Oct 2022 Charity & NFP Law Update>
Leveraged donation arrangements are not charitable gifts. This is what the Tax Court reminded the public in Crane v The King on October 7, 2022. This case was related to Herring v The Queen, which was earlier reported on in the April 2022 Charity & NFP Law Update. Readers may recall that Herring dealt with leveraged donation gifting arrangements to the Banyan Tree Foundation (“Banyan Tree”), an organization which had its charitable status revoked in 2008. This led to the subsequent litigation in Herring, wherein those who made donations unsuccessfully sought to have them recognized as gifts by the Canada Revenue Agency.
In Crane, the Appellant, a retired judge of the Ontario Superior Court of Justice, was a donor to Banyan Tree and claimed that the set of facts surrounding his situation was notably different from those found in Herring. However, the court found that these distinctions were not significant and that, as a result, he could not claim that his donation was a charitable gift.
The Appellant made a donation to Banyan Tree in 2004. On reassessment, the Minister denied the nearly $50,000 in tax credits he had garnered from this donation. Months before the trial commenced, he had changed the issue before trial and only sought a reassessment of an $11,000 donation he had made by cheque to Banyan Tree.
In addition to the 2004 donation, the Appellant signed a pledge to donate $100,000 to Banyan Tree. This pledge had a number of pseudo-legal terms and conditions which the court described as “self-serving nonsense.” This included a clause that said, “this Pledge is made by the undersigned voluntarily and without expectation of any return, right, privilege, recognition, benefit or advantage of any nature from the Foundation, other than an income tax receipt in prescribed form.” Rejecting this and other would be terms and conditions, the court stated that “the Appellant would not have made the pledge had it not been for the financial benefits that he expected to receive from the Program.”
As part of the arrangements here, the Appellant had taken out a loan of $89,000, with a security deposit of $12,200 to the lender, to fund his donation to Banyan Tree. Testimony from the Appellant demonstrated that he intended to use the tax credits from his donation to make high yield investments, paying back his loan quickly and avoiding interest. With these factors considered, the court concluded that the Appellant had actually paid $23,000 as a participant in Banyan Tree’s program, $12,200 from the security deposit and $11,000 out of pocket. He expected to receive $47,000 in financial benefits from this initial investment.
Arguing that he sought no benefit from the program, the Appellant claimed that he was distinct from the plaintiffs in Herring. This was rejected as the court found that the Appellant expected to receive $47,000 from his gift, which was to be directed into his investment portfolio. This expectation “vitiated any donative intent at the time of his alleged gift.” Regarding the amendment of the Appellant’s claim that he only sought the benefit of the $11,000 not covered by his loan, the court found that this did not make him distinct from the taxpayers in Herring, who had also made cash contributions to Banyan Tree. The court concluded that no part of the Appellant’s pledge to the organization was a gift.
Crane serves, once again, as a reminder that taxpayers cannot contribute to leveraged donation agreements and then simply claim they had honest intentions. This not only undermines the ethical foundation of charitable giving, it runs afoul of tax law.