreement.
(i)
Talisker directed Fasken to deposit the amounts received from Wigmore into
Talisker’s bank account at the TD Bank.
(j)
Talisker directed the TD Bank to credit 80% of the Donation (the Loan Amount)
to the account of Irwin Singer in trust.
(paragraph 53,
footnotes removed)
[8]
The judge also set out this series of transactions in a chart format in
Appendix A to her reasons. For ease of reference, I reproduce it here:
[9]
The “essence” of the program, as described by the judge, was that
“little cash was given to a few charities and the MacLaren was required to
acquire art from the creators of the Program with the Donations allocated to
it” (paragraph 61).
Ms.
Kossow’s Participation in the Program
[10]
Section 118.1 of the Income Tax Act permits individual taxpayers
to claim a tax credit for gifts made to registered charities and other
qualified organizations in order to offset income tax payable:
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118.1 (1) In this
section,
…
“total charitable
gifts”, of an individual for a taxation year, means the total of all amounts
each of which is the eligible amount of a gift (other than a gift the
eligible amount of which is included in the total Crown gifts, the total
cultural gifts or the total ecological gifts of the individual for the year)
made by the individual in the year or in any of the five preceding taxation
years (other than in a year for which a deduction under subsection 110(2) was
claimed in computing the individual’s taxable income) to a qualified donee,
to the extent that the amount was not included in determining an amount that
was deducted under this section in computing the individual’s tax payable
under this Part for a preceding taxation year;
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118.1 (1) Les
définitions qui suivent s’appliquent au présent article.
[…]
« total des dons
de bienfaisance » En ce qui concerne un particulier pour une année
d’imposition, le total des montants représentant chacun le montant admissible
d’un don (sauf un don dont le montant admissible est inclus dans le total des
dons à l’État, le total des dons de biens culturels ou le total des dons de
biens écosensibles du particulier pour l’année) qu’il a fait au cours de
l’année ou d’une des cinq années d’imposition précédentes (mais non au cours
d’une année pour laquelle il a demandé une déduction en application du
paragraphe 110(2) dans le calcul de son revenu imposable) à un donataire
reconnu, dans la mesure où la somme n’a pas été incluse dans le calcul d’une
somme déduite en application du présent article dans le calcul de son impôt
payable en vertu de la présente partie pour une année d’imposition
antérieure.
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[11]
The judge set out the steps which a participant in the program, such as
Ms. Kossow, would complete in order to participate:
To become a Participant in the
Berkshire Program, the Appellant was required to complete the following steps,
which she did in 2000, 2001 and 2002:
(a) sign a Pledge to Ideas for the
full amount of her Donation;
(b) make a Loan Application for a
25 year, interest-free loan equal to 80% of her Donation to Talisker (I will
refer to this as the "Loan Amount");
(c) sign a cheque
for 20% of her Donation made payable to Talisker "as agent";
(d) pay Talisker a security
deposit equal to 10% of her Loan Amount which was to be invested for the
purpose of increasing to the Loan Amount in 25 years;
(e) pay Talisker a
loan processing fee of 1-5% of the Donation;
(f) sign a
document called a promissory note for the Loan Amount, due 25 years from the
date on the note.
(paragraph 49).
[12]
Pursuant to the terms of the donation program, Ms. Kossow’s payments to
Ideas were funded by 20% cash from her and 80% from a 25-year, interest-free
loan. She also paid fees to the promoters for processing her loans and
organizing the program. She claimed tax credits of $20,046 (2000), $24,060
(2001), $20,045 (2002) in respect of payments to Ideas totaling $50,000 (2000),
$60,000 (2001), and $50,000 (2002).
