What is a “Gift” for Tax Purposes

• 
  Keith Trussler
  Lawyer

In a recent case which consumed 27 days of Court time in the Tax Court of Canada, Justice Pizzitelli conducted a refresher course on the meaning of “gift”.

The matter was under close scrutiny as a test case related to the Global Learning Gift Initiative Program (“GLGI”).

GLGI involved an offshore entity which was a Bahamian corporation (“Bahamaco.”). Bahamaco acquired software licenses at a nominal value ranging from 13.3 cents per license to 26.7 cents per license from a Florida corporation (“Floridaco”).

Floridaco gifted most of those licenses to a Canadian Trust, Global Learning Trust 2004 (“GLT”). Floridaco also sold some licenses to GLT in order to pay for the licenses it bought from Bahamaco.

GLT was organized by a Bahama resident.

The taxpayers signed a pre-determined set of documents and became capital beneficiaries of GLT. GLT then made a capital distribution of the licenses to the taxpayers and the taxpayers, in turn, donated those licenses to a select charity and received a donation receipt. It was alleged that the licences had a value far in excess of the amount paid for them.

Needless to say, the structure involved in establishing a gifting program was extraordinarily complicated.

The Appellants argued that the Court should focus on the need to see the transactions through the lens of the Appellants. In short, the Appellants argued that they met the 4 conditions of making a charitable donation, namely:

• they made the donation;

• the donation was made to a registered charity;

• they obtained a valid donation receipt; and

• they claimed the deduction in the appropriate year.

They further argued that the cash gift was voluntary and made the donation to benefit the charity and, at the same time, achieving a tax savings.

The Minister of National Revenue took a different approach. He treated the cash laid out as akin to a “participation fee” and noted that the taxpayers executed a predetermined set of documents at the same time, all of which were part of a donation scheme whereby the tax donation receipt for the gift of the licenses exceeded the donation receipt for the cash gift by a multiple of a minimum of 3:1 and as much as 8:1 thereby resulting in a net profit to the donor. In other words, the Minister treated this as more of a profit making business transaction as opposed to a donation program.

In the end, the Court found that the taxpayer failed as a consequence of the overall intention to not only benefit from but materially profit from his or her participation in the donation scheme. The Court therefore concluded that the taxpayers did not have the requisite donative intent.

Indeed, the Court followed an existing established and stable line of authority that is described as follows:

“…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…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.”

Accordingly, the entitlement to a tax donation credit is not the issue which caused this scheme to fail. It was the leveraged donation aspect and the actual profiting from a scheme which negated any possibility of a finding in favour of the taxpayer. Ultimately, this was no gift but, rather, a profit making business transaction.

If you have any questions about this or any other tax matters please contact Keith Trussler, Linda Smits or Ainsley Furlonger.