Docket:
A-555-12
Citation: 2014 FCA 25
CORAM:
SHARLOW J.A.
STRATAS J.A.
NEAR J.A.
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BETWEEN:
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HER MAJESTY THE QUEEN
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Appellant
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and
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ALLEN BERG
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Respondent
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REASONS
FOR JUDGMENT
NEAR J.A.
[1]
The Crown appeals from the November 19, 2012 judgment
of Justice Bocock of the Tax Court of Canada: 2012 TCC 406 (amended reasons for
judgment issued December 14, 2012). The judgment partially allowed Mr. Berg’s
appeal from assessments made by the Minister of National Revenue for the 2002,
2003, and 2004 taxation years pursuant to the Income Tax Act, R.S.C.
1985, c. 1 (5th Supp.).
[2]
For the reasons that follow, I would allow the Crown’s
appeal.
I. Facts
[3]
In 2002 and 2003, Mr. Berg participated in a so-called charitable
donation program where he received inflated tax receipts. The program involved a
series of transactions that included the purchase and subsequent transfer of
timeshare units located on Young Island in St. Vincent and the Grenadines that
were transferred soon afterward to a registered charity. As part of the same
series of transactions, the participants also received documents designed to
enable the participants to receive tax credits based on a falsely inflated
value of the timeshare units. In these reasons, I refer to those documents as
the “pretence documents.”
[4]
Participating in the program involved entering into a
series of transactions with Young Island Timeshare Inc. (a British Virgin
Islands corporation) and SVG Bancorp Inc. (represented as a St. Vincent and the Grenadines corporation). Young Island Timeshare Inc. sold the timeshare units to
participants including Mr. Berg, and SVG Bancorp Inc. provided participants
including Mr. Berg with the pretence documents that were intended to deceive
the Minister into believing that Mr. Berg’s cost of the timeshare units was far
in excess of what he actually paid for them.
[5]
On November 19, 2002, Mr. Berg purchased 68 timeshare
units with a fair market value (FMV) of $242,000. He paid $242,000 for them. The
promoters provided Mr. Berg with the pretence documents, the most important of
which was a document purporting to be a promissory note proving that Mr. Berg
still owed $2,178,000 for the purchase of the timeshare units. Mr. Berg also
paid a fee of $508,200 to the program promoters.
[6]
On December 6, 2002, Mr. Berg transferred the timeshare
units to Cheder Chabad which, at all times material to this case, was a
registered charity under the Act. Cheder Chabad issued him with a charitable gift
receipt for $2,420,000 (ten times the FMV of the timeshare units and equal to
the money Mr. Berg paid for the units plus the face amount of the purported promissory
note). On his 2002 tax return, Mr. Berg claimed a tax credit based on the
$2,420,000 receipt. When the 2002 tax return was initially assessed, the tax
credit was allowed as claimed.
[7]
In 2003, Mr. Berg again participated in the charitable
donation program, which differed from his 2002 participation only in the dollar
amounts of the transaction. The program structure remained the same. On
February 12, 2003, Mr. Berg purchased timeshare units with a FMV of $133,950 for
which he paid $133,950. Again the promoters provided him with pretence documents,
the most important of which was a document purporting to be a promissory note proving
that Mr. Berg still owed $1,652,050 for the timeshare units. Mr. Berg paid the
promoters a fee of $366,130.
[8]
On February 14, 2003, Mr. Berg transferred his timeshare
units to Cheder Chabad. The charity provided him with a charitable tax receipt in
the amount of $1,786,000, on the basis of which he claimed tax credits on his 2003
and 2004 tax returns ($1,067,620 in 2003 and $718,380 in 2004). Again, the tax
credits as claimed were allowed on initial assessment.
[9]
Mr. Berg admitted in a Partial Agreed Statement of
Facts filed in the Tax Court that there was never an intention that he would
pay more than FMV for the timeshare units. After the examinations for
discovery but before the trial, Mr. Berg disclosed the existence of documents
executed contemporaneously with the 2002 and 2003 timeshare purchases that
discharged Mr. Berg from any liability under the purported promissory notes of
$2,178,000 and $1,652,050.
[10]
As illustrated by the following table, Mr. Berg
anticipated a net cash return of $684,480 for the 2002 and 2003 transactions,
assuming his claims for tax credits based on the inflated charitable donation
receipts had been allowed in full.
