Several court decisions have been released in the past few months which highlight issues of which charities and donors should be aware.
Lockie v. The Queen
In Lockie v. The Queen, the Tax Court of Canada considered the appropriate determination of fair market value of certain items donated pursuant to a donation arrangement. The taxpayer in question had purchased in bulk certain gel pens, toothbrushes and school packs at a cost of $2,850 and donated them to a registered charity which issued a receipt for $15,078. The purchase and donation were made pursuant to a structured program which, although not described in the decision as a tax shelter, was promoted on the basis that participants would receive up to a 130 per cent return on their donation. CRA originally reassessed the donor on the basis that the fair market value of the gift was limited to the purchase price on the items. CRA later took the position that the donor was motivated by the attractive return on investment and thus lacked the necessary donative intent to claim a tax credit.
The Tax Court of Canada reviewed the facts and determined that the donor was motivated primarily by a desire to obtain a return on investment as a result of the donation. However, it concluded that because the only benefit to the donor was the donation credit arising from the gift, this did not vitiate the gift outright. However, the Court held that the fair market value of the gift was limited to the purchase price paid on the items. It held that because the items were purchased pursuant to a donation arrangement whereby the donor acted essentially as a conduit to purchase the items wholesale and donate them to a pre-selected charity, the appropriate market for determining the value of these products was not the retail market.
This case confirms, consistent with previous case law, that where a taxpayer purchases products for donation pursuant to a donation shelter arrangement, courts will limit the donation tax credits which may be claimed to the actual cash outlay of the taxpayer. As we have stated in previous editions of this newsletter, charities and donors should be highly cautious before participating in any donation tax shelter arrangements. CRA is auditing tax shelter involvement aggressively to deny tax credits and revoke charities for participation.
Israelite Church of Christ Canada v. The Queen
This is a short decision addressing the correct procedure by which charities must respond to a notice of intention to revoke charitable registration. In this case, the charity in question had received a notice of intention to revoke from CRA, and responded by immediately commencing an appeal to the Federal Court of Appeal. The Court held that because the charity had not filed an objection with the Appeals Directorate of CRA, and CRA had not confirmed its intention to revoke or failed to respond to an objection after 90 days, the charity could not appeal to the Federal Court of Appeal.
Where a charity receives a notice of intention to revoke and wishes to appeal, the charity must first file an objection with the Appeals Directorate of CRA within 90 days of the date that the notice of intention to revoke was mailed. If CRA confirms the intention to revoke, or does not respond within 90 days, the charity then has the option of appealing to the Federal Court of Appeal.
Miller Thomson LLP’s Charities and Not-for-Profit lawyers can assist with all aspects of the objection and appeal process.
Adomphwe v. The Queen
This case dealt with the reassessment of a taxpayer who had been receiving false donation receipts from his accountant, valued at as much as ten times his actual cash donation. The tax preparer had himself been charged with fraud. The Court reviewed the evidence and held that the taxpayer was not entitled to any deductions in respect of the receipts he claimed. In brief, it noted that a donation credit may only be claimed where a taxpayer has properly obtained a donation receipt which meets the requirements under the Income Tax Act. It held that a false receipt which contains incorrect information does not meet these requirements and therefore cannot be used to support a claim for any charitable donation tax credits.
It is important for charities to ensure all receipts comply with all requirements of the Income Tax Act and the Income Tax Regulations. This case is a reminder of the importance that donors should maintain oversight over those employed to assist in the preparation of tax returns. Charities should also monitor those employed to prepare tax receipts on the charity’s behalf, so as to avoid becoming a victim of or a perpetrator of fraud.