Tax Court on Split Receipting and Donative Intent Upheld on Appeal

January 2020 Charity & NFP Law Update

Ryan M. Prendergast

On December 5, 2019, the Federal Court of Appeal (“FCA”) released its decision in Markou v Canada, an appeal by four individuals (the “Appellants”) who had previously lost an appeal over tax reassessments in the Tax Court of Canada (“TCC”) case of Markou v The Queen, discussed in the April 2018 Charity & NFP Law Update. The Appellants had participated in a leveraged donation program (the “Program”) that issued donation tax receipts to the Appellants after they had transferred funds to a charity. These funds were mainly funded with a loan obtained from parties related to the program sponsor which, in some cases, were up to 85% of the total amounts transferred to the charity, with the remainder being paid by the participants with their own funds. The donation tax credits had been disallowed by the Minister of National Revenue (“Minister”) because the transferred amounts were not gifts within the meaning of section 118.1 of the ITA.

At the trial level, the TCC had upheld the Minister’s reassessments on the basis that the Applicants lacked the requisite donative intent. In this regard, the TCC also upheld the TCC and FCA decisions in Maréchaux v The Queen (“Maréchaux”), a separate preceding case that also rejected appeals over reassessments under the same Program because the parties lacked donative intent. However, in this appeal, the Appellants argued that the TCC had erred in concluding that no part of the total amount was given with donative intent. In particular, they argued that, in certain cases, a valid gift could be made where the donor received a benefit or consideration from the donee, such as in the case of split gifts. They further argued that “it is possible to make a ‘“profitable” gift’ due to the favourable tax consequences that some gifts provide.”

The FCA found that the decision turned purely on the issue of stare decisis, i.e. the principle that courts must follow previously established legal precedent when deciding on similar cases. In this regard, the FCA did not distinguish between this case and Maréchaux, and therefore found that the TCC in this case was bound by the decision in Maréchaux. As such, it stated that “the Tax Court judge was also bound to hold that ‘no part of [the interconnected transaction] can be considered a gift that the appellant[s] gave in the expectation of no return.’” Further, it could not overrule the Maréchaux decision, as the TCC had not overlooked binding precedents or ignored relevant statutory authority. As such, the FCA held that the TCC was bound to uphold the Minister’s decision concerning the reassessment.

Although the decision turned on the precedent set in Maréchaux, the FCA further discussed gifts in obiter, particularly in light of the Appellants’ argument that “it is possible to make a ‘“profitable” gift’ due to the favourable tax consequences that some gifts provide.” To that point, the FCA stated that the argument was based on an inaccurate reading of The Queen v Friedberg. In that case, Mr. Friedberg had purchased cultural property at a bargain price donated it at its fair market value, and received tax benefits in excess of his original acquisition costs, which the FCA indicated was permissible. The FCA stated that a tax benefit received by a person making a gift, in and of itself, does not invalidate the gift, but where that person anticipates tax benefits in excess of the value of their “gift”, they cannot be said to have made a gift with donative intent, as “impoverishment is an essential element of a gift under both the civil law and the common law.”

This case, along with the lower level decision and Maréchaux, demonstrate that courts and the Minister will not tolerate “gifts” in leveraged donation programs where individuals expect to “profit” off of a donation by receiving tax benefits greater than the donation itself. In such circumstances, what may have been anticipated as a gift may not, in fact, be a gift where the donor is not impoverished and donative intent is lacking.

Read the January 2020 Issue

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Voluntary Association's Constitution and By-Laws Found to be Contractual
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Charities Legislation & Commentary, 2020 Edition Now Available