Taxpayers who participated in ‘retail’ donation tax shelters continue to fare poorly in the Tax Court. See Maréchaux v. The Queen, 2009 TCC 587.
Mr. Maréchaux participated in a leveraged donation program in 2001. Under the program, Mr. Maréchaux agreed to make a $100,000 donation to a charity but only if a third-party lender connected to the promoter would loan him $80,000 interest-free and repayable in 20 years. The taxpayer paid $30,000 cash and directed $70,000 of the loan proceeds to the charity. The taxpayer directed the remaining $10,000 to the lender as a security deposit that was supposed to be invested to repay the loan. The charity issued a receipt for $100,000 to the taxpayer. At the same time, the taxpayer purchased an insurance policy that would pay out if the security deposit did not yield the returns necessary to repay the loan. Early in 2002 the appellant, pursuant to a “Put Option” granted by the lender, assigned the security deposit and the insurance policy to the lender in complete satisfaction of the $80,000 loan.
Justice Woods, after adopting the definition of “gift” set out by Linden J.A. in The Queen v. Friedberg (1991), [1992] DTC 6031 (FCA), had little trouble concluding that Mr. Maréchaux did not make a gift and that he was not entitled to any kind of tax credit for it “because a significant benefit flowed to the appellant in return for the Donation” (¶32). Justice Woods wrote:
[33] The benefit is the financing arrangement. The $80,000 interest-free loan that was received by the appellant, coupled with the expectation of the Put Option, was a significant benefit that was given in return for the Donation. The financing was not provided in isolation to the Donation. The two were inextricably tied together by the relevant agreements.
[34] It is not necessary for purposes of this appeal to place a value on the benefit. However, it does appear to be somewhere in the neighbourhood of $70,000 ($80,000 received less outlays of $10,000), less a slight discount for the risk that the Put Option would not be effective. The benefit is certainly significant.
[35] I would also comment that, even without the Put Option, the financing provided a significant benefit. It is self-evident that an interest-free loan for 20 years provides a considerable economic benefit to the debtor. I would also note that the $8,000 security deposit could not reasonably be expected to accrete to anywhere near $80,000 in 20 years. The evidence of Mr. Johnson clearly showed this, even taking into account differences of opinion regarding some of his assumptions.
The Income Tax Act was amended with effect in 2003 to allow charities to issue “split receipts”, which are receipts issued for the eligible amount of a gift (the value of a ‘gift’ less any benefit received by the donor in respect of the gift). Justice Woods did not need to consider these provisions, of course, because the taxpayer made his “gift” in 2001, and she appears to have decided the case on the basis that, under the Act before it was amended, any benefit to a donor&emdash;regardless of the amount&emdash;would vitiate his gift.
Some cases decided before the 2003 amendments did appear to allow split receipts perhaps on the theory that the gift and the associated benefits were inherent in separate transactions. Justice Woods disposed of that possibility for Mr. Maréchaux by noting at ¶49 that “on the particular facts of this appeal, it is not appropriate to separate the transaction in this manner. There is just one interconnected arrangement here, and no part of it can be considered a gift that the appellant gave in expectation of no return.”
Justice Woods’ decision was rendered on November 12, and so it is unclear yet whether the taxpayer will appeal.
