Citation: 2009 TCC 587
Date: 20091204
Docket: 2006-410(IT)G
BETWEEN:
F. MAX E. MARÉCHAUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Woods J.
[1] The question to
be decided is whether the appellant, F. Max E. Maréchaux, is entitled to a
charitable donation tax credit under the Income Tax Act in respect of a $100,000
payment made under an arrangement known as the 2001 Donation Program for
Medical Science and Technology (the “Program”). The arrangement was marketed by
Trinity Capital Corporation (“Trinity”).
[2] The appellant is a very experienced real estate lawyer
with a respected Canadian law firm.
[3] As a participant in the Program, the appellant claimed
a tax credit in respect of a purported $100,000 gift to a registered charity
(the “Donation”) made on December 31, 2001.
[4] In a reassessment for the 2001 taxation year, the tax
credit was disallowed in its entirety.
[5] The appellant served a notice of objection to the
assessment, and subsequently filed an appeal to this Court pursuant to
paragraph 169(1)(b) of the Act.
[6] There are two issues: whether the Donation is a gift,
and whether the general anti-avoidance rule is applicable.
[7] I have
concluded that the tax credit was
properly disallowed because the Donation was not a gift. In light of this
conclusion, it is not necessary that I consider the applicability of the
general anti-avoidance rule and I do not propose to do so.
Factual Background
[8] For the appellant, testimony was provided by:
-
the appellant himself;
-
John McKellar, the founder of The
John McKellar Charitable Foundation (the “Foundation”);
-
Gordon Arnold, who assisted
Trinity in the design of the Program. He attended the hearing pursuant to a
subpoena issued by the respondent; and
-
John Thompson, the president of
The Mackenzie Institute for the Study of Terrorism, Revolution and Propaganda (“Mackenzie”).
[9] For
the respondent, testimony was provided by:
-
Howard E. Johnson, of
Campbell Valuation Partners Ltd; and
-
Alexander Novakovic, a
senior vice-president of Brookfield Asset Management (successor to Trilon Financial
Corporation (“Trilon”)).
[10] The Program involved what were called “leveraged
donations.” In general, prospective donors were invited to make a donation of
at least $100,000 to a registered charity, and were to be provided favourable
financing for a large part of the outlay.
[11] The Program was implemented on December 31, 2001, with
118 participants (“Participants”) and donations totalling approximately
$18,305,000.
[12] Prospective donors were informed in the promotional
materials that the Program had the features below:
-
Support of important charities in
medical science and technology;
-
Cash contribution of 30 percent of
the total donation;
-
Donation to be enhanced by a loan
equal to 80 percent of the total donation;
-
Return on donation of up to 62.4
percent depending on the donor’s province of residence;
-
No alternative minimum tax
consequences; and
-
Tax opinion from a firm of
respected tax lawyers (the “Tax Opinion”).
[13] The appellant was informed of the Program by Judy
Moore, a chartered accountant who for many years had prepared the appellant’s
tax returns. Ms. Moore provided to the appellant material that had been
prepared by or on behalf of Trinity, including the Tax Opinion, and she also provided
advice.
[14] Ms. Moore
did not testify and it is not entirely clear what advice she gave. Based on the
evidence presented, I conclude that the
appellant was advised by Ms. Moore that, based on a donation of $100,000, he
could expect a net receipt of $14,218, subject to a risk of challenge by the
Canada Revenue Agency which was described as “slim.” The net receipt was
comprised of tax savings of $44,218, less a cash outlay of $30,000 (Ex. AR-2,
Tabs 1, 9).
[15] The Program encompassed a number of pre-determined
transactions involving quite a few entities. Several of the transactions are
outlined in an agreed statement of facts (ASF), which is reproduced in its
entirety below.
The parties,
through their counsel, agree to the facts as set out below. Where documents are
referred to below the parties have agreed only to their authenticity. This
agreement is without prejudice to the right of either party to adduce further
evidence provided such evidence is not inconsistent with the facts agreed to by
the parties, and the respondent specifically reserves the right to challenge
the legal validity of the transactions described herein.
The Program
1. Trinity Capital Corporation (“Trinity”), an Ontario
corporation, was founded by James D. Beatty (“Beatty”), its president
and sole director. Trinity’s sole shareholder is James D. Beatty &
Associates Inc. From 2001 to 2003, Trinity promoted and operated a leveraged
donation program. In 2001 the program was referred to as the 2001 Donation
Program for Medical Science and Technology (the “Trinity Program”).
