Van Der Steen v. The Queen

Van Der Steen v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2019-01-23
Neutral citation
2019 TCC 23
File numbers
2012-4731(IT)G
Judges and Taxing Officers
Don R. Sommerfeldt
Subjects
Income Tax Act
Decision Content
Docket: 2012-4731(IT)G
BETWEEN:
RONALD VAN DER STEEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on March 7 to 10, 2016; October 24 to 26, 2016;
June 7 to 9, 2017; and November 16 to 17, 2017 at Hamilton, Ontario
Written submissions filed on January 30, 2018
By: The Honourable Justice Don R. Sommerfeldt
Appearances:
Counsel for the Appellant:
Alec McLennan
Counsel for the Respondent:
Nadine Taylor Pickering
Natasha Wallace
JUDGMENT
IT IS ADJUDGED THAT:
1. The Appeal that pertains to the reassessment (the “2009 Reassessment”) that was represented by the Notice of Reassessment dated March 26, 2009 and that assessed a penalty under subsection 163(2) of the Income Tax Act (the “ITA”) is allowed and the 2009 Reassessment is vacated.
2. By reason of the 2009 Reassessment having been vacated, the reassessment (the “2008 Reassessment”) that was represented by the Notice of Reassessment dated March 3, 2008 and that disallowed the donation tax credit in respect of the Appellant’s $65,000 payment to the Canadian Literacy Enhancement Society is reinstated.
3. The Appeal that pertains to the reinstated 2008 Reassessment is dismissed.
4. As success has been divided, there is no award as to costs.
Signed at Ottawa, Canada, this 23rd day of January 2019.
“Don R. Sommerfeldt”
Sommerfeldt J.
Citation: 2019 TCC 23
Date: 20190123
Docket: 2012-4731(IT)G
BETWEEN:
RONALD VAN DER STEEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1] These Reasons pertain to the Appeals by Ronald van der Steen in respect of two reassessments (or possibly a reassessment and an additional assessment) relating to his 2004 taxation year. In 2004 Mr. van der Steen made a payment in the amount of $65,000 to Canadian Literacy Enhancement Society (“CLES”), which was a registered charity. In completing his 2004 income tax return, Mr. van der Steen treated the payment as a gift and claimed a federal tax credit and a provincial tax credit in respect of the $65,000 payment (as well as three smaller donations to other registered charities). In 2008 the Canada Revenue Agency (the “CRA”), on behalf of the Minister of National Revenue (the “Minister”), reassessed Mr. van der Steen’s 2004 taxation year so as to disallow the federal and provincial tax credits derived from the $65,000 payment. In a subsequent Notice of Reassessment the CRA imposed a penalty under subsection 163(2) of the Income Tax Act (Canada) (the “ITA”).
[2] By way of preliminary background, the guiding mind behind the creation of CLES and the charitable donation arrangement that is the subject of this Appeal was Henry Nicholas Thill. [1] Mr. Thill was assisted by Keith Wilson and Steve Reynolds. Mr. Thill and Mr. Reynolds died before the commencement of the hearing of this Appeal.
[3] In auditing the numerous taxpayers who made donations to CLES, the CRA discovered that some of them were told by a representative of CLES that they (or an entity controlled by them) could expect to receive a payment (which the CRA calls a “kickback”), generally corresponding to approximately 70% of the amount donated. One of the fundamental questions in respect of this Appeal is whether Mr. van der Steen was told that he would receive a kickback in respect his $65,000 payment to CLES.
