Federal Court Of Appeal Upholds Decision Denying Charitable Credits

April 25, 2011 | Andrew Valentine

In the April 2010 issue of this Newsletter, we reported on the decision of the Tax Court of Canada in Coleman v. M.N.R., in which the Tax Court denied charitable donation credits claimed by various donors to a structured scholarship fundraising program. The Federal Court of Appeal has recently released a decision upholding the previous ruling.  The case provides insight into the breadth of circumstances in which courts will find that donors have received benefits in respect of charitable gifts.

As previously reported, the case considered certain donations made to a charity which provided scholarships to students at a Christian university.  The donations in question were made pursuant to a scholarship program promoted by the charity.  Under the terms of the program, students were required to fundraise on behalf of the charity in order to be eligible for a scholarship or bursary.  The scholarship amounts given to students were in part a function of the amount of funds raised by those students – the greater the amount raised by the student, the greater the available scholarship (provided that the student otherwise met certain academic and financial criteria).  Students were encouraged to solicit donations from family and friends.  At issue was whether donations to the charity from relatives of students who had fundraised through the program, and who subsequently received scholarships from the charity, constituted gifts that could be receipted.

The donations in question pre-dated the split-receipting regime under the Act, and were therefore analyzed under the common law definition of “gift”.  That definition requires, among other things, that no benefit accrue to the donor in respect of the donation.  The Tax Court had analyzed the links between the donations and the benefits received by the donors (in the form of scholarships or bursaries received by their children) and held that the link was sufficiently strong that the donations did not meet the definition of gift.  Donation credits claimed by these donors to the program were accordingly denied.

On appeal, several taxpayers made arguments as to why their donations to the program should be accepted as gifts. First, it was argued that because the parents and grandparents who made donations and whose children/grandchildren received bursaries were not legally obliged to pay for their post-secondary education, the provision of a bursary to these children should not count as a donor benefit.  The Court rejected this argument, calling it too narrow a definition of “benefit”.

The taxpayers also argued that there was some uncertainty as to whether their children would receive a bursary through the program and that therefore they cannot have made the gifts with the expectation of receiving a benefit.  The Court also rejected this argument, stating first that the taxpayers in question knew that their children met the requirements to receive a bursary under the program and would most likely do so, and second that the existence of an element of uncertainty would not necessarily prevent a finding that the taxpayers made their gifts with the expectation of receiving a benefit.

The Court made other statements that confirmed the breadth of the concept of “benefit” that will be applied by the courts.  The Court stated:

  • that “reciprocal” donations by family friends would count as a benefit.  In other words, where a donation by the parent of student A solicited by student B was matched by a donation by the parent of student B solicited by student A, the provision of bursaries to these students would qualify as a benefit to the donors.
  • where donations to the program were made by a corporation controlled by an individual whose child(ren) receives a bursary through the program, the corporation will be considered to have received a benefit.

The Federal Court of Appeal ultimately dismissed the taxpayers’ appeals in this case.  The decision confirms that courts will take a broad view of what constitutes a donor benefit.  Courts will also likely apply a similarly broad analysis when determining whether an advantage has been received in respect of a gift under the split-receipting rules.  Charities and donors should be cautious and seek legal advice when issuing or claiming receipts where there is uncertainty as to whether a benefit has been received in respect of the gift.

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