A recent decision of the Tax Court of Canada addressed the treatment of donors claiming receipts that were inflated in excess of the actual donation. Among other things, the Court made some interesting comments on the meaning of “gift” and on the imposition of penalties for the false filing.
David v. The Queen, 2014 TCC 117 involved six separate appeals (heard consecutively) concerning CRA’s disallowance of the entire tax credit for a purported gift (comprised of both cash and in-kind donations) to CanAfrica International Foundation (CanAfrica). CRA found that the donors had made donations amounting only to 10% of the face value on the receipts (plus a commission to the tax preparer who promoted the scheme). CanAfrica’s charitable status has since been revoked and its President has pled guilty to selling false donation receipts. However, at the time the receipts in question were issued, CanAfrica was a registered charity under the Income Tax Act.
Many of the appellants in David acknowledged that the tax receipts issued to them were false and were unable to provide any evidence to support the position that they had paid more than 10% of the amount on the receipts; however, some sought relief on the basis that CRA should bear some responsibility as CRA had failed to warn taxpayers of its concerns with the organization. Justice Woods explicitly dismissed this argument, stating that regardless of whether CRA should have issued the suggested warning, tax credits may only be determined based upon the true value of the gift and nothing more.
The central issue addressed in David was whether the expectation of an inflated tax credit based on an inflated donation receipt is a benefit that ultimately negates the gift. The Court held that the receipt of an inflated tax receipt was not sufficient to deny the tax credits altogether, and that the appellants should be allowed a charitable tax credit with respect to the 10 percent of the receipt that was actually paid to the charity.
At first blush, this ruling seems to contradict prior rulings in leveraged donation tax shelter cases involving inflated receipts issued for purported gifts of cash and property. In several such cases, courts have denied any credit in respect of these schemes. The Court in David, however, made a distinction from these cases, stating that
“unlike many of the cases dealing with so-called leveraged charitable donations, the transactions in these appeals are not complex and do not involve a series of inter-related transactions to which the cash is connected.”
Furthermore, the Court determined that it would not consider whether the appellants had donative intent (which has been held by some courts to be a requirement for a valid gift) as this argument was raised by the respondent at the hearing and the appellants did not have prior notice of such argument to enable them to respond. As a result, the Court found that the appellants paid cash, and perhaps some household goods, as a donation to CanAfrica for which they received greatly inflated receipts. Whether future courts will agree with the distinction drawn by Justice Woods between this case and the leveraged donation tax shelter cases remains to be seen. We expect that CRA will continue to take the position that the no credit is available for any portion of the donation (and indeed, CRA has appealed this decision).
Interestingly, no penalties were imposed in respect of the reassessment of the donors. The Court noted that there was conflicting evidence as to whether penalties had in fact been imposed by CRA, and stated that penalties, if any, should be deleted. Again, this decision should not be taken as assurance that penalties would not be sought (and upheld) in respect of similar reassessments from false donation credits.
CRA has filed an appeal with the Federal Court of Appeal. We will keep readers of this Newsletter updated as the case progresses.