Webb v. The Queen, 2004 TCC 619 (Informal Procedure)

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Agent for the Appellant: Bob Rogers

Counsel for the Respondent: Gavin Laird

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REASONS FOR JUDGMENT

(Delivered orally from the Bench on

July 16, 2004, at Vancouver, British Columbia)

Bowie J.

[1]      These appeals are brought from reassessments for income tax for the 1997 and 1998 taxation years. The issue in each appeal is whether the Appellant is entitled to a tax credit in respect of a charitable donation, as claimed by him in his income tax returns for those years. The Minister of National Revenue initially allowed the credits as claimed by the Appellant, but subsequently reassessed him to disallow those credits in their entirety.

[2]      The Appellant's claims were for credits based on $7,069 of a $30,000 donation said to have been made in 1997, and $17,097 carried forward to 1998. He claimed to have donated $30,000 in 1997 to an organization known as the Association for the Betterment of Literacy and Education, which I shall call ABLE, during the year 1997.

[3]      The Appellant testified that he gave $30,000 to ABLE because he wished to do something to promote literacy in British Columbia and that organization was, he said, dedicated to that purpose. He himself was not a very quick reader, he said, and he regretted that. He had met a person by the name of Stuart MacPherson through Montecristo Jewellers where he, the Appellant, was employed. Mr. MacPherson recommended ABLE to him as an organization through which he could make a donation to help the cause of literacy, and he did so. First, however, he telephoned the Canada Customs and Revenue Agency to ensure that ABLE was indeed a registered charity, and he was assured that it was. At the time that was true, although a short time after he made his donation ABLE was deregistered.

[4]      Mr. Webb also testified that he was not offered any inducement or reward for making the donation that he made to ABLE, nor any receipt for an amount in excess of the $30,000 that he gave. This was the substance of his evidence in chief. He produced a copy of a cancelled cheque drawn by him, payable to ABLE, and a receipt in that amount made out in his name and signed on behalf of ABLE. Both of these documents are dated January 30, 1998. Mr. Webb testified that he gave the cheque to Mr. MacPherson in the Montecristo jewellery store and received the receipt from him.

[5]      It is obvious that the appeal for 1997 must fail. Tax credits may be claimed in respect of a donation made in the year to a registered charity; a donation or part of one may be carried forward to a later year if it has not been claimed in the year in which it was made; but there is no provision for a carryback to an earlier year of the unused portion of a donation. The appeal for the 1997 taxation year is therefore dismissed, as the gift, if there was one at all, was not made before the end of 1997.

[6]      At the conclusion of the Appellant's evidence in chief, he and his agent sought to stay these proceedings on the curious basis that by his evidence he had proved his case. Clearly he did not wish to be subjected to cross-examination. That cross-examination took place, however, and it, together with the evidence of Mr. Larry Kuhn, satisfy me that the Appellant did not tell the truth when he testified that he had donated $30,000 to ABLE in January 1998 without any incentive offered to him, and without anticipation of receiving any payment in return from ABLE, or from a related third party.

[7]      Mr. Webb admitted reluctantly under cross-examination that his charitable donations in the years 1992 to 2002, exclusive of the $30,000 cheque to ABLE and a $150 cheque to something called Taxman, which the evidence suggests is an organization related to ABLE, amounted to $100 in 1994, $50 in 1997, $30 in 1998, $100 in 2000, and $100 in 2002. That is to say less than $400 in a period of 11 years or an average of approximately $35 per year.

[8]      Mr. Webb was questioned about his prior relationship with Mr. Stuart MacPherson and he denied having had any business dealings with him. However it became clear during Mr. Kuhn's evidence that the Appellant and Mr. MacPherson had been involved together in a number of business ventures over a period of years, all in the form of corporations subscribed by only a few investors. It seems highly unlikely that they did not know each other, and know on those occasions that the other was also an investor.

[9]      Mr. Larry Kuhn is a chartered accountant and has a degree in business administration. He has been a Revenue Canada, or Canada Customs and Revenue Agency, assessor since 1992. He was personally and extensively involved in audits arising out of numerous claims for charitable donations to ABLE during the period from 1993 to 1996. He investigated the operations of ABLE and is familiar with its history and its mode of operation.

[10]     He testified that ABLE was a creation of a Mr. Henry Thill, who brought it into existence and ran it during its early years. He identified a number of promotional brochures that explained its operations. At different times, he said, it operated in different ways. Two of the principal methods of operation were these. An arrangement under which a person could make a donation for which he would receive a receipt for four times the amount donated, that he would then use to claim tax credits, which generally speaking could be expected to exceed the amount of the so-called donation. In the later period, beginning around 1995, donors would receive a gift in return for their donations of 75% of the amount of the gift. These gifts would come from either ABLE or some related source. This method of operating has essentially the same effect as the first. A person who purports to donate $1,000 and receives a receipt for $1,000 and $750 returned in cash, then has in fact only transferred $250 to the organization but has a $1,000 receipt which can be used then to claim a spurious tax credit.

[11]     Mr. Kuhn testified that during his time investigating the operations of ABLE and assessing donors to it he had disallowed the tax credits claimed by each and every one of 550 so-called donors whom he had audited. In no case did he find a donor to ABLE who had paid more than 25% of the value of the receipt obtained. Either they paid 25% of the face amount of the receipt, or they paid 100% of the face amount of the receipt and received a 75% rebate in one form or another.