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2002
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2003
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FMV of property
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$242,000
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$133,950
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Amount paid for property
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$242,000
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$133,950
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Face amount of purported promissory
note
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$2,178,000
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$1,652,050
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Inflated value of property as shown
on gift receipt
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$2,420,000
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$1,786,000
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Total federal and provincial tax
credits anticipated
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$1,113,200
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$821,560
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Less: Fee paid to promoters
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$(508,200)
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$(366,130)
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Less: Amount paid for property
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$(242,000)
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$(133,950)
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Net cash return anticipated by Mr.
Berg
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$363,000
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$321,480
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II. Procedural
History
[11]
On January 4, 2007, the Minister issued a notice of
reassessment covering the 2003 and 2004 taxation years, and on June 19, 2009,
the Minister issued a notice of reassessment covering the 2002 taxation year. These
reassessments disallowed Mr. Berg’s entire claim for tax credits based on the transfers
of the timeshare units to Cheder Chabad.
[12]
Mr. Berg appealed the reassessments to the Tax Court. The
matter was heard by Justice Bocock on June 4, 2012 with the judgment released
November 19, 2012 and amended reasons released December 14, 2012 (correcting
certain figures in the reasons).
[13]
At the outset of the hearing, Mr. Berg abandoned an
issue in his appeal (he had initially attempted to claim a capital loss in
relation to some of the guarantee fees). As a result, there was only one issue
to be determined. The judge articulated it as follows (at paragraph 21):
This […] is the
precise legal issue for this Court to determine, namely, does the overall
scheme of the Donation Program, the Inflated Gift Receipt and/or the bogus
Transaction Documents submitted in vain by the Appellant to the CRA, vitiate
the donative intent or animus donandi regarding the Transferred Units
donated to the Charity.
[14]
The judge determined that, in return for the transfer
of the timeshare units to Cheder Chabad, Mr. Berg had received no benefit
beyond the inflated tax receipts. His reading of the jurisprudence from the Tax
Court and this Court was that (at paragraph 33):
... in the absence of
some additional benefit or consideration beyond that of enhanced, supplementary
or additional donation tax receipts, [the Courts] have been reluctant to impugn
donative intent where the underlying gift has some tangible property and is not
otherwise commingled with a received tangible or potential benefit beyond the
donation tax receipt; however inflated or unsupportable.
[15]
The judge determined that Mr. Berg was entitled to
claim a charitable tax credit to the extent that he was actually impoverished
by his purchase and subsequent transfer of the timeshare units (at paragraphs
47-48):
The
Appellant was not overwhelmingly and perhaps only marginally motivated by
donative intent when he gave the Transferred Units to the Charity. Factually,
the Appellant had an intention to give the Transferred Units purchased with the
Cash Donation Amounts without the condition of receiving any benefit beyond
that of the tax receipts, however perversely inflated they may have been. Both
counsel agreed the Appellant received no consideration beyond the possibility
of the overstated tax receipt and the concordantly inflated charitable tax
credit.
The
fact remains however, that to the extent the Cash Donation Amount related to
the Transferred Units, the Appellant was impoverished by, paid valuable
consideration for, intended to give, and conveyed the Transferred Units which
were, in turn, received by the Charity. Whatever opprobrium may be ascribed to
the Donation Program, legally the Cash Donation Amount has met the legal test
of a charitable gift. In the absence of some other benefit received beyond the
Inflated Tax Receipts, no legal authority suggests donative intent as defined
by the case law relevant to section 118.1 of the Act has been vitiated
or nullified to the extent of the value of the Cash Donation Amount.
[16]
The matter was referred back to the Minister for
reconsideration and reassessment on the basis that Mr. Berg was entitled to
claim charitable gifts in the amount of $242,000.00 and $133,950.00 for the
2002 and 2003 tax years, respectively.
[17]
Notwithstanding Mr. Berg’s success before the Tax
Court, the judge declined to award Mr. Berg his costs because of his conduct in
preparing his return, his dealings with the Canada Revenue Agency, his
insistence in litigating a withdrawn issue, and his use of the pretence
documents.
[18]
The Crown has appealed to this Court on the basis that
Mr. Berg should not have been entitled to any tax credits concerning the
transfer of the timeshare units to Cheder Chabad.
III. Issue
[19]
In my view, the sole question in this matter was
whether the judge erred in finding that Mr. Berg made gifts entitling him to
tax credits pursuant to section 118.1 of the Act.
IV. Standard of
Review
[20]
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 and 10).
[21]
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
[22]
Section 118.1 of the Act provides individual taxpayers
with tax credits for gifts they make to registered charities.
[23]
The Act does not define the term “gift.” The meaning of
the term is determined under the applicable law, which in this case is the
common law. The authoritative definition for this purpose is stated as follows
in The Queen v. Friedberg, 92 D.T.C. 6031(F.C.A.) (Friedberg):
[…]
a gift is a voluntary transfer of property owned by a donor to a done in return
for which no benefit or consideration flows to the donor (at 6032).