2. The Trinity Program required participating taxpayers (“Participants”)
to pledge an amount to a registered charity (the “Pledge”).
3. Trinity arranged for all Participants to borrow funds for a
substantial portion of their Pledge from Capital Structures Ltd. (“Capital”),
an Ontario corporation incorporated in 2001 whose sole shareholder is Trinity
and whose president and sole director is Beatty. Capital was created for the
sole purpose of providing loans for the Trinity Program. Marked as Exhibit “1”
is a photocopy of the promotional materials that outline the Trinity Program.
4. Originally, Trinity permitted all Participants to borrow
80% of their Pledge from Capital by way of non-interest bearing 20-year loan,
open to pre-payment at any time after January 15, 2002 (the “Loan”).
Participants were to pay the remaining 20% of their Pledge with their own
resources, and also were to pay an amount equal to 10% of their Pledge to
Capital for fees, insurance and a security deposit.
5. Based on a Pledge of $1,000, the Trinity Program operated
such that the Participant would:
(a) pay $200 to Trinity;
(b) sign an agreement to borrow a Loan amount of $800 from
Capital;
(c) deposit $80 with Capital as security for the Loan, which
was to be invested for the purpose of accreting to $800 in 20 years (the “Security
Deposit”);
(d) pay Capital $12 as a fee for arranging the Loan (the “Fee”);
and
(e) pay Capital an additional $8 as a premium in respect of an
insurance policy (issued in Bermuda) that was to insure the risk that the
Security Deposit would not accrete to $800 in 20 years (the “Insurance
Policy”).
6.
The Trinity Program was subsequently specifically altered to provide
that only 70% of the Pledge would come from the Loan amount and the remaining
30% of the Pledge would be paid from the Participant’s own resources. The rest
of the Loan, equal to 10% of the Pledge, was used for the Fee, Security Deposit
and Insurance Policy. The total Loan amount therefore still equalled 80% of the
Pledge. Attached as marked as Exhibit “2” is a photocopy of the promotional
material that outlines the Trinity Program subsequent to the above alterations.
7.
The Trinity Program provided that all Participants could assign the
Insurance Policy and the Security Deposit to Capital as full payment of the
Loan at any time after January 15, 2002, and Capital was obligated to accept
the assignment of the Security Deposit and Insurance Policy as payment in full
of the Loan.
The
Transfer of Funds
8.
The John McKellar Charitable Foundation (“Foundation”) is a
Canadian registered charity which was registered in 1987 by its founder John D.
McKellar. The directors of the Foundation are John D. McKellar, Marjorie
McKellar and Barbara McKellar.
9.
Through the Trinity Program, Trinity facilitated the transfer of funds
from the Participants to the Foundation. In return for this transfer, the
Foundation issued charitable donation receipts to the Participants in the
amount of the transferred funds including the Loan amounts.
10.
From the Trinity Program, and through lawyer’s trust accounts, the
Foundation recorded receipt of $18,305,000 of Pledged funds from 118
Participants in 2001, of which approximately 70% represented the Loan amounts.
Marked as Exhibit “3” is a copy of the Foundation’s record showing payments
received.
The
Foundation’s Payments
11.
The Foundation directed substantially all of these funds to: the
Mackenzie Institute for the Study of Terrorism (“Mackenzie”), a Canadian
registered charity; and Cornell University (“Cornell”), a University in
the United States of America which is a prescribed university under Schedule
VIII (s. 3503) of the Income Tax Regulations.
12.
The Foundation directed $12,479,024 to Mackenzie and $5,643,000 to
Cornell. It received $182,976 for its own purposes. Marked as Exhibit “4” is a
photocopy of the Foundation’s record showing the directed funds recorded in
2001.
13.
In 2001 Trinity also acted as a fundraising agent for Mackenzie. Marked
as Exhibit “5” is a photocopy of the Fundraising Agreement.
Mackenzie’s
Transactions
14.
Pursuant to an Exclusive License Agreement, dated December 31, 2001, and
an Amending Agreement dated January 15, 2002, Charterbridge Holdings
International Ltd. (“Charterbridge”), a British Virgin Islands
corporation, acquired from Osteopharm Inc. (“Osteopharm”), a Canadian
corporation, an exclusive license to discover, develop, obtain regulatory
approval for, manufacture and sell certain products described in the license
agreement (the “Osteopharm Intellectual Property”). Marked as Exhibits
“6” and “7” are copies of the Agreement and Amending Agreement.
15.
