written on behalf of Feigenbaum Law

Over the last few years, we have written several blogs on tax shams that have been uncovered and Canada Revenue Agency’s attempts to crack down on them. The most well-known of these is known as the Global Learning Gifting Initiative, in which participants bought software and, in turn, gave it to the “charity.” The participants would then be given a tax receipt worth far more than the price they paid for the software.

However, not all shams are as well-known, and it might be difficult for a taxpayer to know when are about to participate in an illegal tax-saving opportunity that opens them up to potential litigation. The Tax Court of Canada’s recent decision in Crane v. The King sheds some light on what types of warnings to look out for and how the Court might respond to those who deny an intention to run afoul of the law.

Taxpayer participated in “Banyan” charity program

The taxpayer involved in the matter is a retired Ontario Superior Court of Justice judge. The transactions occurred while he was sitting as a judge, though he has since retired.

The charity program the taxpayer found himself involved in was referred to as “Banyan,” a registered charity in Canada from 2002 until 2008, when its registration was revoked. While it was active, Banyan marketed itself as a program that would allow people to enter a “gift program” that, as the taxpayer testified, would essentially allow them to donate $100,000 to charity while only putting in $11,000 of their own money.

The taxpayer told the Court that he showed the documents for the program to his tax accountant, admitting the accountant was not “overly happy” with his decision to take advantage of it but accepted them and filed his taxes.

$40,000 tax break claimed through scheme

On March 4, 2004, the taxpayer pledged $100,000 to Banyan, which was payable by December 31, 2004. In addition to the $11,000 he directly contributed, he paid $12,200 as a deposit on an $89,000 loan. This loan represented the difference between his contribution to the charity and the $100,000 that was donated.

The plan was for the lender of that money to use the deposit to invest and recoup the money lent out. Ultimately, the taxpayer was not expected to pay back the $89,000. This meant that the taxpayer donated $11,000 to charity, provided $12,200 towards a loan, and ultimately received a tax break of more than $40,000, which he invested.

Other cases involving Banyan shut down by Tax Court

The Court referenced its recent decision of Herring v. The Queen, in which it addressed appeals of others who had donated to Banyan. In that decision, the Court reviewed the facts of each of the people involved and dismissed their appeals, writing:

“Based on an objective review of the evidence, the Court must conclude that the Appellants lacked the requisite donative intent, as that term has been defined in the jurisprudence. While they may have been motivated by the Program’s philanthropic objectives, they participated because of the benefit offered to them in exchange for their cash outlay. As stated by Justice Woods in Maréchaux TCC, ’once it is determined that the appellant anticipated to receive, and did receive, a benefit in return for the Donation, there is no gift’.”

Taxpayer argued “donative intent” distinguished him from other Banyan donors

In this case, too, the Court focused on the “donative intent” of the taxpayer. The taxpayer argued that he expected “no benefits” from the program and was therefore distinguishable from the appellants in Herring. He specifically referred to his $11,000 donation, which was non-refundable if he could not secure the $89,000 loan. For those involved in Herring, they were able to receive a refund for that donation if their loans were denied. Since the judge in Herring relied heavily on that factor, the taxpayer in Crane thought he should be singled out.

Secondly, the taxpayer stated that his loan needed to be repaid, even if he didn’t expect to make any actual payments himself. This is unlike the appellants in Herring, who did not have a contractual obligation to repay their loans.

Donative intent invalidates expectation of financial benefit: Tax Court

The Tax Court accepted the taxpayer’s position that the $11,000 donation was not repayable and that even if he didn’t expect to have to make a payment, his loan of $89,000 was expected to be repaid. Nevertheless, the Court focused on his actual intent and what he expected to receive. The taxpayer had hoped to pay $23,200 in order to receive $47,000 back from his tax return. The Court wrote that “the appellant’s expectation of these financial benefits vitiated any donative intent at the time of his alleged gift.”

The taxpayer asked the court to consider allowing him to receive tax credits for just the $11,000 he actually gave Banyan. However, the Court found this was not a voluntary payment. Instead, it was a necessary portion of the required consideration of $23,200, which was needed for the taxpayer to take advantage of the program. Therefore, the Court ruled that no part of his $100,000 pledge was a gift.

Contact Feigenbaum Consulting in Vaughan for Multi-Disciplinary Tax Advice

Feigenbaum Consulting provides a full range of cross-border tax planning and compliance services to individuals and corporations throughout Canada, the U.S., and the world. The firm’s founder, Mark Feigenbaum, has an unprecedented level of knowledge as a lawyer and accountant in both Canada and the United States. Clients also benefit from his extensive experience in immigration, high-net-worth family law matters, entertainment and sports law, estate planning, and litigation. To schedule a confidential consultation, contact Feigenbaum Consulting online or by phone at 905-695-1269.