http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/126629/index.do
Mattacchione v. The Queen (November 13, 2015 – 2015 TCC 283, C. Miller J.).
Précis: This may (one can only hope) be one of the last cases dealing with inflated valuations of gifts in kind to charities. The appellants, formerly husband (“Roberto”) and wife (“Vincenzina”), made donations to a registered charity in the period 2003-2005 of hockey sticks and medical supplies. They received donation receipts of roughly $8 million in the case of the wife and $1.5 million in the case of the husband. The cost of the donated supplies varied. In the case of the wife it was roughly 1/35th of the donation receipt amount. In the case of the husband it was roughly 1/50th of the donation receipt amount. The wife did not argue for the validity of the donation receipts. Rather she argued that the funds she had reported as income were taxable in the hands of her former husband, not in her hands. She was unsuccessful on that argument. The husband did argue, unsuccessfully, in support of the receipts. Both of them argued against the imposition of penalties. They lost on that point as well. The Tax Court asked for written submissions on the issue of costs.
Decision: This is a careful, thorough decision which covers much of the same ground we have seen in the area of charitable donations for going on some 15 years. The fact situation is distinguished by both an aggressive level of donations and aggressive valuations of the donated objects. Much of the decision is taken up dealing with the ex-wife’s arguments that the income reported by her actually belonged to her ex-husband. The bonuses paid to her were not shams:
[73] Further, I find there was no intention on the part of the taxpayer, Vincenzina, to deceive the Minister. She believed she was the recipient of the bonus income, she signed a resolution to that effect and signed her returns recording that income. I am also satisfied Roberto did not intend to deceive the Minister. Why would he? The legal structure was in place, in his view, to flow funds from companies owned by his wife into her hands as bonuses. I find no intent to deceive.
Nor did subsection 56(2) of the Income Tax Act (the “Act”) operate to attribute the income back to the ex-husband:
[80] I also conclude that condition (ii.) has not been met. The Appellant argues that the bonus decision was in fact Roberto’s decision claiming that he controlled the decision making process generally. This ignores the legal reality that Vincenzina owned the company and was its sole director. It also ignores the evidence that Mr. Wood discussed the bonuses with both Roberto and Vincenzina. Only Vincenzina could legally declare the bonus. I conclude that she did not act only on the direction of Roberto with no input, in effect simply signing what was put in front of her. I find that bonuses were discussed between her and Roberto and she, as sole director, ultimately directed their payment. There is no doubt Roberto played a role in this, but not to the point that he usurped Vincenzina’s legal responsibility. It is not open to her to now rely on an anti-avoidance provision of the Act, normally serving as an arrow in the Minister’s quiver, to shift that income from her to her former husband. I find subsection 56(2) of the Act does not apply.
Similarly, Roberto was not the beneficial owner of the funds attributed to his ex-wife:
[86] Vincenzina’s three arguments are intertwined as they are all based on a conclusion that what you see is not what you get. And, very simply, I disagree with that conclusion. I find the Mattacchiones, as a happily married couple, deliberately and jointly organized their affairs to suit their purposes. This meant Vincenzina was shareholder and director of the Riel companies and she would receive and report the bonuses and claim the charitable donation tax credit. I have not been convinced on balance that this is not what on its face it purports to be. It is as simple as that.
Only Roberto argued for the validity of the donation receipts and he did not prevail:
[97] To come full circle then, is the tax receipt, inflated 50 fold from Roberto’s cost, a benefit vitiating Roberto’s gift to the charity? It is, only because it does not stand alone but is part of a coincidental transaction that included the provision of a questionable appraisal in circumstances demanding greater scrutiny. I am satisfied there was no intention on Roberto’s part to impoverish himself in any way by transferring these medical supplies to the charity. He was in the business of profiting from buy low – donate high programs and this particular transaction was more in keeping with that profit motive than a charitable donation motive. I conclude he had no donative intent.
In both cases gross negligence penalties were sustained:
[103] The false statements in issue are the claims by the Appellants they made charitable donations for approximately $7,900,000 in Vincenzina’s case and $1,500,000 in Roberto’s case. At the time they made these claims if they either knew they were false or made them in circumstances amounting to gross negligence, then they are liable for the penalties.
[104] With Vincenzina, by her concession in this litigation that the value of the hockey sticks and medical supplies equalled her cost, she is confirming that she now knows the claims were false. Can I extend that knowledge back to the time she made the claims? Yes. At the time she filed her returns, Vincenzina knew very well what she paid for the hockey sticks and the medical supplies and she knew very well that the claim was for a value many many times greater than that cost. She presumed, given her familiarity with the buy low – donate high program, this claim would simply meet the required objective of a significant tax credit, with no regard for any further inquiry. I conclude she knew the claim was unrealistically high. Even if I did not find an actual knowledge, I would readily find a willful blindness in the circumstances constitutes gross negligence.
[105] With respect to Roberto, while I come to the same conclusion it is for slightly different reasons that flow from my earlier finding that Roberto had no donative intent. He knew he was not making a gift: his claim was a misrepresentation. If not on this basis, then I would indeed find on a similar basis to my reasons given for Vincenzina, and that is that he knew the value was not many many times greater than his cost.
As a result the appeals were dismissed. The Court reserved the issue of costs, directing the Crown to make submissions by December 7, 2015 and giving the taxpayers until the end of the year to respond.