Donation tax-shelter schemes have suffered another setback. A Federal Court of Appeal decision has denied Kathryn Kossow’s donation tax credits for 2000, 2001 and 2002 (Kossow v The Queen, 2013 FCA 283).
Kossow contested a September 2012 Tax Court judgment that dismissed her appeal of CRA reassessments about her participation in a leveraged charitable donation program. The crux of her claim was that the money would be used to finance the purchase of art for a registered charity.
Evidence presented at the original trial focused on whether prices paid for the art were “reasonable” and whether various complex transactions, in which “money transferred quickly between the promoters, companies, financial institutions and charities,” were legitimate.
The essence of the program, in the judge’s words, was that “little cash was given to a few charities and the [charity] was required to acquire art from the creators of the program with the donations allocated to it.”
The leveraged donation program
Under the program, 20% of Kossow’s payments were funded with her own cash and the other 80% by a 25-year interest-free loan. She also paid fees to the promoters. For the years 2000, 2001 and 2002, she claimed charitable donation tax credits of $20,046, $24,060 and $20,045, respectively, for payments totaling $50,000, $60,000 and $50,000. On September 4, 2004, CRA reassessed Kossow, disallowing 80% of the donation tax credits claimed each year. A year later, CRA further reassessed her 2002 tax year, disallowing the entire credit.
The Tax Court judge’s primary task was to determine whether the donations were gifts, which were defined previously by the Federal Court of Appeal as “a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor.”
Kossow testified she participated in the program “to make a larger donation [...] and the tax savings were a secondary consideration.” The judge didn’t buy it, saying, “The tax savings were [Kossow’s] principal reason.”
Relying on prior jurisprudence (Maréchaux v. The Queen, 2010 FCA 287), the judge concluded Kossow did not make a gift within the meaning of the Income Tax Act, finding the “25-year interest-free loans were significant benefits she received in return for making her donations.” That means the donation doesn’t qualify as a gift.
So, the main issue for the appellate court was whether the Tax Court judge was correct in concluding that Kossow’s case wasn’t meaningfully different from the Maréchaux case. The Court of Appeal said the leveraged charitable donation program under review in the Maréchaux case was “strikingly similar to the program considered in [Kossow’s] case.” It then referred to the precedent set by the Maréchaux case, which says a long-term interest-free loan is “a significant financial benefit…and a benefit received in return for making a gift will vitiate the gift.”
Since long-term, interest-free loans were part of the leveraged-donation program Kossow participated in, the appeal court concluded she “received a significant financial benefit.”
The court added the Kossow case is “so similar to the facts of Maréchaux that the judge did not err in law in reaching the same conclusion.” Kossow’s donation credits were denied.