II. ISSUES IN DISPUTE
[4] The issues that are in dispute in this Appeal are summarized as follows:
a) Was Mr. van der Steen’s payment to CLES in the amount of $65,000 a gift, so as to be included within his “total charitable gifts,” as that term is defined in subsection 118.1(1) of the ITA?
b) Did the receipt issued by CLES to Mr. van der Steen in respect of the payment in the amount of $65,000 comply with subsection 118.1(2) of the ITA and section 3501 of the Income Tax Regulations (Canada) (the “ITR”)?
c) In filing his 2004 income tax return, did Mr. van der Steen make a misrepresentation that was attributable to neglect, carelessness or wilful default or did he commit a fraud in filing the return, thus permitting the Minister, pursuant to subparagraph 152(4)(a)(i) of the ITA, to make a reassessment after Mr. van der Steen’s normal reassessment period in respect of the 2004 taxation year, so as to assess a penalty payable by Mr. van der Steen in respect of that year?
d) By reporting the $65,000 payment as a gift in his 2004 income tax return and deducting a tax credit pursuant to subsection 118.1(3) of the ITA, did Mr. van der Steen knowingly, or under circumstances amounting to gross negligence, make a false statement in that return, so as to be liable to a penalty pursuant to subsection 163(2) of the ITA?
[5] Initially, the CRA also alleged that Mr. van der Steen had participated in a “gifting arrangement,” as defined in subsection 237.1(1) of the ITA, that such gifting arrangement had not received an identification number, and that Mr. van der Steen had not filed a prescribed form, for the purposes of subsection 237.1(6) of the ITA, with the result that Mr. van der Steen was not entitled to deduct a tax credit under subsection 118.1(3) of the ITA. At the commencement of the hearing of this Appeal, counsel for the Crown advised the Court that the Crown was no longer relying on section 237.1 of the ITA.
III. FACTUAL BACKGROUND
A. Chronology of Events (taken from Mr. van der Steen’s evidence)
[6] In 2004 Mr. van der Steen, who was a lawyer and a member of a partnership carrying on the practice of law, determined, at a time when he had approximately $165,000 to $265,000 in his Registered Retirement Savings Plan (“RRSP”), [2] that it would be advisable for him to withdraw $100,000 or more from the RRSP. Mr. van der Steen, who had worked as an engineer before going to law school, explained that, when he was employed as an engineer, he found it beneficial to make RRSP contributions. However, as a self-employed lawyer and given his income, he had found it “difficult to make RRSP contributions and really benefit.” [3]
[7] In a casual conversation with a business acquaintance named Michael Gomes, Mr. van der Steen mentioned that he was looking for a tax‑efficient way to withdraw money from his RRSP. Mr. Gomes said that he knew someone who could assist Mr. van der Steen and referred Mr. van der Steen to Steve Reynolds. In late October or early November 2004, Mr. van der Steen telephoned Mr. Reynolds and explained his desire to withdraw approximately $100,000 from his RRSP on a tax-efficient basis. Mr. Reynolds advised Mr. van der Steen that, if he were to withdraw $100,000 from his RRSP and use the money (after topping it up to replace the income tax that would be withheld at source) to make a donation of $100,000 to CLES, he would be entitled to a tax refund that would offset the amount of the tax liability that he would incur in withdrawing the money from his RRSP, such that the transactions would be substantially tax neutral.
[8] On November 10, 2004 Mr. van der Steen discussed the proposal with Tom Birnie, who was Mr. van der Steen’s financial advisor and broker. Mr. Birnie advised Mr. van der Steen that a significant portion of the funds in Mr. van der Steen’s RRSP were invested in labor sponsored venture capital corporations and other investments which could not easily be liquidated. Accordingly, Mr. Birnie recommended that Mr. van der Steen not withdraw more than $65,000 from his RRSP.
[9] After making an online search to confirm that CLES was a registered charity, Mr. van der Steen made the arrangements to withdraw $64,854.52 from his RRSP. That withdrawal occurred on or about November 24, 2004. In conjunction with the withdrawal, Union Securities Ltd. (“USL”) issued to Mr. van der Steen a cheque in the amount of $45,380.66. As well, USL withheld tax in the amount of $19,473.86 and presumably remitted that amount to the Receiver General for Canada.
[10] As Mr. Reynolds had advised Mr. van der Steen to contribute to CLES an amount approximately equal to the amount of the withdrawal from the RRSP, on November 26, 2004 Mr. van der Steen arranged a cash advance in the amount of $71,000.00 from his personal line of credit at the Bank of Nova Scotia (“BNS”) and, on the same day, made a payment to BNS in the amount of $45,380.66, [4] so as to reduce the balance of that line of credit, resulting in a net borrowing of $25,619.34 (i.e., $71,000.00 – $45,380.66).
