On November 19, 2012, the Tax Court released its decision in Berg v. The Queen (2012 TCC 406), which dealt with donative intent in the context of a donation scheme involving inflated charitable donation receipts. The Tax Court held that, although the taxpayer received documentation reflecting a valuation about nine times greater than the fair market value of the donations, the cash contributed by the taxpayer could effectively be segregated from the rest of the scheme and, thereby, constitute a “gift” for purposes of subparagraph 118.1 of the Income Tax Act.
Facts
In 2002 and 2003, Mr. Berg purchased 68 timeshare units, for which he paid $375,950 in cash and the remainder via low-interest financing. The taxpayer subsequently donated the units, and the recipient charity issued donation receipts for amounts approximately nine times higher than the fair market value of the units. The taxpayer claimed the inflated charitable donation tax credits. The CRA reassessed and disallowed the claimed charitable gifts of $2,420,000 for 2002, $1,786,000 for 2003 and $718,380 for 2004, including the portions paid by the taxpayer in cash for the units.
The only issue before the Tax Court was whether the cash paid was a “gift” and therefore eligible for the charitable donation tax credit.
Analysis
The taxpayer argued that since he provided value for the units, and received no benefit from the charity (other than the credits themselves), the cash payments had to constitute a gift. The Crown argued that the inflated receipts conferred an additional benefit to the donor, thereby negating the donative intent of the taxpayer entirely. The Tax Court distinguished Marechaux v. The Queen in the Tax Court and Federal Court of Appeal on the basis that the Crown had conceded in this case:
[35] . . . that the Transaction Documents were pretenses and thereby not legally effective documents. Legally, no tangible or potential benefit to the Appellant, beyond the camouflage afforded by the Inflated Gift Receipts which were needed to enhance the purported gift value beyond the Cash Donation Amounts, can be ascribed to the Transaction Documents which, on admission by the Respondent, gave rise to no legal rights, obligations or benefits.
The Tax Court concluded as follows:
[48] . . . to the extent the Cash Donation Amount related to the Transferred Units, the Appellant was impoverished by, paid valuable consideration for, intended to give, and conveyed the Transferred Units which were, in turn, received by the Charity. Whatever opprobrium may be ascribed to the Donation Program, legally the Cash Donation Amount has met the legal test of a charitable gift. In the absence of some other benefit received beyond the Inflated Tax Receipts, no legal authority suggests donative intent as defined by the case law relevant to section 118.1 of the Act has been vitiated or nullified to the extent of the value of the Cash Donation Amount.
Conclusion
The Tax Court concluded that the taxpayer intended to donate to the charity, even if he was motivated by the possiblility of receiving an inflated tax receipt. This decision takes seriously the words of the Federal Court of Appeal in The Queen v. Friedberg in which it was held that a “gift is a voluntary transfer of property owned by the donor to a donee, in return for which no benefit or consideration flows to the donor.” In certain circumstances, including those found in this case, one may be able to effectively segregate the “gift” amount from the “non-gift” amount provided that the requisite degree of intent is found in connection with the former.
It is not known whether the Crown will appeal the Tax Court’s decision to the Federal Court of Appeal.