Trinity arranged for Mackenzie to be the recipient of $12,479,024 of the
Pledged amounts from the Foundation, and so Mackenzie agreed to enter into an
Agreement of Purchase and Sale, dated December 31, 2001, to purchase from
Charterbridge a 5% interest in the commercial exploitation of the Osteopharm
Intellectual Property for $65,000,000. Pursuant to its Agreement, Mackenzie
agreed to direct $11,628,887 of the Pledged funds receivable from the
Foundation to Charterbridge for a 0.9% interest in the commercial exploitation
of the Osteopharm Intellectual Property. Marked as Exhibits “8”, “9” and “10”
are photocopies of the Purchase Agreement between Mackenzie and Charterbridge,
a Direction from The Foundation to Weir Foulds LLP to pay $11,628,887 to
Charterbridge, and an acknowledgement letter from Charterbridge.
16.
Mackenzie also had $725,274 of the funds receivable from the Foundation
directed to Charterbridge. The amount of $748,741 was then directed by
Charterbridge, on Mackenzie’s instructions, to Trinity as per Mackenzie’s
fundraising agreement.
The Cornell
Transactions
17.
LifeTech Corporation (“LifeTech”) is a public Canadian
biotechnology company, whose chairman of the board is Beatty, which was
subsequently renamed IATRA Life Sciences Corporation.
18.
Pursuant to an Agreement dated December 31, 2001, Charterbridge acquired
from LifeTech two level III biocontainment laboratories (the “Laboratories”),
together with all relevant patents and all the intellectual property relating
to the inventions of an ozone generator and a bolus flow apparatus, and a
number of working models of such inventions (the “Lifetech Intellectual
Property”). The consideration for this transaction included the payment of
$600,000 to Lifetech, and the provision to Lifetech of the exclusive right to
develop and commercialize in Canada a proprietary diagnostic test for kidney
disease (which was later changed to the exclusive right to develop and
commercialize a proprietary diagnostic test for osteoporosis) upon the
acquisition by Charterbridge, if any, of such a right. Marked as Exhibit “11”
is a photocopy of the Agreement along with associated documentation including
press releases.
19.
Trinity arranged for Cornell to be the recipient of $5,643,000 of the
Pledged funds from the Foundation, and so Cornell agreed to enter into two
Agreements, both dated December 31, 2001, to acquire the Laboratories and the
Lifetech Intellectual Property from Charterbridge, all for the purchase price
of $5,643,000, and to direct all of the funds receivable from the Foundation to
Charterbridge. Marked as Exhibits “12” and “13” are photocopies of the
Agreements.
The Loan
Funds
20.
Capital did not have sufficient funds to make Loans to the Participants
in the combined amounts of $14,644,000, and so it borrowed the sum of
$14,052,000 from Trilon Financial Corporation (“Trilon”), a Canadian
financial services corporation, by way of daylight loan, and $592,000 from
Trinity. Marked as Exhibits “14”, “15” and “16” are the promissory note, the
General Security Agreement, and a Direction from Capital to Trinity.
21.
Charterbridge directed at least $14,052,000 of the $17,997,161
receivable from Mackenzie and Cornell, to Capital, on the terms and conditions
set out in a promissory note dated December 31, 2001, provided by Capital to
Charterbridge. Marked as Exhibit “17” is a photocopy of the promissory note
from Capital to Charterbridge.
22.
Capital directed the $14,052,000 receivable from Charterbridge to
Trilon, to repay the daylight loan used to finance the loans.
23.
The transfer of funds between the relevant entities occurred on the
following dates:
Transaction Date
Trilon, via
daylight loan, provided December 31, 2001
Capital with
$14,052,000 of the
Loan funds
Trinity
provided Capital with December 31, 2001
$592,000 of
the Loan funds
Capital
directed the Loan funds to December 31, 2001
the Foundation
(as per the
Participant’s
pledge)
The Foundation
directed the December 31, 2001
payments, less
an amount retained by
it, to Cornell
and Mackenzie
Cornell and
Mackenzie directed December 31, 2001
$14,052,000 of
the Loan funds from
the Foundation
to Charterbridge
Charterbridge
directed $14,052,000 December 31, 2001
of the Loan
funds from Cornell and
Mackenzie to
Capital
Capital used
the funds from December 31, 2001
Charterbridge
to repay the daylight
loan to Trilon
24.
In 2002, most of the Participants assigned their Security Deposits and
Insurance Policies to Capital in full satisfaction of their Loans.
25.
Pursuant to the loan agreement between Capital and Charterbridge, the
funds were repaid over a period of time by Capital assigning to Charterbridge
the Security Deposits and Insurance Policies it received from the Participants.
26.