[11] Also on November 26, 2004, Mr. van der Steen obtained from BNS a bank draft in the amount of $65,000 payable to CLES. He used the remaining $6,000 (i.e., $71,000 – $65,000) of the cash advance for purposes that are not relevant to this Appeal.
[12] Sometime in mid- or late November 2004, Mr. van der Steen called Mr. Reynolds a second time to obtain mailing or delivery instructions for the $65,000 bank draft. Mr. van der Steen subsequently sent the bank draft to CLES and later received from CLES an official receipt dated December 2, 2004, stating that Mr. van der Steen had made a donation in the amount of $65,000.
[13] Mr. van der Steen testified that he had only two telephone conversations with Mr. Reynolds. In those conversations, Mr. Reynolds emphasized that it was important for Mr. van der Steen to donate to CLES the full amount withdrawn from the RRSP, even if that meant borrowing money to top up the donation by an amount equal to the tax withheld on the withdrawal from the RRSP. Mr. van der Steen testified that Mr. Reynolds did not promise him anything, other than that he would get a receipt. Mr. van der Steen stated he did not expect to receive anything (other than the receipt) in return for the $65,000 payment. [5] Mr. van der Steen stated that his intention in making the payment was “To make a donation and maximize the return on what I can get in a tax return for removing money from my RRSP.” [6]
B. Charitable Donation History
[14] From 1987 to 2014 Mr. van der Steen contributed the following amounts to registered charities:
Year
Amount ($)
1987
20
1988
50
1989
70
1990
110
1991
75
1992
80
1993
0 [7]
1994
0
1995
14
1996
0
1997
0
1998
0
1999
120
2000
0
2001
30
2002
2,555
2003
2,803
2004
66,389 [8]
2005
2,065
2006
1,909
2007
1,898
2008
80
2009
255
2010
100
2011
45
2012
250
2013
257
2014
0
[15] In 2004, in addition to the $65,000 payment to CLES that is the subject of this Appeal, Mr. van der Steen donated $1,389 to other registered charities.
C. RRSP Contribution History
[16] The amounts of the contributions made by Mr. van der Steen to his RRSP during the period from 1987 to 2014, together with two withdrawals from his RRSP in 2004 and 2013 respectively, are set out below:
Year
Contributions (Withdrawals)
1987
1,835
1988
1,663
1989
2,119
1990
7,500
1991
7,927
1992
8,915
1993
9,977
1994
0 [9]
1995
0
1996
0
1997
3,000
1998
0
1999
0
2000
9,616
2001
12,451
2002
0
2003
5,550
2004
(64,854.52) [10]
2005
0
2006
0
2007
29,908 [11]
2008
21,909
2009
5,071
2010
0
2011
0
2012
6,000
2013
(107)
2014
92
The above table indicates that Mr. van der Steen’s contributions to his RRSP were often sporadic and that, when he did make contributions, the amounts contributed were generally less than the RRSP dollar limit for the particular year. This suggests that Mr. van der Steen likely did not consider his RRSP to be a central feature of his retirement planning. In fact, he stated during his testimony that he anticipated that he would work for most of his life, [12] although he also acknowledged that the purpose of his RRSP was to save for retirement. [13]
D. Assessing History
[17] Leonard Cappe, a chartered accountant engaged by Mr. van der Steen and by the partnership of which Mr. van der Steen was a partner, prepared Mr. van der Steen’s 2004 income tax return in mid‑March 2005. Mr. Cappe filed the return electronically with the CRA, on March 18, 2005. [14]
[18] The Minister assessed Mr. van der Steen’s 2004 income tax return and issued the initial Notice of Assessment on July 28, 2005. [15] This marked the beginning of the normal reassessment period. On August 22, 2005 the Minister reassessed the tax payable by Mr. van der Steen in respect of the 2004 taxation year so as to allow a federal political contribution tax credit in the amount of $103.50. [16]
[19] On March 3, 2008 the Minister reassessed the tax payable by Mr. van der Steen in respect of the 2004 taxation year so as to reduce the amount of his charitable gifts from $66,389 to $1,389. [17] In other words, it was this Notice of Reassessment that disallowed the tax credits in respect of the $65,000 payment to CLES.
