The Federal Court of Appeal, at 2014 FCA 25, has overturned the Tax Court decision in Berg v R, 2012 TCC 406, which I wrote about here.
The Tax Court had held that Mr Berg should be entitled to a donation receipt for the cash he paid as part of a donation scheme where the non-cash gift didn`t really exist. The Tax Court reasoned that Mr Berg could not have received consideration for his cash that vitiated the gift because the non-cash property was a sham and therefore worthless. The Federal Court of Appeal responded as follows (at ¶28):
In my view, on this record, it was not open to the judge to conclude that the pretence documents were “of no value” at the time that Mr. Berg consummated the “deal.” They clearly had value to Mr. Berg – he paid a substantial fee at that time, well in excess of the value of the timeshare units – and it is clear that the pretence documents were part of the package he received in return. Mr. Berg intended to rely on the pretence documents as though they were genuine, and he did so. He used them to support his initial claim for inflated tax credits. He continued to rely on them throughout the audit and objection, and even to the end of examinations for discovery. The fact that his position became untenable upon discovery of the discharge documents does not change the fact that the pretence documents had value when they were delivered to Mr. Berg. In my view, this case is indistinguishable from Maréchaux, and for that reason the Crown’s appeal should succeed.
What is the value of worthless documents? I put the matter this way in a post on LinkedIn today:
I wonder whether some of the older cases like Berg help with [the] puzzle. Of course, I can`t think of their names off the top of my head, but these cases characterized amounts of cash paid as part of phony donation schemes as the price paid for a chance at bogus tax credits. The cash was the price of admission to the schemes. Seen in that light, the cash bought something — the pretence documents“ — that did have value at the time of purchase. The documents represented a chance to play audit roulette. If the little ball had landed on the right number, the taxpayer might have gotten away with tax avoidance. That the chance failed only became evident in hindsight. People buy lottery tickets all the time and pay good money for them — the tickets have value at the time of purchase. Of course, the day after the draw, the vast majority of those tickets aren`t worth the paper they`re printed on … So it was with Mr Berg.