[13]
The judge set out Ms. Kossow’s disbursements and receipts as follows at
paragraph 44 of her reasons:
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Year
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Donation
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Loan
Amount
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20% of
Donation
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Security
Deposit
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Loan
Processing
Fee
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Charitable
Receipt
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2000
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$50,000
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$40,000
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$10,000
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$5,000
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$2,000
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$50,000
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2001
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$60,000
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$56,400
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$12,000
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$6,000
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$2,400
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$60,000
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2002
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$50,000
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$40,000
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$10,000
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$5,000
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$2,000
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$50,000
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II. Procedural History
[14]
On September 4, 2004, the Minister reassessed Ms. Kossow and disallowed
80% of the tax credit claimed each year. On September 9, 2005, the Minister
issued a subsequent reassessment, disallowing the entire tax credit received
for the 2002 tax year.
[15]
The case was heard on its merits before the judge over a period of ten
days in spring and summer 2011, with reasons issued in the fall of 2012.
[16]
In her reasons, the judge set out the factual context of the program and
Ms. Kossow’s participation in it. She then set out the issues to be decided as
the following:
The issues in this
appeal are: (a) whether the Donations made by the Appellant were gifts within
the meaning of subsection 118.1(1) of the Income Tax Act (the “Act”);
(b) whether the general anti-avoidance rule is applicable to deny the tax
credits to the Appellant; and, (c) who has the onus of proving the Minister’s
assumptions when those assumptions involve third parties (paragraph 3).
[17]
Ms. Kossow’s evidence before the Tax Court was to the effect that she
participated in the program in order to make a larger donation than she would
have been able to give without the leveraged portion and that the tax savings
were a secondary consideration. Notwithstanding this evidence, the judge
disagreed and held that “the tax savings were the Appellant’s principal reason
for making the Donation” (paragraph 65). The judge did accept that Ms Kossow
was “not aware of most of [the] individuals or the transactions” involved in
the program (paragraph 62).
[18]
The judge held that the jurisprudence of this Court in Maréchaux
v. The Queen, 2010 FCA 287 (Maréchaux) governed and found that Ms.
Kossow did not make a gift within the meaning of section 118.1 of the Income
Tax Act. She held that “[t]he 25 year interest-free loans were
‘significant benefits’ which she received in return for making her Donations”
(paragraph 69) and “[t]hat a benefit flowed to Ms. Kossow in return for her
Donation is sufficient to demonstrate that her Donation did not constitute a
gift” (paragraph 70).
[19]
The judge also addressed a submission made by Ms. Kossow’s counsel that
the Ontario Court of Appeal, in the case of McNamee v. McNamee, 2011 ONCA 533 (McNamee), had stated that at common
law, a gift was only vitiated by the donor’s receipt of consideration if the
donee provided it. The judge disagreed, holding that to apply a family law
case about whether property had been gifted or not from a family member, would
be “misinterpret[ing] its scope” (paragraph 73).
III. Issues
[20]
In my view the issues for determination on this appeal are as follows:
1.
Was the judge correct in law concluding that the facts of this case are
not distinguishable in any relevant way from Maréchaux, so that she was
bound to conclude that the appellant had not made any gifts for the purposes of
s. 118 of the Income Tax Act?
2.
Were the reasons given by the judge sufficient to permit meaningful
appellate review?
3.
Did the inclusion of materials not admitted into evidence by the judge
but included in the court record cause prejudice requiring intervention by this
Court?
4.
Does the general anti-avoidance rule in section 245 of the
Income Tax Act apply to restrict Ms. Kossow from using the tax credits?
IV. Standard of
Review
[21]
Questions of law are to be reviewed on the
standard of correctness, while questions of fact are to be reviewed on the
standard of palpable and overriding error (Housen v. Nikolaisen, 2003
SCC 33 at paragraphs 8, 10).
[22]
As stated in Canada Trustco Mortgage
Co. v. Canada, 2005 SCC 54, “[t]he textual, contextual and purposive
interpretation of specific provisions of the Income Tax Act is
essentially a question of law but the application of these provisions to the
facts of a case is necessarily fact-intensive” (paragraph 44).
V.
Analysis
Application
of Maréchaux
[23]
Before this Court, counsel for Ms. Kossow has advanced a number
of arguments; however, the fundamental question to be
determined in this matter is whether the judge was correct in following the
decision of this Court in Maréchaux and, as a result, holding that the
Appellant had not made any gifts pursuant to section 118.1 of the Income Tax
Act.