[20] On March 26, 2009 the Minister issued a Notice of Reassessment so as to impose a penalty, in the amount of $14,992.65, under subsection 163(2) of the ITA. [18] This Notice of Reassessment was issued after the expiration of Mr. van der Steen’s normal reassessment period in respect of 2004.
[21] A question arose as to whether the Notice of Reassessment dated March 26, 2009 represented a reassessment or an additional assessment. Counsel for Mr. van der Steen takes the position that the reassessment of March 26, 2009 was an actual reassessment, and not an additional assessment. On the other hand, counsel for the Crown takes the position that the reassessment of March 26, 2009 was an additional assessment, whose only effect was to impose a penalty under subsection 163(2) of the ITA, and was not a true reassessment.
[22] On March 1, 2016 the Crown filed with the Court an affidavit of Barbara Harvey, a CRA Litigation Officer. In paragraph 7 of that affidavit, Ms. Harvey stated that Mr. van der Steen’s “2004 income tax return was reassessed to levy gross negligence penalties….” In describing the electronic record kept by the CRA in respect of Mr. van der Steen’s 2004 taxation year, in the same paragraph of the affidavit, Ms. Harvey indicated that the procedure was recorded as a reassessment. As well, in paragraph 8 of the affidavit, she described the process as a reassessment. However, in paragraph 7 of the affidavit, she also stated that, apart from the imposition of the penalty, no other adjustments were made by that reassessment.
[23] In addition to the above affidavit, several documents sent by the CRA to Mr. van der Steen may be of assistance in determining whether the assessing procedure on March 26, 2009 was a reassessment or an additional assessment. One such document was a letter dated June 2, 2008, in which the CRA stated:
It has come to our attention that, due to technical errors in processing, the recent reassessment(s) giving effect to our proposal(s) did not include the subsection 163(2) penalties previously proposed. We wish to advise that the penalties will now be levied under a separate Notice of Reassessment to be issued to you in the very near future….
… if you have already filed an objection to the reassessment(s) relating to the Canadian Literacy Enhancement Society Donation Program, this penalty reassessment(s) will invalidate the previous Notice of Objection. [19]
In the Notice of Reassessment itself that was issued on March 26, 2009, the CRA stated:
We have re-examined your return for the tax year indicated above. The details of the resulting reassessment appear below….
If you filed a Notice of Objection for 2004, you must refile the objection. [20]
[24] The language of the CRA’s letter of June 2, 2008 and the Notice of Reassessment of March 26, 2009, as quoted above, suggest that the effect of that Notice of Reassessment was to nullify and replace the Notice of Reassessment of March 3, 2008, otherwise there would have been no need for the CRA to have advised Mr. van der Steen that it would be necessary for him to refile his notice of objection. [21] On the other hand, the only effect of the Notice of Reassessment dated March 26, 2009 was to impose a penalty in the amount of $14,992.65; no other change was made to the total payable, as reassessed on March 3, 2008, in the amount of $47,527.40. [22]
[25] As explained below, it is not necessary for me to determine whether the assessing procedure represented by the Notice of Reassessment dated March 26, 2009 was a reassessment or an additional assessment:
a) If Mr. van der Steen made a misrepresentation attributable to neglect, carelessness or wilful default, such that the reassessment (the “2009 Reassessment”) of March 26, 2009 was valid, it both disallowed the tax credit that Mr. van der Steen had claimed in respect of the $65,000 payment to CLES and imposed a penalty under subsection 163(2) of the ITA. As well, if the Notice of Reassessment dated March 26, 2009 represented a reassessment, it displaced and nullified the reassessment (the “2008 Reassessment”) of March 3, 2008. [23]
b) If the Notice of Reassessment dated March 26, 2009 represented a reassessment, but that reassessment is vacated pursuant to subsection 152(4) of the ITA (because there was no misrepresentation attributable to neglect, carelessness or wilful default), the 2008 Reassessment will be reinstated, [24] or there is a possibility that the 2008 Reassessment was never displaced or nullified. [25] As noted, the 2008 Reassessment disallowed the tax credit that Mr. van der Steen had claimed in respect of the $65,000 payment to CLES, but did not impose a penalty under subsection 163(2) of the ITA.