[12]     Mr. Kuhn also identified a series of purchase orders by which ABLE purchased what may be called "reading kits", or packages to be distributed by it to various schools in British Columbia, as well as the invoices by which its supplier obtained these packages. Without going into all the details of these transactions, it is obvious from the magnitude of the markups that these are not normal business transactions, but that, as Mr. Kuhn testified was the usual case, much of the money simply was circulated through the printing and distributing companies before being returned to the original donors.

[13]     Mr. Webb's employer, Pasquale Cusano, was one of the individuals who participated in this operation, as was Stuart MacPherson, who apparently became a director of ABLE in or about April 1997. As I mentioned earlier, as a result of the evidence that came to light during Mr. Kuhn's investigations of ABLE, it was deregistered in 1999. Mr. Laird said quite candidly, in the course of argument, that there was, as he put it, no smoking gun in the evidence to show that Mr. Webb's cheque payable to ABLE for $30,000 was not a gift. He could offer no concrete evidence of a payback to Mr. Webb of $22,500, or any other amount.

[14]     Despite the lack of any such conclusive proof, I find that Mr. Webb either received such a payment, or at the least, wrote his cheque and gave it to Mr. MacPherson in anticipation of such a payment in return for it. I base my conclusion as to Mr. Webb's lack of credibility on a number of factors. First, he was dishonest as to the date of his cheque when filing his income tax return in 1997. He made a claim for a credit in 1997, although he must have known that the payment was in fact not made, if it was made at all, until 1998. Secondly, he was extremely evasive when cross-examined about his business dealings with Stuart MacPherson and Pasquale Cusano. At first he denied having had business dealings with Mr. MacPherson, although quite clearly he did. Third, it is inherently improbable that a man who made virtually no charitable gifts during a period of more than ten years, would suddenly in one year only make a gift of the magnitude of this one, being something close to the amount of his after-tax income for the year, and do so without any apparent investigation of the charities that exist to promote literacy. Mr. Webb spoke from time to time of due diligence in the course of his evidence, but he was unable to name even one other organization in British Columbia, or for that matter in the world, whose aims and objects included the promotion of literacy. One might expect a person suddenly moved to make such a magnanimous donation to have at least considered other possible, and perhaps more worthy, donees. Fourthly, it would be a remarkable coincidence if on the occasion of that $30,000 transaction, it turned out also to be the one occasion on which ABLE was soliciting donations without offering the inducement of cash back or inflated receipts that would turn what was intended to appear on the face of it as a donation into the purchase of tax credits at a favourable price. I am hard pressed to believe that on this one occasion, ABLE accepted a gift and gave nothing in return, or promised nothing in return. On several occasions throughout the hearing Mr. Webb and his agent both referred to the purported donation as a purchase. I am sure when they did, it was unconscious on their part, but "purchase" is, of course, a word quite inapt to describe a gift. It was, I thought, a telling slip of the tongue. Sixthly, neither Mr. Thill nor Mr. MacPherson was called to testify as to the use of the funds donated by ABLE, or as to the genuineness of ABLE's operations, or with respect to this specific transaction, although it was clearly put in issue by the Reply that the Minister would advance the position that this purported gift was in fact not a gift but a transaction of a kind intended to confer a tax advantage greater than the amount paid. As Mr. Laird conceded, there is no smoking gun. Nevertheless the evidence satisfies me that Mr. Webb made the payment of $30,000, as I have already said, at least in anticipation of the future return of a large portion of his gift back to him, either from ABLE or through an indirect channel, in addition to the receipt itself.

[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,[1] 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.

[17]     The circumstances that I have referred to lead me to conclude that there was nothing donative at all about Mr. Webb's payment to ABLE. His intention was to receive a tax credit for a charitable donation, as well as a substantial refund of the amount he had given, such that when the two were aggregated they would exceed the $30,000 for which he wrote the cheque.

[18]     I was referred in argument to the recent decision of Madam Justice Campbell in Doubinin v. The Queen[2] and her statement in the first sentence of paragraph 18 where she said:

            He is not part of a tax evasion scheme, and although he may have been motivated by potential tax benefits, I do not believe that this can be equated to consideration for a gift because tax benefits are not considered a benefit. ...

I do not read Madam Justice Campbell as purporting there to extend what was said by Mr. Justice Linden in Friedberg[3] to suggest that a scheme entered into whereby a person would be put in a position to claim tax credits for charitable donations in excess of the donations actually made, by the issuing of false receipts or by the kickback of part of the donation, to be a normal transaction and something that would not be considered a benefit within the context of the definition of what constitutes a gift. As Mr. Justice Linden put it in Friedberg:

A gift is a voluntary transfer of property owned by a donee, owned by donor to a donee, in return for which no benefit or consideration flows to the donor.

I am bound, of course, by that definition and, I do not consider it to be qualified by what was said by Madam Justice Campbell in Doubinin. Clearly the amount paid in this case does not fall within that definition, and the appeal for 1998 will also be dismissed.

Signed at Ottawa, Canada, this 9th day of September, 2004.

Bowie J.