On November 12, 2009, the Tax Court of Canada (the “TCC”) released its decision in Maréchaux v. The Queen, 2009 TCC 587. The decision relates to an appeal by a taxpayer from an assessment made under the Income Tax Act (the “ITA”) in which a tax credit claimed by the taxpayer in respect of a purported $100,000 gift to a registered charity was disallowed in its entirety. The decision is significant because it is one of the first dealing with a leveraged donation gifting arrangement from the donor’s perspective.

The appellant was one of 118 participants in an arrangement known as the 2001 Donation Program for Medical Science and Technology (the “Program”). The participants in the Program each donated a minimum of $100,000 to a registered charity. The majority of the donation was financed by a non-interest-bearing 20-year loan. The promoter of the Program arranged for each participant to borrow these funds from a lender that had been created for the sole purpose of providing loans for the Program. Participants were also required to pay an amount equal to 10% of their pledge to the lender for fees, an insurance policy and a security deposit.

A crucial feature of the loan was that it could be fully repaid by assigning the insurance policy and security deposit to the lender any time after January 15, 2002 (the “Put Option”). The funds were transferred to the charity, which then issued donation receipts in the full amount of the transferred funds. Most of the participants then claimed charitable donation tax credits for their 2001 taxation year and went on to satisfy their loans by assigning their security deposits and insurance policies to the lender.

On December 31, 2001, the appellant taxpayer participated in the program to the extent of the minimum donation of $100,000. The appellant received an $80,000 non-interest-bearing loan, $70,000 of which was added to $30,000 of his own funds and transferred to a charity. The remaining $10,000 of the loan was paid to the lender for the fees, insurance and security deposit. The appellant then received a donation receipt from the charity in the amount of $100,000.

Too much benefit for a gift

The TCC’s decision turned on whether the $100,000 donation could be considered a gift. If the donation was not a gift, the $100,000 could not be included in the calculation of the taxpayer’s charitable donation tax credit. At the time, Section 118.1 of the ITA provided for a tax credit to individuals based on the total amount of gifts made to registered charities and other listed organizations. This tax credit was calculated based on the “total charitable gifts” of an individual for a taxation year.

However, the ITA does not define the term “gift.” The TCC examined briefly how the general meaning of “gift” has been expressed in case law, including the definition of “gift” that was stated in The Queen v. Friedberg, 92 DTC 6031(FCA), at 6032: “…a gift is a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor.”

The TCC applied the Friedberg definition to the facts of the appeal and stated “it is clear that the appellant did not make a gift to the [charity] because a significant benefit flowed to the appellant in return for the donation.” The benefit received by the appellant was the $80,000 loan, coupled with the Put Option.

The Court found that the loan was given in return for the donation and that the financing and the donation were “inextricably tied.” In the Court’s view, “it is self evident that an interest-free loan for 20 years provides a considerable economic benefit to the debtor.” The court also noted that the $8,000 security deposit assigned to the lender in full satisfaction of the loan could not reasonably be expected to grow to anywhere near $80,000 in 20 years.

The appellant attempted to argue that his participation in the Program was primarily for charitable reasons and presented evidence of his past charitable works and giving. The TCC rejected this argument, stating “[O]nce it is determined that the appellant anticipated to receive, and did receive, a benefit in return for the Donation, there is no gift.” Therefore, the appeal was dismissed and the TCC ruled that the tax credit was properly disallowed.

Although the point was not argued, the TCC also addressed the issue of whether the appellant made a partial gift consisting of his own cash outlay. The court noted that “in some circumstances, it may be appropriate to separate a transaction into two parts, such that there is in part a gift, and in part something else.” However, the court decided such a separation was not appropriate in this matter.

Proposed amendments already guiding decisions

Since the transactions at issue in Maréchaux, proposed amendments to the ITA related to split-receipts and donation tax shelters have significantly changed how these transactions would be treated on an assessment, though the results could remain the same.

Under the proposed amendments, donors are permitted to receive something in return for a donation provided the amount of the donation is reduced by the amount of any advantage received by the donor and a receipt is issued only for the eligible amount of the gift. The proposed definition of “advantage” includes limited recourse debt in respect of the donation. The Department of Finance noted that debt incurred as part of a leveraged cash donation will be considered to be limited-recourse debt if it is to be repaid under an arrangement such as a guarantee, security, or similar indemnity or covenant. All of those structures are very similar to the one in the Maréchaux case.

Notwithstanding the fact that these amendments have fallen off the legislative agenda and have not been enacted, Canada Revenue Agency already requires charities to comply with the proposed split-receipting rules, and courts have upheld its administrative positions. Therefore, any leveraged donations made after February 19, 2003 will be denied on the basis of the proposed amendments.

Karen Cooper is a partner with Carters Professional Corporation in Ottawa and practises charity and not-for-profit law with an emphasis on tax issues, having formerly been a Senior Rulings Officer with the Income Tax Rulings Directorate of Canada Revenue Agency, as well as former counsel for the Department of Justice in tax litigation.

Ms. Cooper also has considerable teaching experience, including as part-time professor at the University of Ottawa, Faculty of Common Law, and is a contributing author to The Management of Charitable and Not-for-Profit Organizations in Canada (LexisNexis Butterworths).