c) If the Notice of Reassessment dated March 26, 2009 represented an additional assessment, it only imposed a penalty, but did not displace or nullify the 2008 Reassessment. If the additional assessment is found to be invalid by reason of subsection 152(4) of the ITA, the penalty falls, but the disallowance of the tax credit is not affected.
Thus, regardless of the situation, I will need to determine whether the tax credit claimed by Mr. van der Steen was properly disallowed, and whether, by reason of subparagraph 152(4)(a)(i) of the ITA, the Notice of Reassessment dated March 26, 2009 was properly issued by the CRA.
[26] From a procedural perspective, if the Notice of Reassessment dated March 26, 2009 represented a reassessment, these proceedings constitute an appeal in respect of the reassessment represented by that Notice of Reassessment. If that appeal is successful and the 2009 Reassessment is vacated pursuant to subparagraph 152(4)(a)(i) of the ITA, the 2008 Reassessment will be reinstated, and these proceedings will also constitute an appeal in respect of the 2008 Reassessment. [26] If the Notice of Reassessment dated March 26, 2009 represented an additional assessment, these proceedings constitute an appeal in respect of the 2008 Reassessment and an appeal in respect of the additional assessment.
E. Leonard Cappe’s Evidence
[27] For many years Mr. Cappe had prepared the financial statements for the partnership of which Mr. van der Steen was a member in 2004. As well, Mr. Cappe prepared the personal income tax returns for the members of the partnership. Accordingly, in the first part of 2005, Mr. van der Steen and his two partners met with Mr. Cappe to review and finalize the partnership’s financial statements, agree on the distribution of partnership income and begin the preparation of the partners’ respective individual income tax returns for 2004. At that time Mr. van der Steen advised Mr. Cappe of the $65,000 payment to CLES and provided the official receipt to Mr. Cappe. Mr. van der Steen did not discuss the payment with Mr. Cappe, other than to advise that the payment had been made. Mr. Cappe was surprised to learn that Mr. van der Steen had paid $65,000 to CLES.
[28] During direct examination, Mr. Cappe stated that in 2005 the CRA requested that Mr. Cappe send to the CRA the official receipts for the charitable gifts made by Mr. van der Steen in 2004. Mr. Cappe did so. Those receipts were subsequently returned by the CRA to Mr. Cappe, with no action having been taken by the CRA.
[29] A year or two later, the CRA again requested that Mr. Cappe send to the CRA the official receipts for 2004. Mr. Cappe did so. Once again the receipts were returned in due course by the CRA to Mr. Cappe, without any official action having been taken by the CRA.
[30] In February 2007, the CRA sent a letter to Mr. Cappe, asking that Mr. van der Steen’s 2004 official receipts be sent to the CRA a third time. Mr. Cappe sent those receipts to the CRA, which ultimately retained the receipts and eventually disallowed the tax credits claimed by Mr. van der Steen in respect of the $65,000 payment.
[31] Mr. Cappe testified that the official receipt issued by CLES to Mr. van der Steen in respect of the $65,000 payment appeared to be acceptable. Mr. Cappe also testified that he was not aware of any unreported income in respect of Mr. van der Steen’s 2004 taxation year, nor did he see any evidence of any false statement being made in that tax return. Mr. Cappe stated that he was surprised to learn that the CRA ultimately imposed a penalty under subsection 163(2) of the ITA.
