Law Firm of Martin K.I. Rumack

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The Tax Man Strikes Again – Beware of Leveraged Donation Schemes

Over the past several years, promoters, namely individuals who concoct schemes on how you can earn tax credits to reduce your taxable income, have devised “Leveraged Donation Programs”. On the surface, these programs appear to be a winner for both the Taxpayer who makes the donation and the Charity who receives the donation… a “win-win” for all concerned. However, most recently the Canada Revenue Agency has attacked this particular type of program. In a recent case, an individual claimed a tax credit on His income tax return for a $100,000.00 cash donation made to a registered charity. C.R.A. did not allow a credit for the cash portion of the gift which he paid from his own resources. On an application to The Tax Court, they upheld the position taken by the CRA and this was further confirmed by The Federal Court of Appeal: The taxpayer in question is merely one of numerous Canadian taxpayers who participated in similar types of tax minimization programs based on donations. Unfortunately for those individuals the tax refunds will not be forthcoming. The case is referred to as Maréchaux v. Canada, [2009] T.C.J. No. 467 (aff’d [2010] F.C.J. No. 1337).

These donation programs were promoted to donors on the basis that if they made a large cash donation to a properly registered charity they would receive a donation receipt which would result in the donor receiving a donation receipt which would result in the taxpayer receiving a tax refund significantly greater than the actual cash amount donated.

I understand that in a number of these cases the promoters of these programs, who earn significant fees, obtained written opinions from well-known large accounting firms indicating the donation program had only a ‘slight’ chance of not being accepted by the C.R.A. In the particular case of Maréchaux the program was structured as follows:

In exchange for making a $30,000.00 cash donation to a charitable foundation, Maréchaux obtained a 20-years interest free loan in the amount of $80,000.00 from a lender which in fact was owned by the promoter, and which was created for the sole purpose of providing loans to donors. $70,000.00 of this amount was donated to a charitable foundation. The foundation then paid the funds to two charities, one of which had entered into a fundraising agreement with the promoter. The foundation issued a receipt reflecting a donation of $100,000.00.

Of the remaining $10,000.00, Maréchaux deposited $8,000.00 with the lender as security for the loan, with the intention that it would grow to $80,000.00 in 20 years. A further $800.00 of the monies were paid for a policy to insure against the risk that the security deposit would not grow to that amount. The remaining $1,200.00 was paid as fee to the promoter. The same day, Maréchaux satisfied the loan by assigning the security deposit and insurance policy back to the lender. Had the CRA accepted his claim for a tax credit for the $100,000.00 donation, Maréchaux would have received a rate of return in excess of 60 percent on his initial $30,000.00 cash outlay.

The CRA attacked this arrangement. The Tax Court agreed, finding that, Maréchaux was not entitled to a tax credit in relation to any of the amount donated because he did not make a “true gift” to the charitable foundation. The Tax Court stated that it was not a “true gift” because a “significant benefit” had flowed to Maréchaux in return for making the donation.

That “benefit” was the financing arrangement – the $80,000.00, 20-year interest-free loan, in conjunction with the arrangement that enabled Maréchaux to discharge the loan immediately after he borrowed the money. The court said it was clear that the $8,000.00 security deposit could not be expected to grow to $80,000.00 in 20 years, so it could not be said that he had paid sufficient consideration to discharge the loan.

The CRA has previously indicated that it is inclined to treat donors who have participated in programs similar to the program in question in the same manner and the same result as the final disposition of the Maréchaux case. But donors who wish to have accepted at least the cash portion of their donation (in Maréchaux case, the $30,000.00 amount) may yet be able to do so.

What was not argued in Maréchaux is that the loan was not a bona fide financing arrangement. In many of these cases, there is never a true expectation that the donor will ever be obliged to repay the loan. The financing itself is no more that a pretence, the purpose of which is to put fees in the pocket of the promoter, the lender, the lawyers and the accountants. It does not reflect a true obligation of the donor to the lender.

If the financing arrangement is not bona fide, and the donor never himself obtains the use of the “borrowed” money, what possible benefit could there be to the donor from the cancellation of the sham liability immediately after it is incurred? None! However, the donor’s cash portion of the gift should be recognized and accepted as a proper donation.

Of course, this argument would require the donors to accept the fact that the borrowed money will not be recognized as a gift. As a logical conclusion, the prospect of a high rate of return on the cash donation is doomed. Remember the age old adage, in life you get nothing for nothing!!!

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