Words and Phrases - "donative intent"

In December 2009, the taxpayers participated in a program that had both an investment and gifting component. The investment program entailed each taxpayer purchasing a minimum of 10 limited partnership units in an Ontario LP indirectly controlled by the shareholder of the promoter, mostly with the proceeds of a loan from a trust (“FT”), with most of the funds so received by the LP being lent to a BVI corporation (“Leeward”) and then circled back to FT through a loan to a second trust (“DT”), and a loan by DT to FT.

Under the gifting component, each taxpayer transferred $10,200 to a registered charity (“TGTFC”) of which $10,000 per LP Unit was funded by a loan from FT (the “TGTFC Loan” – maturing in February 2019) that required that the borrowed funds be so transferred to TGTFC and that bore interest at 7.85% p.a., of which 3.75% p.a. was required to be paid annually in cash (“cash-pay interest”) and the balance was to be funded through with further cash advances from the lender (“capitalized interest”), namely, FT. The $10,200 (for which TGTFC issued a charitable receipt) was transferred to TGTFC under a pledge executed by the taxpayer and TGTFC, which required TGTFC: to invest 98.04% of the amount (i.e., $10,000) in secured debt obligations (the “TGTFC Notes”) issued (together with a security interest) by Leeward; to hold the TGTFC Notes until maturity on December 31, 2028 and which bore interest of 4.75% of which 3.75% was cash-pay interest, and the balance capitalized interest of 1% (which would cause the amount owing thereunder to accrete by over 1/3 by 2028); and to disburse 90% of its interest received in cash on the TGTFC Notes to charities (taken from a list) designated by the taxpayer. The TGTFC Notes had priority over the loans made by the LP to Leeward under the investment component.

Leeward lent to DT the proceeds from issuing the TGTFC Notes and DT immediately lent the same amount to FT. These secured loans had the same or similar terms as the loans referred to above in connection with the investment component, (i.e., a 2028 maturity and 7.85% p.a. interest).

Leeward also invested $2,575 in Class D Notes (the “Man Notes”) issued by a U.K.-based investment manager (“Man Investments”) and with a return dependent on the return realized on an underlying pool of assets managed by it. The return on the Man Notes to December 31, 2028 was required to be at least 9.61% p.a. in order for Leeward to be able to discharge the TGTFC Notes when they matured in 2028.

In confirming CRA’s complete denial of charitable credits to the taxpayers (and before turning to the effect of the split-receipting rule in s. 248(32) and the limited-recourse amount rule in s. 142.3(7)), Owen J stated (at para 272):

Maréchaux and Kossow hold that a transfer of property is not gratuitous if a benefit flows to the transferee as part of an interconnected series of transactions that includes the transfer of property. …

In finding that there was such a benefit here by virtue of the TGTFC Loan having been made at an unreasonably low rate of interest, Owen J stated (at paras 311, 314, 316):

I find it especially difficult to believe that an arm’s length commercial lender in the same circumstances would lend such significant amounts, which accumulate over 9 years to become even larger amounts, at a rate that is only roughly 1% above the rate on a 10-year residential mortgage.

In addition, the credit application forms provided FT with ranges of income and assets instead of hard numbers… . In my view, a lender in these circumstances would require detailed information to support the creditworthiness of the Appellants … and would require full disclosure of all liabilities… .

… I conclude that a commercially reasonable interest rate on the TGTFC Loans would be no less than… 10%. On the basis of this rate, Mr. Johnson [the Crown’s valuation expert] calculated a benefit per LP Unit of $1,475 for the 9-year term of the TGTFC Loans.

Before so concluding, Owen J noted (at para. 303) that “the tax credit provided by section 118.1 cannot be a benefit that disqualifies a transfer of property to a qualified donee from being a gift” and (at para. 296, after stating at para. 291 that “benevolence is not a requirement for a gift” and in rejecting a Crown submission (summarized at para. 249) that “gift” required “detached and disinterested generosity”):

Donative intent does not require the transferor to have a particular motive for making the transfer. Rather, donative intent simply requires that the transferor intended to transfer the property gratuitously.