F. Lakhwinder Saran’s Evidence
[32] Counsel for the Crown subpoenaed Lakhwinder Saran and called him as a similar-fact witness, on the basis that the he too had made purported donations to CLES and had been reassessed by the CRA to disallow those donations. [27] Mr. Saran testified that in or about 2003 he attended a seminar at which Steve Reynolds was one of the speakers, and that the CLES donation program was explained to him and the other attendees. The attendees were told that, if they were to donate to CLES, altruistic foreign benefactors would arrange for certain trust distributions, not exceeding 50% (and perhaps significantly less) of the respective amounts of the donations, to be made available to them. [28] The attendees were provided with offshore investment opportunities in respect of the distributions to be arranged by the benefactors. Mr. Saran also testified that this was explained as all being appropriate and above board (notwithstanding that a significant portion of the attendees’ respective donations would, in essence, circuitously be returned to them) and that the funds would be distributed as a tax-free gift, which did not need to be included in income. After attending the seminar, Mr. Saran made donations to CLES over three years, in the range of $35,000 to $40,000 each year. [29]
[33] Mr. Saran stated that he also invested $10,000 with Mr. Reynolds in an offshore gold account operated by Crowne Gold Inc. (“Crowne Gold”) and that this investment was made by way of a cash payment that was not a charitable gift. Mr. Saran received periodic statements as to how this offshore investment was performing. Those statements were emailed to him. He did not receive any paper statements.
[34] Mr. Saran could not recall whether he received any periodic statements in respect of the purported investment of the donated funds that were to be returned to him. In fact, he stated that such funds never were returned to him. He could not remember whether he received bogus statements suggesting that the funds had been credited to an account in his name. In other words, Mr. Saran could not remember whether the periodic statements pertained only to his $10,000 investment in the offshore gold account or whether they also pertained to the purported investment of the funds that were to have been returned.
[35] My impression was that Mr. Saran’s situation was different from that of Mr. van der Steen. Mr. Saran attended a seminar presented by Mr. Reynolds and others. Mr. van der Steen did not attend any such seminar. In addition to making donations to CLES, Mr. Saran also invested cash with Mr. Reynolds, which was invested in an offshore gold account. Mr. van der Steen made only the $65,000 payment to CLES, and did not make an investment in an offshore gold account.
[36] In deciding, in the context of an interlocutory motion, the admissibility of Mr. Saran’s testimony, I concluded that:
a) the testimony of Mr. Saran is admissible, but only for the purpose of providing evidence of the state of affairs or context (including the existence, workings, scope, extent and duration of the payment arrangement) in which payments were made to CLES by Mr. Saran and by other donors in similar circumstances;
b) the testimony of Mr. Saran is not relevant or admissible for the purposes of implying or proving that Mr. van der Steen made a payment to CLES in circumstances similar to those of Mr. Saran; and
c) the testimony of Mr. Saran is to be given such weight (if any) as may be considered appropriate, recognizing that the circumstances in respect of Mr. Saran’s payments to CLES were not necessarily the same as the circumstances in respect of Mr. van der Steen’s payment to CLES. [30]
[37] Having reviewed the transcript of Mr. Saran’s testimony, I have concluded that very little weight should be given to his evidence. Mr. Saran stated that CLES “has a scheme that was not explained,” or that he “did not understand.” [31] Mr. Saran’s lack of understanding was illustrated by a statement that he made when responding to a question about a $40,000 pledge that he made to CLES. He stated that his understanding was that most of the pledged amount was supposed to be used to buy educational materials that would be distributed, but then went on to state, in the same response to that question, that most of the amount was supposed to be invested in MEI (which was the acronym used by Mr. Saran to designate an investment fund that was connected to Mr. Reynolds). [32] Furthermore, as noted above, Mr. Saran’s circumstances differed from those of Mr. van der Steen.
G. Shellen Leung’s Evidence (Direct Examination)
[38] Shellen Leung was the auditor who concluded the audit of Prime Packaging Ltd. (“Prime”) and other entities owned or controlled by Mr. Thill. That audit had been commenced by Shawn Mapoles and was subsequently taken over by Ms. Leung. After the Prime audit was completed, Ms. Leung then began to audit all of the donors to CLES, including Mr. van der Steen.