All of the above steps, including the disputed Loans to the
Participants, the purchase of the Laboratory Equipment and Lifetech
Intellectual Property, and the flow of funds in the series of transactions that
occurred in the Trinity Program, were pre-determined and interconnected.
27.
The Foundation issued 118 tax receipts to Participants for the entire
amount of Pledged funds, including the amount funded by the Loans.
28.
Most of the Participants claimed charitable donation tax credits for
their 2001 taxation year using the receipts issued by the Foundation.
[16] The ASF provides a fairly good description of how the
Program operated, as far as it was revealed by the evidence.
[17] When the appellant agreed to participate in the
Program, he was not aware of many of the transactions described above. In
particular, the appellant did not have detailed information as to what the
Donation would be used for after it was paid to the Foundation.
[18] The elements of the Program that directly involved the
appellant are described in paragraphs 4 to 10, and 24 of the ASF.
[19] The appellant participated in the Program to the
extent of the minimum donation of $100,000, and it was implemented in the
following manner.
-
Sometime in December 2001, the
appellant agreed to make a $100,000 donation to the Foundation, provided that
the $80,000 loan was provided to him.
-
At the closing on December 31,
2001, $30,000 of the appellant’s own funds were paid to the Foundation.
-
Also on closing, the appellant
received a 20-year interest-free loan in the amount of $80,000. The loan
proceeds were directed to be paid to the Foundation, as to $70,000, and to Capital
(the lender), as to $10,000.
-
On January 16, 2002, the appellant
assigned the Security Deposit and the Insurance Policy to Capital in complete
satisfaction of the $80,000 loan.
[20] Notwithstanding that the Program, as marketed,
envisaged that Participants would be able to fully satisfy the loans shortly
after closing by assigning the Security Deposit and the Insurance Policy to
Capital (the “Put Option”), the relevant agreements do not clearly provide a
commitment to that effect.
[21] The appellant noted in his testimony that the relevant
agreements did not require that the Insurance Policy be provided to him. The
only requirement was that an application for the Insurance Policy be made.
Since the Put Option depended on this, the result was that the Put Option might
not be effective.
[22] The appellant also stated, however, that he was fairly
satisfied that the Put Option would be effective because this was the intention
of all concerned (Transcript, p. 126-128). He also testified that he was
willing to take a risk on the Put Option because his primary objective was to
make a charitable contribution for medical science and technology.
[23] I accept that the agreements do not clearly provide for
an effective Put Option because there was no clear obligation to provide the
Insurance Policy.
[24] Turning
to the elements of the Program after the funds were paid to the Foundation, it
is clear from the ASF that all but a very small portion of the funds were
transferred by the charities to Charterbridge and Trinity.
[25] Aside from
a small amount of cash that the charities could retain, most of the donated
funds were required to be used to acquire property from Charterbridge. The evidence was not sufficient to establish the value
of that property at the relevant time. To the extent that Mr. Arnold and Mr.
Thompson suggested that the property had significant value, I did not find the
testimony to be at all convincing.
Later programs
[26] Programs similar to this were promoted by Trinity in
2002 and 2003. The total amount of purported gifts made in the later years were
approximately $106,000,000 and $94,000,000. The Foundation and Mackenzie were
both involved in the subsequent programs.
Analysis
[27] Section 118.1 of the Act provides a tax credit
to individuals for a specified portion of gifts made to registered charities
and other listed organizations.
[28] The respondent submits that the $100,000 amount
transferred by the appellant to the Foundation is not eligible for this credit because
it was not a gift.
[29] The relevant provision is the definition of “total charitable
gifts” in s. 118.1(1), which provides:
“total charitable gifts” of an individual for a taxation
year means the
total of all amounts each of which is the fair market value of a
gift (other
than a gift the fair market value of which is included in the total
Crown
gifts, the total cultural gifts or the total ecological gifts of the
individual
for the year) made by the individual in the year or in any of the 5
immediately preceding taxation years (other than in a year for which a
deduction under subsection 110(2) was claimed in computing the
individual’s taxable income) to
(a) a registered charity,
(b) a registered Canadian amateur athletic association,
(c) a housing corporation resident in Canada and exempt from tax
under this Part because of paragraph 149(1)(i),
(d) a Canadian municipality,
(e) the United Nations or an agency thereof,
(f) a university outside Canada that is prescribed to be a university
the student body of which ordinarily includes students from
Canada,
(g) a charitable organization outside Canada to which Her Majesty
in right of Canada has made a gift during the individual’s taxation
year or the 12 months immediately preceding that taxation year, or
(g.1) Her Majesty in right of Canada or a province,
to the extent
that those amounts were
(h) not deducted in computing the individual’s taxable income for a
taxation year ending before 1988, and
(i) not included in determining an amount that was deducted under
this section in computing the individual’s tax payable under this
Part for a preceding taxation year;
(Emphasis added.)
