Decision Date: April 15, 2014
Link: Case Summary Document
Citation: [2014] TCC 117 (Tax Court of Canada, Woods J, )
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.


This case dealt with six appeals relating to the disallowance of a tax credit for a purported charitable gift to CanAfrica International Foundation (CanAfrica). The appellants had purportedly donated between $2500 and $20000 to CanAfrica and been issued with receipts by the then registered charity.  However, for the relevant tax year (2006), the amounts were disallowed in their entirety for tax credit purposes.

In 2007 CanAfrica was deregistered as a charity in Canada, and subsequently its director plead guilty to selling false donation receipts for the 2005 and prior tax years. Although the appellants now accepted that the donation receipts were false, their case was that the Canada Revenue Agency (CRA) bore some responsibility in the matter because it had listed CanAfrica as a registered charity on its website in 2006 without any warning of the concerns that CRA had in relation to the charity. If the CRA had issued a warning, the appellants suggested, they would not have entered into these transactions. The appellants sought to have at least a portion of their tax credit allowed, as well as a waiver of interest and penalties.

Her Honour first considered what actual amounts were donated.  It was evident that the donation receipts had been inflated, because the scheme engaged in by the appellants (via their tax preparer) was that they would pay 10% of the face value of the receipt, plus a commission to their tax preparer. The appellants had no documentary evidence of even a 10% donation.  As Her Honour pointed out, all their evidence was ‘self-interested’ (at [14]-[16]). They claimed that they had given 10%-16% of the face value of the receipts plus household goods as donations. Her Honour ultimately found that each had given only 10% of the face value of the donation receipt.

Pursuant to subsection 118.1(3) of the (Federal) Income Tax Act, a Canadian individual may claim a tax credit with respect to a gift made to a registered charity. The amount of the tax credit is determined by the amount of the gift. Some of the appellants contended that they should be allowed the face value of the receipts because of the lack of warning about CanAfrica by CRA, but Her Honour said that this was clearly ruled out by the legislation.

The central question to be determined was whether an expectation of an inflated tax credit based on an inflated donation receipt was a benefit that negated any charitable gift. It was Canadian law that the receipt of a benefit negated a gift to charity: see Canada v Berg, 2014 FCA 25. However, that decision did not deal with the question of whether an inflated tax receipt was such a benefit. Her Honour turned to The Queen v Doubinin, 2005 FCA 298 for guidance.  Although the facts of that case were very different, the issue of an inflated tax receipt was specifically dealt with by the court, which concluded that the issuance of an inflated tax receipt would not normally be described as a benefit.

Her Honour took this as her starting point, and then looked for any particular circumstances which would negate this conclusion (at [63]-[65]):

Are there particular circumstances in these appeals that would justify a conclusion that the inflated tax receipts are a benefit that negates the gifts? In my view there are no such circumstances. Unlike many of the cases dealing with so-called leveraged charitable donations, the transactions in these appeals are not complex and do not involve a series of inter-related transactions to which the cash is connected. The appellants simply paid cash, and perhaps household goods, as a donation to CanAfrica and received greatly inflated tax receipts. The appellants likely knew that they were claiming inflated tax credits, but this is not a sufficient reason to deny the tax credits altogether.  In my view, on the facts of these appeals the appellants did not receive a benefit that negates the gifts.

Therefore, the result in all the appeals was that the appellants were allowed a charitable tax credit with respect to 10 percent of the face value of the tax receipts, and any penalties imposed were deleted. The court did not deal with the issue of waiver of interest, since it did not have jurisdiction to do so.

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Implications of this case

This case dealt with ‘low-level’ charitable tax fraud.  The appellants had ‘likely known’ they were engaging in an ‘inflated receipt’ scheme at the suggestion to their tax preparer. However, Her Honour distinguished this type of situation from that of the very complex fraudulent leveraged donation schemes which had operated in Canada for some years. Since the appellants had not received a ‘benefit’ from their participation in the donation scheme, they were permitted a tax credit for the actual amount they had donated to an organisation which was, at the time of the donations, a registered charity.