[39] In her testimony, Ms. Leung explained the manner in which the various iterations of the Prime/CLES donation program had been formulated. There were three main iterations, to which the CRA referred as Scheme I, Scheme II and Scheme III.
[40] In Scheme I, contributors paid cash to Prime to acquire Advanced Reading Courses (“ARCs”), and Prime issued a receipt to the contributors for the amount paid. Prime, on behalf of the contributors, then donated the ARCs to various high schools, and the high schools issued letters of appreciation to the contributors. The contents of those letters of appreciation all appeared to be the same and were presumably drafted by Mr. Thill. The contributors treated those letters of appreciation as receipts in respect of charitable gifts.
[41] When the letters of appreciation (which were not official receipts and which did not contain the information prescribed by subsection 3501(1) of the ITR) were filed with the contributors’ income tax returns, the CRA obviously disallowed the charitable tax credits.
[42] To provide greater likelihood of tax success, Mr. Thill moved to Scheme II, which involved an actual registered charity, CLES, whose registration as a charity took effect on July 1, 2003. Under Scheme II, a donor made a donation to CLES, which then used the money to purchase an ARC from Prime. CLES issued an official receipt to the donor, who filed the receipt with his or her income tax return. By reason of an assignment of the copyright in respect of the ARCs which had happened previously, for each ARC sold by Prime to CLES, Prime paid a royalty to Gemini Ventures Inc. (“Gemini”), which was incorporated in the Turks and Caicos Islands. [33]
[43] Ms. Leung testified that the donors who participated in Scheme I and/or Scheme II were provided with various alternatives for having a portion of the amount of the gift circuitously returned to them, as set out in Schedules D(a) through D(e) of the Crown’s Reply and Amended Reply. Ms. Leung spent a great deal of time explaining to the Court how the various circuitous arrangements worked. She used the term “kickback” to refer to the funds that were circuitously moved from a donor to CLES to Prime to Gemini to an intermediary agent and back to the donor or to the donor’s nominee. Some of the circuitous arrangements were:
a) In some situations, Humber Financial Corporation (“Humber”) loaned to a prospective donor approximately 70% to 75% of the amount that the donor intended to donate to CLES. [34] Using the borrowed money and the donor’s own money (to the extent of 25% to 30% of the intended donation), the donor made a donation to CLES, which then used the donated money to purchase an ARC from Prime. Prime then paid a significant royalty to Gemini, which made a payment (approximately 70% to 75% of the amount of the donation) to another entity (referred to by the CRA as “Agent Co.”), which then paid to Humber an amount equal to the loan made by Humber to the prospective donor. Humber later forgave the donor’s obligation to repay the loan.
b) In other situations, the first several steps were the same as those described in the preceding subparagraph. However, Agent Co., rather than making a payment to Humber, made a payment to the donor of approximately 70% to 75% of the amount of the donation, after which the donor used that money to repay the loan that had been provided by Humber.
c) In other situations, the flow of funds was similar that described in subparagraph b) above, but the instructions to Agent Co. to make the payment to the donor came from Hastings Literacy Foundation (“Hastings”), which appears to have been a trust settled by Gemini or perhaps Mr. Thill and which purported to be an offshore philanthropic society, one of whose purposes was to award cash gifts to parties supporting literacy in Canada and other countries. [35]
d) In other situations, rather than borrowing money from Humber, a prospective donor used his or her funds to make the entire donation to CLES. CLES used the donated money to purchase an ARC from Prime, which paid a royalty to Gemini, which then paid an amount equal to 70% to 75% of the donated amount to an offshore entity (such as an international business corporation, also known as an “IBC”) or account (including an international credit card) designated by the donor.
e) In other situations, the arrangement was similar to that described in subparagraph d) above, except that Gemini paid the 70% - 75% kickback to a Canadian entity (rather than an offshore entity) designated by the donor.
Subparagraphs d) and e) above described the manner in which many donors were told that the arrangement would be structured. It is my understanding that, as events unfolded, Gemini did not actually pay any money to the entity or account (whether offshore or domestic) designated by the donor.