[24]
The underlying facts are not in dispute. The series of
interconnected and pre-arranged transactions set out earlier in this judgment
have been determined and are not in question, nor is the intention of Mr. Berg
in dispute. It was accepted by the judge and it is evident from the record that
Mr. Berg understood from the outset that the series of interconnected and
pre-arranged transactions (or the “deal” as Mr. Berg himself described them as
referred to at paragraph 27 of the judge’s reasons) were designed to mislead
tax officials as to the FMV of the property transferred to Cheder Chabad. This
was done solely for the purpose of receiving inflated tax receipts and claiming
inflated tax credits. Nor can there be any doubt that Mr. Berg’s participation
in the scheme was conditional upon him receiving the pretence documents to support
his inflated claims.
[25]
Before this Court, counsel for both parties advanced a
number of arguments in support of their respective positions. Counsel for Mr.
Berg essentially took the position that no matter how egregious the behaviour
of Mr. Berg in participating in the “deal,” the fact is that the only benefit
he received at the end of the day was charitable tax receipts entitling him to
a charitable tax credit at least to that extent of the FMV of the property he
transferred to the charity. Notwithstanding that he was motivated by
greed in attempting to obtain tax treatment to which he was not entitled, the
end result was that Mr. Berg was “impoverished” to the extent of the FMV of the
property transferred to Cheder Chabad. As such, counsel for Mr. Berg
submitted that the definition of gift pursuant to Friedberg was
established. In large measure the judge accepted this
position.
[26]
The Crown took the position that Mr. Berg had received
a significant benefit beyond the receipt of a charitable tax receipt, namely
the provision of the pretence documents that would have allowed him to obtain a
large profit as a result but for the reassessment by the Canada Revenue Agency.
Thus, as per Maréchaux v. The Queen, 2010 FCA 287 (Maréchaux) and
more recently Kossow v. Canada, 2013 FCA 283, this resulted in the
interconnection of the transfer of the timeshare units to Cheder Chabad and the
significant benefit of the ability to participate through the pretence
documents, given that one was conditional upon the other. The judge rejected
this position largely based on his finding (and the Crown’s admission) that the
pretence documents were bogus. He concluded that this rendered the pretence
documents of no value, and therefore they could not constitute a significant
benefit (see paragraph 36 of the reasons).
[27]
In so doing, the judge was led to the conclusion that
the only benefit received by Mr. Berg was the inflated charitable tax receipt. In
turn, this led the judge to conclude, based on his understanding of the case
law, that Mr. Berg was entitled to a tax credit to the extent of the FMV of the
property transferred to the registered charity (see paragraph 33 of the
reasons).
[28]
In my view, on this record, it was not open to the
judge to conclude that the pretence documents were “of no value” at the time
that Mr. Berg consummated the “deal.” They clearly had value to Mr. Berg – he
paid a substantial fee at that time, well in excess of the value of the
timeshare units – and it is clear that the pretence documents were part of the
package he received in return. Mr. Berg intended to rely on the pretence
documents as though they were genuine, and he did so. He used them to support
his initial claim for inflated tax credits. He continued to rely on them
throughout the audit and objection, and even to the end of examinations for
discovery. The fact that his position became untenable upon discovery of the discharge
documents does not change the fact that the pretence documents had value when
they were delivered to Mr. Berg. In my view, this case is indistinguishable
from Maréchaux, and for that reason the Crown’s appeal should succeed.
[29]
The Crown is entitled to succeed for a further reason.
In my view, it was not open to the judge on this record to conclude that, at
the time of the transfer of the timeshare units to Cheder Chabad, Mr. Berg had
the requisite donative intent for the purposes of section 118.1 of the Act. In
my view, Mr. Berg did not intend to impoverish himself by transferring the
timeshare units to Cheder Chabad. On the contrary, he intended to enrich
himself by making use of falsely inflated charitable gift receipts to profit
from inflated tax credit claims. He consummated the “deal” solely with that
objective, and he acted from beginning to end in a manner intended to achieve that
result.
VI. Conclusion
[30]
For these reasons, I would allow the appeal, set aside
the judgment of the Tax Court, and, rendering the judgment that should have
been rendered, dismiss Mr. Berg’s appeal from the 2002, 2003, and 2004 taxation
year reassessments. The Crown is entitled to its costs in this Court and in the
Tax Court.
"David G. Near"
“I agree
K. Sharlow J.A.:
“I agree
David Stratas J.A.:
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