http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/120604/index.do
Mariano v. The Queen (October 19, 2015 – 2015 TCC 244, Pizzitelli J.).
Précis: This decision involved a somewhat complex charitable donation program involving gifts in kind of software licenses by donees and the issuance of charitable receipts to them in an amount roughly 3 or more times their cash actual outlay. The trial was unusually long for Tax Court proceedings (25 days) and ended with the taxpayer losing on all points they raised. Among other points the Court concluded that there was no donative intent and the valuation of the gifts was simply inflated.
The appeals were dismissed with costs.
Decision: This is a lengthy and well written decision that delves into virtually all of the permutations and combinations of charitable gift promotions. I do not intend to go into it in any detail however since it essentially covers the same ground as the 2004 Klotz decision of Chief Justice Bowman and many other decisions since.
The plan was convoluted, to say the least:
[6] The donation program known as the Global Learning Gift Initiative (the “Program”) involved an offshore entity, Phoenix Learning Corporation (“Phoenix”), which was a Bahamian corporation, acquiring software licenses consisting of 6 different courseware titles, at nominal value, ranging from 13.3 cents per licence to 26.7 cents per licence, from a Florida corporation, Infosource Inc. (“Infosource”), and in turn, gifting most of such licenses to a Canadian trust, Global Learning Trust 2004 (the “Trust”), and directly or indirectly selling the balance to such Trust in order to fund its purchase of licences from Phoenix. The Trust was settled by a Mr. Morris, a Bahamian resident and expat Canadian under the laws of Ontario and of which Global Learning Trust Services Inc., an Ontario corporation, was the appointed trustee (“Trustee”). The Trust then distributed them to the participants, like the Appellants, who, after submitting a predetermined set of documents described later, were accepted as capital beneficiaries of the Trust; who in turn donated them to a select charity, Canadian Charities Association (“CCA”), and received a donation receipt having a purported value that exceeded the donation receipt received for their cash outlay to another charity, Millenium Charitable Foundation (“Millenium”), by a factor of 3 or more times.
[7] The Program was promoted by Global Learning Group Inc. (the “Promoter”) a Canadian corporation owned by Robert Lewis, whose name was linked to earlier donation programs such as Global Learning Systems, which entered into letter agreements with both charities for a fee. The Agreements indicate that the Promoter was to receive about 20% of the cash donations made to Millenium, net of its expenses in relation to the Program, and 20% of the amount of both the cash and in‑kind donations made to CCA. Millenium redonated 80% of the cash donations it received to CCA so, in the end, retained only a small portion of the cash donations it received from which it had to pay its operating expenses, including fees paid to other entities like JDS Corporation (“JDS”), of which one Mr. Denis Jobin was the sole officer, director, shareholder and worker, for administration services such as maintaining a database and preparing and/or issuing tax donation receipts on its behalf.
[8] The other parties involved in the Program, aside from the lawyers for the Promoter who appeared to have acted for almost everyone involved at some time or another, other than for Infosource Inc., were the administrators of the program. IDI Strategies Inc. (“IDI”), a corporation owned or controlled by James Penturn and Richard Glatt that had been involved with earlier donation programs, contracted with the Promoter to effectively administer the program for an annual fee that consisted of a lump sum of cash and a percentage of the cash donations made by donors under the Program, payable on the date of each such donation and which the Promoter directed Millenium to pay out of funds payable to it within the terms of the Promoter’s letter agreement with Millenium above discussed. The services IDI provided included general administrative and record keeping, developing and maintaining an electronic database for recording the details of the donors’ identification and contact information and their donations of cash and other properties, handling all verbal inquiries and preparing all required documentation in relation to the Program. JDS above mentioned was also contracted by the Promoter to perform computer consulting work, evidenced by numerous invoices issued to and paid by the Promoter in 2005, was contracted by the Trust to develop, maintain and host a database and register and record complete records of all capital beneficiaries and the property received and distributed by the Trust; all for essentially a lump sum set‑up fee and monthly fee of $3000; performed contract work for IDI as evidenced by payments made to it, and even kept databases and prepared tax donation receipts for Millenium and CCA, even though it had no contract with CCA but because, as Denis Jobin of JDS testified, they were all part of the same program from which he received instructions from Jack Keslassy of IDI, with whom he shared a small office. It should be noted JDS prepared the Assignment of Licences and related documents, including the Trust resolution approving the acceptance of participants as capital beneficiaries and the allocation of a specific number of licences.