[24]
In Maréchaux, this Court dealt with a
leveraged charitable donation program that was strikingly similar to the
program considered in this case, particularly in so far as a substantial part
of the purported gift was funded by an interest-free loan provided by the
promoters (who were not the donees) on terms that were part of a series of
interconnected contractual arrangements. The Federal Court of Appeal adopted
the well-known definition of a gift as set out in The Queen v. Friedberg,
92 D.T.C. 6031 (F.C.A.) (Friedberg) for the purposes of section 118.1 of
the Income Tax Act as
[…] a gift is a
voluntary transfer of property owned by a donor to a donee, in return for which
no benefit or consideration flows to the donor (at 6032).
[25]
In my view, Maréchaux stands for two
propositions, as follows:
(a) a long-term
interest-free loan is a significant financial benefit to the recipient; and
(b) a benefit
received in return for making a gift will vitiate the gift, whether the benefit
comes from the donee or another person.
[26]
I turn now to the facts of this case and the
application of these principles.
[27]
It is evident from the facts of this case that
several long-term interest-free loans formed part of the leveraged-donation
programme entered into by Ms. Kossow. The judge found, and I agree, that
[t]he Appellant
was able to transfer $50,000, $60,000 and $50,000 to Ideas by using only
$17,000, $20,400 and $17,000 of her own money in 2000, 2001 and 2002
respectively. She accomplished this without having to pay interest on a
commercial loan for the difference (paragraph 69).
[28]
The result was that Ms. Kossow received a significant
financial benefit as the recipient of a long-term, interest-free loans. That
benefit did not come from the donee but from Talisker as a result of her
participation in the donation program. The interest-free loan and the donation
were two components of an arrangement consisting of a series of interconnected
transactions, as illustrated by the chart set out in Appendix A to the reasons
of the judge (reproduced above). Counsel for Ms. Kossow submitted that the
chart did not accurately reflect all aspects of the program. However, in my
view, the judge made no palpable and overriding error in finding as a fact that
there was only one interconnected transaction in this case. Indeed, it appears
to me that this was the only reasonable conclusion that was open to her given
the evidence before her.
[29]
As noted by the judge, in Maréchaux, the
Federal Court of Appeal found that Mr. Maréchaux did not make a gift within the
meaning of section 118.1 of the Income Tax Act because he made his
payment to the charitable foundation expecting to receive a “significant
benefit” in return. The “significant benefit” received in Maréchaux was
an interest-free loan from a third party lender (paragraph 9). Ms. Kossow
received a 25 year interest-free loan from Talisker and her donations were
conditional upon being approved and receiving her interest-free loans. This
resulted in the cash and leveraged components of the program and the donations
being interconnected. 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: Canada
(Citizenship and Immigration) v. Thamotharem, 2007 FCA 198 at paragraph 61,
Sanofi-Aventis v. Apotex Inc., 2013 FCA 186 at paragraphs 77 to 81.
[30]
Ms. Kossow argued before the judge and before this
Court that the Ontario Court of Appeal in McNamee had superseded Maréchaux
in at least one respect, namely, that the significant benefit received by a
donor must come from the donee and not from a third party. I do not agree with
this position.
[31]
I agree with the judge that McNamee did
not purport to change the generally accepted definition of gift as set out in Friedberg.
In McNamee, the Ontario Court of Appeal considered the arrangement
between a father and a son and determined whether shares given by the father to
a son in an estate freeze situation were as a result of any consideration being
given to the father (the donor) from the son (the donee). The Ontario Court of
Appeal in McNamee did not consider either a leveraged donation program
or a situation where, through a series of interconnected transactions, a donor
receives a significant benefit from a party other than the donee as part of an
interconnected series of transactions that includes the purported gift.