[30] The term
“gift” for purposes of this provision is not defined in the Act, and it
has been given its general meaning.
[31] Some of the
relevant judicial decisions have a tendency to describe what a gift is in slightly different ways. It is not necessary for
purposes of this appeal to discuss these nuances. It is sufficient to refer to
the description of “gift” that was stated by Linden J.A. in The Queen v.
Friedberg, 92 DTC 6031 (FCA), at 6032:
The Income
Tax Act does not define the word “gift”, so that the general principles of
law with regard to gifts are utilized by the Courts in these cases. As Mr.
Justice Stone explained in The Queen v. McBurney, 85 DTC 5433, at p.
5435:
The word
gift is not defined in the statute. I can find nothing in the context to
suggest that it is used in a technical rather than its ordinary sense.
Thus, a
gift is a voluntary transfer of property owned by a donor to a donee, in return
for which no benefit or consideration flows to the donor (see Heald, J. in The
Queen v. Zandstra [74 DTC 6416] [1974] 2 F.C. 254, at p. 261.) The tax
advantage which is received from gifts is not normally considered a “benefit”
within this definition, for to do so would render the charitable donations
deductions unavailable to many donors.
(Emphasis added.)
[32] In
applying the above definition to the facts of this appeal, it is clear that the appellant did not make a gift to
the Foundation because a significant benefit flowed to the appellant in return
for the Donation.
[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.
[36] I now turn to some of the submissions made by counsel
for the appellant.
[37] Reference was made to the decision of Cooper v. The
Queen, 88 DTC 6525 (FCTD). In that case, Rouleau J. held that the provision
of an interest-free loan by a trust to a beneficiary/executor was not a benefit
that was required to be included in income under subsection 105(1) of the Act.
[38] This decision does not assist the appellant. The basis
for the decision in Cooper was not the meaning of “benefit” in a general
sense, but it was the Court’s interpretation of the particular legislative scheme
in reference to taxing benefits.
[39] Regarding whether an interest-free loan generally
could be considered a benefit, Rouleau J. thought that it could. At page 6528
of Cooper, he stated:
There is no
doubt that in some sense, the loan made to the Plaintiff constituted a
substantial benefit to him, as anyone who has attempted to negotiate an
interest-free loan may attest. […]
[40] Counsel
for the appellant also submits that the
appellant made the Donation primarily for charitable reasons, and that the tax
savings were a secondary consideration.
[41] This submission was based largely on the self-interested
testimony of the appellant, coupled with supporting evidence of the appellant’s
history of charitable works and charitable giving.
[42] Even if it is accepted that the appellant’s
participation in the Program was influenced primarily by a charitable
motivation, this would not assist the appellant. Once it is determined that the
appellant anticipated to receive, and did receive, a benefit in return for the
Donation, there is no gift.
[43] Counsel also referred to Antoine Guertin Ltée v. The Queen,
81 DTC 5268 (FCTD), aff’d 88 DTC 6126 (FCA). This decision concerned a loan
made on favourable terms by a charity. The trial judge concluded that the
favourable terms did not make the loan artificial.
[44] The problem with this submission is that the bona
fides of the financing arrangements provided to the appellant are not in
dispute in this appeal. I do not think that the Antoine Guertin decision
assists the appellant.
[45] This is
sufficient to dispose of the appeal, and it is not necessary that I consider the respondent’s alternative
argument that the tax receipt issued by the Foundation and its associated tax
credit constitutes a benefit.
[46] I would
comment briefly, though, on whether the appellant made a partial gift, consisting of his own cash outlay.
[47] The appellant did not argue this, and rightly so in my
view.
[48] In some circumstances, it may be appropriate to
separate a transaction into two parts, such that there is in part a gift, and
in part something else.
[49] 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. In this regard, I found
assistance from the following decision referred to by counsel for the
respondent: Hudson Bay Mining and Smelting Co. v. The Queen, 89 DTC 5515
(FCA).
Disposition
[50] I would dismiss the appeal, with costs to the
respondent.
These
Amended Reasons for Judgment are issued in substitution for the Reasons for
Judgment dated November 12, 2009.
Signed at Ottawa, Canada this 4th day of December 2009.
“J. M. Woods”
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