http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/111115/index.do
Glover v. The Queen (August 6, 2015 – 2015 TCC 199, Campbell J.).
Précis: The taxpayer participated in a leveraged donation scheme. In the Tax Court he did not pursue a claim for the donation of the software licences which he allegedly donated to a registered charity. His claim was restricted to the cash portion of his donation. CRA denied his claim both on the basis that he did not have the requisite donative intent and on the basis that the gifting program was a registered tax shelter, the terms of which had been modified so much that its original registration no longer protected the taxpayer and he was therefore disentitled to the donation claimed.
The Tax Court found that the taxpayer did not have the requisite donative intent and dismissed his appeal without costs (it was an informal procedure appeal). In addition the Court, in an obiter discussion, accepted the position of CRA that the modifications to the gifting program was sufficiently extensive that it no longer qualified as a registered tax shelter.
Decision: The tax shelter at issue was a variant of leveraged donation programs previously reported in the literature. The particular spin was that it used the interposition of a discretionary trust to avoid some of the specific anti-avoidance rules relating to charitable donations:
[2] The Appellant claimed a charitable donation tax credit in the 2003 taxation year pursuant to subsection 118.1(3) of the Income Tax Act (the “Act”). The tax credit related to the Appellant’s participation in a gifting arrangement which involved the donation of software licenses to a registered Canadian charity, Canadian Single Adult Ministry Inc. (“CSAM”). Donors applied to become capital beneficiaries of a trust and if accepted, the trust distributed software to those beneficiaries who could donate them to a registered charity. Pursuant to the CSAM Plan, the Appellant donated $29,952 in cash and applied for 64 software licenses that had a purported retail value of $1,499 per license. Forty‑eight donors, including the Appellant, were required to pay $468 per license, allegedly to discharge a lien on the software. Each donor received a receipt for the cash payment and a receipt for the fair market value of the license less the lien amount.
[3] In written submissions received subsequent to the hearing, the Appellant abandoned the issue relating to the in-kind donation of the software licenses and advanced an argument relating only to the Appellant’s cash payment of $29,952. Consequently, the within reasons will not address whether the trust was properly constituted, whether the software existed or had value or whether the receipts relating to the software were deficient.
The Court quickly cut right to the issue of donative intent:
[24] Mr. Wiseman also insisted that the entire transaction could be separated and that the cash donation could be considered apart from the alleged gift of software licenses. In Maréchaux v The Queen, 2010 FCA 287, 2010 DTC 5174, the Federal Court of Appeal concluded that it is inappropriate to separate transactions that form part of an integrated arrangement into their cash and non-cash components. Based on the evidence before me, the Appellant would not have paid the cash amount without the assurance that he would receive software licenses which could then be gifted for an enhanced tax benefit. In fact, parts of Mr. Wiseman’s testimony in cross-examination support my conclusion:
A Well, I would certainly agree that he made the payment… So, his intent was -- his interest in the situation was to have these two components…
He's not isolating just the cash component from the software component. He definitely wants to make the cash donation, and hoped to be entitled to receiving the software so that he could donate that as well….
(Transcript, Volume 1, page 61, lines 14 to 25)
Although the Appellant’s agent argued that the cash donation was intended to impoverish the Appellant in a material manner, he also admitted that the possibility of being accepted to the program was a “portion of the reason for the cash donation.” (Appellant`s Written Argument, paragraph 90).
[25] As a result, the Appellant did not have the requisite donative intent for the purposes of section 118.1 of the Act. The Appellant’s intent was to enrich himself by applying to become a capital beneficiary of the trust with the objective of obtaining and using inflated charitable gift receipts in order to profit from inflated tax credits. Based on the facts before me, the cash component cannot be separated from the software transaction as they are part of one interconnected arrangement where the Appellant’s agent admitted that the cash donation was required in order to apply to the program. The onus or burden of proof is on the Appellant to rebut the assumptions of fact contained in the Reply to the Notice of Appeal. These assumptions are presumed to be factually correct unless the Appellant is able to bring evidence that would support a conclusion that the critical assumptions of fact are not correct. The Appellant has not been successful in presenting a prima facie case that would convince me that the Minister of National Revenue’s (the “Minister”) assumptions of fact are incorrect or cannot be supported. On this basis I am dismissing the appeal because the cash payment is not a valid gift.
In addition the Court volunteered its opinion on the effect of the changes to the gifting program after the date of its registration as a tax shelter (the charity to which the donation was to be made was changed from one known as “Aurora” to one known as “CSAM”):
[26] Because the parties spent some time addressing the modifications to the original registered plan and the unregistered tax shelter issue, I will comment briefly although I have disposed of the appeal on an entirely different basis. Section 237.1 outlines a detailed regime respecting tax shelters as well as the associated tax credits. The Respondent argued that on a plain reading of the section “each separate arrangement will be a distinct tax shelter.” (Respondent’s Written Argument, paragraph 27). The CSAM Plan did not obtain its own identification number. The Minister assumed that the CSAM Plan differed substantially from the Aurora gifting arrangement contained in the original application for a tax shelter identification number in more than a dozen ways ranging from the identity and residence of both the vendor of the software and the settlor of the trust to the nature and value of the property acquired and donated, the identity of the trustee, the financing arrangements and the destination charity (Assumptions of Fact, paragraph 11(ddd) of the Reply to the Notice of Appeal). The Appellant’s evidence was unsuccessful in demolishing those assumptions. Therefore, the issue is whether the modifications to the original registered tax shelter can invalidate all associated tax credits. Hogan J. in Bandi did not accept the Respondent’s argument in this regard but the Respondent noted that the original charity, Aurora, was actually used in that case enabling the Minister to continue to track taxpayers’ donations. The shift in charities from Aurora to CSAM should have alerted the Appellant to a potential problem with the tax shelter registration. The Respondent argued that an identification number assigned by CRA attaches to a particular arrangement and cannot be used for other arrangements (Respondent’s Written Argument, paragraph 31). I agree with the Respondent’s view. However, this may not mean that minor changes concerning an arrangement would require a completely new and different tax identification number. So what constitutes a material change? Hogan J. in Bandi noted that there is no dynamic reporting system in which a taxpayer can verify with CRA whether changes have been reported. Section 237.1 does not address this issue. However, one interpretation may be that modifications to an arrangement should be dealt with under subsection 237.1(7.4) penalty provision. From the Minister’s perspective, it may be false or misleading to implement an arrangement different than that which has been disclosed to the CRA. If a penalty is issued pursuant to subsection 237.1(7.4), all credits could be denied under subsection 237.1(6.1). Unless subsection 237.1(6.1) is triggered in relation to the modified plan, when an identification number exists, the original number is sufficient to satisfy provision 237.1(6). There was no evidence presented to me in respect to an alternative reading of this section. On the other hand, the change in registered charities from Aurora to CSAM, together with the Appellant’s knowledge of that change, is likely sufficient to deny credits related to the CSAM arrangement on the basis that it was an unregistered tax shelter. The Respondent points out that while taxpayers who participate in tax shelters qualify for significant benefits, the registration system permits the Minister to track and audit tax shelters and verify the benefits claimed. Permitting promotors to tinker with the original registered arrangement and in particular permitting promotors to use an identification number for an arrangement where the Minister has issued that number to a separate program, defeats the purpose of the registration system and impedes the Minister’s ability to track, audit and verify such arrangements. This explains in part Parliament’s intent when enacting those provisions.
As a result the appeal was dismissed without costs (it was an informal procedure appeal).