[32]
The result is that there is no conflict between
the Federal Court of Appeal in Maréchaux and the Ontario Court of Appeal
in McNamee, and there is no basis upon which this Court should depart
from Maréchaux.
[33]
It is my view that earlier decisions of this
Court, particularly recent decisions, should be followed save in rare
circumstances. The well known test, as set out in Miller v. Canada
(Attorney General), 2002 FCA 370, for this Court to overrule a decision of
another panel of this Court is that the
[…] previous
decision is manifestly wrong, in the sense that the Court overlooked a relevant
statutory provision, or a case that ought to have been followed…” (paragraph
10).
[34]
The Federal Court of Appeal in Maréchaux
did not overlook a relevant statutory provision nor did it fail to follow a
case that ought to have been followed. Given my conclusion with respect to the
lack of conflict between Maréchaux and McNamee I agree with the
Crown that there is no need to re-visit Maréchaux in light of McNamee.
[35]
In my view, the judge did not err in law or fact
when she concluded that she was bound by the Federal Court of Appeal findings
in Maréchaux.
Adequacy of
Reasons
[36]
Counsel for Ms. Kossow submitted that the
judge’s reasons failed to meet the test set out in R. v. Sheppard, 2002
SCC 26 at paragraph 55, in that they were neither transparent nor accessible
and precluded meaningful appellate review. I find no merit in this
submission. The judge’s findings of the relatively few facts material to the
question of law on which this appeal turns are both comprehensible and
complete. She was not obliged to set out every item of evidence on which she
relied nor explain in detail why she ejected any evidence to the contrary.
Appeal Book Contents
[37]
Counsel for Ms. Kossow also raised concerns at
the hearing of this matter that the appeal book contained reference to a number
of documents that were not admitted in evidence at trial. Just prior to the
hearing of this appeal, the Crown informed both the Court and counsel for Ms.
Kossow that it had inadvertently referred to three pages of material that were identified
as potential exhibits but were ultimately not admitted into evidence. The
Crown referred to this material in its Memorandum of Fact and Law at footnotes
28, 29 and 37. Ms. Kossow did not object to the contents of the appeal book
prior to the appeal hearing. Her counsel advised the Court that she did not
notice the references to documents not admitted as evidence in the footnotes
prior to being advised of them by the Crown’s letter to the Court.
[38]
Ms. Kossow submitted to the Court that the
matter should be referred back to a different judge for a new hearing as a
result of these documents being in the Tax Court’s file identified but not
admitted as evidence in the proceeding. Ms. Kossow submitted that the judge
may have considered these documents referred to in footnotes 28, 29 and 37
despite having found they were not to be admitted as evidence.
[39]
In support of this position, reference was made
to Oberreiter v Akmali, 2009 BCCA 557 (Oberreiter). This case
involved a civil jury trial where a potentially prejudicial security videotape
had been left with the jury during its deliberations even though portions of it
had not been admitted into evidence. The British Columbia Court of Appeal
found that the irregularity may have affected the verdict given the potentially
prejudicial nature of the videotape in question.
[40]
In my view, Oberreiter does not compel a
retrial of this matter. The judge made no reference to those documents in her
decision. Nor is there any basis for rebutting the presumption that the judge
knew the law, or for concluding that she had “forgotten” that she had ruled
during the course of the trial that these documents were not to be admitted as
evidence. A review of the documents indicates that they were inconsequential
to the findings of fact made by the judge that are material to this appeal.
Hence, there is no merit in Ms. Kossow’s argument that she was prejudiced or
that a reasonable person, informed of the facts, would conclude that she had
been denied procedural fairness.
GAAR
[41]
Having reached the conclusion that Maréchaux
governs the facts at hand to disentitle Ms. Kossow to claim the charitable tax
credits under section 118.1 of the Income Tax Act, it is not necessary
to comment on this issue, and I decline to do so.
VI. Conclusion
[42]
For these reasons, I would dismiss the appeal with
costs.
“D.G. Near”
“I agree
John M. Evans J.A.”
“I agree
Johanne Gauthier J.A.”
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