[9] Another relevant party involved in the Program was Escrowagent Inc. (the “Escrow Agent”), a corporation controlled by Allan Beach, one of the solicitors for the Promoter, and others, who purportedly received documents from each applicant, including the Appellants, consisting of a Deed of Gift to Millenium for a cash outlay, a Cheque to Millenium for such outlay, a Deed of Gift of the In‑kind property ( i.e the courseware licences) to CCA, a cheque of $10.70 to the Escrow Agent for its fees, an Application for Consideration as a Capital Beneficiary to the Trust, and two directions to the Escrow agent authorizing it to deliver the gifts and accompanying Deed of Gift to the requisite charities, to date such cheques or documents to reflect the date of actual delivery and arrange for delivery of charitable receipts back to the donor- all if the donor did not revoke such gifts within 72 hours for the cash gift and 48 hours for the licences gift after being notified by email of being approved as a capital beneficiary and given a distribution of property from the Trust; and, in some cases, the donor would execute a Waiver of the time periods purportedly allowed for them to change their minds, referenced in the Deeds of Gift above, as in the case of Mariano (all such documents or items hereinafter together referred to as the “Transaction Documents”). All of the Escrow Agent’s services were clearly effectively undertaken by IDI and JDS from the evidence which includes correspondence from the Escrow Agent to the CRA confirming it, in fact, only played a small role and that the contemplated deliveries were made by IDI, JDS or others.
[10] Infosource, earlier mentioned, was the developer and proprietary owner of the 6 instructional courseware titles that formed the subject matter of the licenses in issue (the “Licenses”) described as:
1. Office 2000 Seminar on a Disk, which involved training for various Microsoft Office applications at beginner, intermediate and advanced levels;
2. How to Master Office XP, which was similar to Office 2000 Seminar on a Disk updated for Office XP;
3. How to Master Office 2003, which related to Microsoft’s further update of its Office products;
4. IC3, which was an internet and computing course certification to enable the user to obtain the competency;
5. A+ 2003, which dealt with an application that could be used for individuals training to become computer hardware technicians to handle the use of PCs; and
6. MCSE 2000, or the “Microsoft Certified Systems Engineer for 2000”, which was a more advanced application related to deploying Windows 2000 to multiple PCs.
[11] Infosource sold Licenses to its courseware, substantially all in the U.S. market with less than 5% in the Canadian market, which were packaged for one to multiple titles, were perpetual or time limited, and were for single or multiple users. At the relevant time, the products were delivered online or in CD Rom formats. The online delivery for multiple users involved the setup of an access site with a password. This option provided clients with administrative access and the ability to track the activities of their users through the so-called learning management system (the “LMS”).
[12] Infosource entered into various Licence agreements with Phoenix from 2004 to 2007, however the two most relevant are the two initial agreements reflected by an agreement dated October 20,2004 and a Schedule “B” amending the initial agreement dated September 14, 2005 pursuant to which Infosource transferred 250,000 licenses for each of the courseware titles to Phoenix on both dates, for a fee of $400,000 and $200,000 U.S. respectively; thereby transferring 3 million Licenses, consisting of 500,000 licences per courseware title, for a total fee of $600,000 within that one year period (hereinafter referred to as the “Master License Agreements”). The Master License Agreements permitted assignment of such licenses to third parties on subsequent notification to Infosource and allowed the holder, at its expense and from an authorized party, to convert the licenses to CD Rom format only, on a basis of one courseware title per CD. By the end of 2006, more than 5,000,000 of these Licences had been transferred to Phoenix, pursuant to all the respective License agreements between them. It is these Licences that were purportedly transferred through a “pipeline”; from Phoenix to the Trust to the Appellants to CCA.
The Crown’s arguments were exhaustive, and ultimately proved devastating:
[3] The Respondent has identified the 5 legal issues related to determining the issue of whether the Appellants were properly denied their charitable contributions, namely;
1. Did the Appellants make any ‘gifts’ to Millenium and CCA [the charities later defined] within the meaning of section 118.1? The Respondent says this involves determining whether the Appellants had the “donative intent” to do so, as well as whether a gift was actually made having regard to the other requisite elements of a gift.
2. Is the Global Learning Trust (2004) a valid trust at law? The Respondent challenges the validity of the Trust due to to its failure to have “certainties” present or due to the non-exercise of unassignable duties by its Trustee.
3. Is the GLGI Program and all the transactional steps involved in it a “sham”?
4. If 1 and 2 are answered in the affirmative and 3 in the negative, then was the fair market value of the licenses donated what the Appellants claimed?; and if so,
5. Do subsections 248(30) to (32) apply so as to reduce the eligible amounts of the gifts to Nil?
The Court’s very careful decision makes for instructive reading but the affair boils down to the two last paragraphs:
[146] Having regard to all the foregoing, I find that the Appellants did not have the donative intent to make any of their gifts, did not own or transfer the property that is the subject matter of the gift in kind, i.e. the Licences, and that the Program was a sham; however even if I am wrong on those issues, I find the value of each Licence donated by the Appellants would actually only be 26 cents per Licence but for purposes of these appeals would have to be set at 35 cents per License based on the Minister’s assumptions in its Reply of that amount.
[147] Accordingly, the appeals are dismissed, with costs to the Respondent. The parties shall have 30 days to make submissions as to costs if they are not satisfied with the above order as to costs.
On the facts before the Court it is difficult to imagine any other result.