On January 19, 2010, Justice Lax of the Ontario Superior Court of Justice certified a class proceeding brought on behalf of 2,825 individuals who participated in the Banyan Tree Foundation Gift Program (the “Gift Program”) against the promoters of the program and a law firm that provided legal opinions in support of the program.

This decision is significant because it is the first certification of a class action relating to leveraged donation gifting arrangements in Canada. The claim against the Gift Program promoters and the law firm will now proceed as a class action.

Background

The Gift Program was operated from 2003 to 2007 and had a structure typical of many leveraged donation gifting arrangements. Each participant pledged a donation of a specific amount to Banyan Tree. Participants contributed 15% of the pledged amount from their own resources. The remainder was financed by a non-recourse loan evidenced by a promissory note.

Participants paid a security deposit to the lender, which was to be invested and used to pay the interest, taxes and principal amount of the loan. Participants received a charitable donation receipt for the full amount pledged, not the 15% they actually paid.

It appears from the decision that Canada Revenue Agency has determined that the Gift Program was a sham, and that it has or will have reassessed all of the participants to deny their claims for the charitable donation tax credit related to their participation. CRA revoked the charitable status of the Banyan Tree Foundation in September 2008, largely because of its involvement with the Gift Program.

Plaintiffs claim breach of contract

In their claim against the promoters, the plaintiffs pled breach of contract and negligence, and sought a declaration that the promissory notes issued by the participants as part of the Gift Program are void and unenforceable. The plaintiffs alleged that it was an express or implied term of the contracts between the participants and the Gift Program promoters that the participants would receive a charitable donation tax receipt that would be recognized by CRA and that they would not be at risk to repay the loans.

With respect to the law firm, the plaintiffs alleged that the legal opinions were a necessary prerequisite for the promotion and sale of the Gift Program, without which the gift program could not have been launched. The plaintiffs contended that the law firm intended the participants to rely on the opinions in deciding whether to participate in the Gift Program, and that the firm was negligent in the preparation of the opinions.

Reasons for certification

The judge applied the test for certification set out in Section 5(1) of the Class Proceeding Act. An action must be certified as a class proceeding where the following five requirements are met: (a) the pleadings or the notice of application discloses a cause of action; (b) there is an identifiable class of two or more persons that would be represented by the representative plaintiff; (c) the claims of the class members raise common issues; (d) a class proceeding would be the preferable procedure for the resolution of the common issues; and (e) there is a representative plaintiff who would fairly and adequately represent the interests of the class, has produced an adequate litigation plan, and does not have an interest in conflict with the interests of other class members on the common issues for the class.

The judge was satisfied that the plaintiffs had met each requirement for certification. 

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. 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 (2009, LexisNexis Butterworths).