Link: Case Summary Document
Citation:  ONSC 911 (Ontario Superior Court of Justice, Strathy J)
This Canadian case concerned a tax shelter called the Banyan Tree Foundation Gift Program (the program), which operated during 2003 to 2007. It was referred to as a ‘leveraged’ charitable donation program because, in return for a proportionately small out-of-pocket payment, a taxpayer was purportedly entitled to ‘ratchet-up’ his or her donation and to receive a charitable tax credit equivalent to 3.5 times the amount of his or her cash outlay.
The program was promoted by the Banyan Tree Foundation through a network of salespeople who were paid substantial commissions. The ‘leverage’ was supposed to be provided by a ‘loan’ to the participant, made by one of the defendants, Rochester Financial Limited, secured by a promissory note. Part of the participant’s cash payment was described as a ‘security deposit’, which was supposed to be invested so that it would pay off the loan before the taxpayer was ever called upon to pay it. The effect of this was to allow the taxpayer to profit from his or her donation – in the case of a taxpayer in the highest bracket, a payment of $2,700 would secure a tax credit of $4,600, resulting in a profit of about $1,900.
The Canada Revenue Agency (CRA) disallowed the charitable donation tax credits claimed by participants in the program. The CRA took the position that the ‘donation’ made by the taxpayer was not a gift for the purposes of the Income Tax Act, because the loan was not bona fide and there were only book-keeping entries to give an aura of respectability to the transaction. The CRA said that the participants were never at risk of needing to repay their loans and that the program was a sham, designed to have the appearance of a legitimate charitable donation. The real purpose was to enrich the taxpayer, rather than to benefit a charity. Having disallowed the charitable donation tax credits, the CRA required the participants to repay the taxes they had deducted, with interest.
In addition to this taxation consequence, the participants in the program also lost their security deposits, apparently due to defalcation by the investment manager of the program. A class action ensued. In Canadian law, the ‘last person standing’ becomes liable in a class action, and in this case that person was the law firm which had provided legal opinions that the program complied with the applicable tax legislation and that the tax receipts issued by the Banyan Tree Foundation would be recognized by CRA. None of the other parties directly responsible was able to be pursued.
A settlement was agreed for the sum of $11 million, of which $7.75 million was set aside to reimburse participants (the remainder was for costs and disbursements of the class legal team). As there were 2,825 participants in the program, and there were some who did not opt in to the class action, the return to each participant was about $3,000. Most of the participants did not express interest in the amount of the settlement, but were rather concerned that the loans should not be enforceable. His Honour confirmed as part of the settlement that the loans and promissory notes within the scheme were unenforceable.
The case may be viewed at: http://www.canlii.org/en/on/onsc/doc/2012/2012onsc911/2012onsc911.html
Implications of this case
This was a class action settlement, and all members of the class received a payment, even if was nowhere near the amount that they had lost in the program. His Honour noted that over 80% of participants were apathetic about the outcome, perhaps not wishing to be associated with participation in a sham scheme which misrepresented their ‘donations’ as charitable. However, a class action requires some plaintiffs to be the representative parties (their names appear in the name of the case). The representative parties in this case, the Robinsons, were denied any special payment as compensation, even though they had to reveal a lot of personal financial information and put in substantial hours to help class counsel run the case. His Honour felt that such a payment, though sometimes available in class actions, was not appropriate in this case (at –).