Link: Case Summary Document
Citation: [2013] FCA 283 (Federal Court of Appeal, Evans, Gauthier, Near JJA, )
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.
Summary:
This was an appeal from Kossow v. Canada, 2012 TCC 325 (CanLII), 2012 TCC 325, concerning a sham charitable donation program promoted by Berkshire Funding Initiatives Limited (Berkshire) and Talisker Funding Limited (Talisker).
In 2000, 2001, and 2002, Kossow participated in a leveraged charitable donation program on the basis that the money donated would be used to finance the purchase of art for a registered charity. Berkshire organised the fundraising program and Talisker provided loans to participants so they could make payments that it was hoped would entitle them to charitable donation tax credits.
Talisker itself borrowed money from a Canadian lender in order to provide the loans and then borrowed from an offshore lender to repay the original Canadian lender. The program’s participants, including Kossow, would then combine their own cash with the proceeds of a loan from Talisker to make a payment to a registered charity, Ideas Canada Foundation (ICF). ICF was structured to pass money on to other charities, rather than carrying on its own charitable activities.
At least 88% of the total money paid to ICF (the remainder covered fundraising fees and administrative costs) flowed through an escrow account with a law firm pursuant to a series of directions. The money was used to purchase art for the MacLaren Art Centre. MacLaren had no control over 87.5% of the money, receiving only 0.5% free of the direction of others. The art, and the price that the MacLaren paid for the art, was decided upon by the promoters of the program and their associates. This process involved a complex and rapid set of transactions. However, very little money actually flowed through to charities from the program.
Under the terms of the donation program, Kossow’s payments to ICF were funded by 20% of her own cash and 80% from a 25-year, interest-free loan. She also paid fees to the promoters for processing her loans and organising the program, in a series of steps as follows:
· sign a pledge to ICF for the full amount of her donation;
· make a loan application for a 25 year, interest-free loan equal to 80% of her donation to Talisker (the Loan Amount);
· sign a cheque for 20% of her donation made payable to Talisker ‘as agent’;
· pay Talisker a security deposit equal to 10% of her Loan Amount which was to be invested and applied to the Loan Amount in 25 years’ time;
· pay Talisker a loan processing fee of 1-5% of the donation;
· sign a promissory note for the Loan Amount, due 25 years from the date on the note.
Section 118.1 of the Canadian Income Tax Act permits individual taxpayers to claim a tax credit for gifts made to registered charities and other qualified organisations in order to offset any income tax payable. Kossow claimed tax credits of $20,046 (2000), $24,060 (2001), $20,045 (2002) in respect of donations to (and charity receipts from) ICF of $50,000 (2000), $60,000 (2001), and $50,000 (2002). The actual cash amounts contributed by Kossow were respectively $10,000, $12,000 and $10,000 in the relevant years, plus security deposits and fees:
|
Year |
Donation | Loan
Amount |
20% of
Donation |
Security
Deposit |
Loan
Processing Fee |
Charitable Receipt |
| 2000 | $50,000 | $40,000 | $10,000 | $5,000 | $2,000 | $50,000 |
| 2001 | $60,000 | $56,400 | $12,000 | $6,000 | $2,400 | $60,000 |
| 2002 | $50,000 | $40,000 | $10,000 | $5,000 | $2,000 | $50,000 |
On 4 September 2004, the Minister reassessed Kossow and disallowed 80% of the tax credit claimed for each to the years in question. On 9 September 2005, the Minister issued a subsequent reassessment, disallowing the entire tax credit received for the 2002 tax year. In court, the judge at first instance held that there was no gift under section 118.1 involved in the scheme. The 25 year interest-free loans were ‘significant benefits’ received in return for the donations, and the benefits flowed to Kossow. This was ‘sufficient to demonstrate that her donation did not constitute a gift’ (at [70] of the primary judgement).
On appeal, the Federal Court of Appeal reiterated the long-held view that a gift was the voluntary transfer of property owned by a donor to a donee for which no benefit or consideration flows to the donor. The primary judge had held that the Federal Court of Appeal decision in Maréchaux v. The Queen, 2010 FCA 287 (CanLII), 2010 FCA 287 (Maréchaux) governed the issue. That case stands for the propositions that:
(a) a long-term interest-free loan is a significant financial benefit to the borrower; and
(b) a benefit received in return for making a gift will vitiate the gift, whether the benefit comes from the donee or another person.
The Court of Appeal in this case agreed. Kossow had only contributed $17,000, $20,400 and $17,000 of her own money in each of the relevant tax years (see table above). From this she was able to ‘transfer’ $50,000, $60,000 and $50,000 as ‘donations’, and obtain charitable receipts for these ‘donations’. In addition, she obtained a significant financial benefit in interest-free long-term commercial loans. The benefit did not come from the donee but rather from Talisker, a third-party lender. This was exactly on point with Maréchaux (at [29]):
‘…in Maréchaux, the Federal Court of Appeal found that Mr. Maréchaux did not make a gift within the meaning of section 118.1 of the Income Tax Act because he made his payment to the charitable foundation expecting to receive a “significant benefit” in return. The “significant benefit” received in Maréchaux was an interest-free loan from a third party lender…Ms. Kossow received a 25 year interest-free loan from Talisker and her donations were conditional upon being approved and receiving her interest-free loans. This resulted in the cash and leveraged components of the program and the donations being interconnected. In my view, the relevant facts of this case are so similar to the facts of Maréchaux that the judge did not err in law in reaching the same conclusion. Where cases are similar in nature, it is fundamental to the idea of justice that they receive the same treatment…’
There being no reasons either to overturn Maréchaux , or to disagree with the primary judge’s findings in this case, the appeal was dismissed, with costs.
The case may be viewed at: http://www.canlii.org/en/ca/fca/doc/2013/2013fca283/2013fca283.html
Implications of this case
There was some argument in this case that the Maréchaux decision had been affected by a decision of the Ontario Court of Appeal in McNamee v. McNamee, 2011 ONCA 533 (CanLII), 2011 ONCA 533 (McNamee). This case had appeared to hold that at common law, a gift was only vitiated by the donor’s receipt of consideration if the donee provided it. Thus, if the benefit or consideration came from a third party there was no vitiation. However, the Federal Court of Appeal said that McNamee was a family law case (about a loan from a father to a son), and not relevant to the situation in this taxation case. Therefore, there was no need to change established law.