Carson v. The Queen – Court confirms circumstances for gifting a right to use property

November 29, 2013 | Natasha Smith

Issue
Under the Income Tax Act (Act), where a transfer of property constitutes a gift for tax purposes, the recipient charity can issue a donation receipt to the donor in an amount equal to the fair market value of the property at the time of the gift.  In a recent case before the Tax Court of Canada, Carson v. The Queen, the Court was asked to determine whether the use by a charity of two rooms in a house was considered a charitable gift in-kind from the owner/occupier of the house such that the owner/occupier was lawfully eligible for a donation receipt, and the corresponding tax credit, representing the estimated fair market value of the rent otherwise payable.

Facts
For five years, Peaceful Schools International (the “Charity”) made use of two rooms in the home of its President – one for the storage of products and supplies and the other as an office.  The Charity’s President married the Appellant in this case and the rooms continued to be used by the Charity for the same purposes.  No rental agreement or lease was signed.  In 2009, the Appellant was issued two donations receipts by the Charity for amounts totalling $3,120.  The value of the receipts was calculated on the estimated value of rent at $130 per month for rent over a two-year period.  The Appellant never reported any rental income on his personal income tax return.  CRA initially denied his claim for the total value of the receipts issued and the Appellant appealed to the Tax Court of Canada.  The Court denied his appeal.

Judgment
The primary issue before the Court was whether the Charity’s use of space represented a ‘transfer’ of the Appellant’s property such that that the Appellant could be said to have been divested of the property and the Charity vested with the property.  With reference to various CRA publications, the Court noted that while a tax receipt cannot be issued for the value of a loan of property, a receipt may be issued where a charity pays rent to an individual and then later accepts a gift of all or part of the rent paid.  This would require the individual to report the income on his/her personal income tax return and then claim the tax credit on the subsequent donation back to the charity.  In determining that the Charity’s use of space did not represent a transfer of property resulting in the Appellant’s eligibility to receive the subject tax credits, the Court made the following conclusions:

  1. There was not an implicit transfer of money representing rent; and 
  2. There was not a transfer of property in the form of a right to use the two rooms.

Turning first to whether there was a transfer of money, the Court held that there was no such transfer in form or substance.  There was clearly no exchange of payment for the use of the space and there was no formalized arrangement between the Applicant and the Charity, in the form of a lease or otherwise.  Simply, the Court held that there was no legal obligation for the Charity to pay rent to the Applicant and, indeed, it did not do so.  The Court further noted that formalizing the arrangement would have been particularly appropriate in such a circumstance where the parties were operating not at arm’s length.

With respect to whether there was a transfer of property in the form of a right to use the two rooms, the Court acknowledged that ‘property’ has been defined in the common law to include a right of any kind.  However, in highlighting the fact that a right within the definition of property still entails a legally enforceable claim, the Court held that in the context of property transferred as a gift, the Applicant’s “right” did not fall within the definition of property; there was no legally enforceable claim.  The Applicant’s wife (and lawful owner of the house containing the subject rooms) used the rooms for her involvement with the Charity.  There was no lease or license for the use of the rooms and, therefore, no transferrable right that could be categorized as ‘property’.

This case reminds both charities and donors that receipts can only be issued for gifts of property, and that this does not include direct receipting for the value of free rent or free services provided to a charity.  While it is possible to synthesize this result using an exchange of cheques – in which the charity pays for the rent or services, then receives a voluntary donation of the payment in return – that is important to adhere to the formal requirements for such gifts.

Miller Thomson’s Charity and Not-for-Profit lawyers can assist charities and donors in complying with these rules.

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