[44] While it is not relevant to this Appeal, in Scheme III there were inflated receipts, rather than kickbacks. An individual who attended a promotional seminar was given a gift certificate with a stated face amount of $4,500 (in 2005) or $5,000 (in 2006) merely for attending the seminar, and an additional gift certificate with a stated face amount of $4,500 (in 2005) or $5,000 (in 2006) if the individual made an actual payment of $1,000 (in 2005) or $1,500 (in 2006). The various gift certificates could be used only to make gifts to CLES. Upon giving a gift certificate to CLES, the donor received a purported official receipt in an amount equal to the stated face amount of the gift certificate. CLES then forwarded the donated gift certificates to Saskan Foundation (“Saskan”) [36] supposedly for settlement with CLES.
[45] It is the position of the CRA that Mr. van der Steen participated in Scheme II; however, the CRA did not provide any evidence as to which, if any, of the five variations of Scheme II pertained to Mr. van der Steen. As noted above, it is the position of Mr. van der Steen that he was unaware of the arrangements and kickbacks described above and that he merely made a payment of $65,000 to CLES without receiving, and without expecting to receive, anything in return, other than an official receipt.
IV. ANALYSIS
A. Disallowance of Tax Credit
[46] As noted, the CRA disallowed the tax credit claimed by Mr. van der Steen in respect of the $65,000 payment that he made to CLES in 2004. If Mr. van der Steen received, or expected to receive, a kickback, he would have lacked donative intent, with the result that his purported gift would have been vitiated.
[47] Mr. van der Steen testified that, in making the $65,000 payment to CLES, he did not expect to receive, nor did he actually receive, a kickback or other benefit by reason of the payment.
(1) Jurisprudence
[48] Mr. van der Steen relies on the following statements by Associate Chief Justice Bowman (as he then was) in Klotz:
22. One thing is clear, albeit probably irrelevant to what has to be decided here, and it is that Mr. Klotz’s motivation in participating in this program was purely the anticipated tax benefit….
25. It is unnecessary for me to deal at any greater length with the donor. Mr. Klotz made a mass donation of limited edition prints to FSU. He did not see them or have them in his possession. He was indifferent as to what they were or who they went to or what the donor did with them. His sole concern was that he receive a charitable receipt. None of this is relevant to the issue. A charitable frame of mind is not a prerequisite to getting a charitable gift tax credit. People make charitable gifts for many reasons: tax, business, vanity, religion, social pressure. No motive vitiates the tax consequences of a charitable gift….
55. In Aikman, [[2000] 2 CTC 221, aff’d 2002 DTC 6874], … I stated:
The intent or expectation of obtaining a tax advantage does not vitiate the charitable gift. [37]
[49] The authoritative definition, [38] for the purposes of the ITA, of the term “gift” is found in Friedberg:
… 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…. [39]
The elements of the above definition reflect the general notion that a taxpayer, desiring to make a charitable gift, must have a donative intent in respect of the transfer of property to the charity. [40]
[50] An early description of donative intent was given in Burns:
I would like to emphasize that one essential element of a gift is an intentional element that the Roman law identified as animus donandi or liberal intent…. The donor must be aware that he will not receive any compensation other that pure moral benefit; he must be willing to grow poorer for the benefit of the donee without receiving any such compensation. [41] [Italics are in the original.]
[51] In discussing the concept of donative intent in Webb, Justice Bowie stated:
These cases [Friedberg and others] make it clear that in order for an amount to be a gift to charity, the amount must be paid without benefit or consideration flowing back to the donor, either directly or indirectly, or anticipation of that. The intent of the donor must, in order words, be entirely donative. [42] [Emphasis added.]
In McPherson, Justice Little stated:
There is an element of impoverishment which must be present for a transaction to be characterized as a gift. Whether this is expressed as an animus donandi, a charitable intent or an absence of consideration the core element remains the same. [43] [Italics and underlining are in the original.]
[52] Concerning donative intent, the Federal Court of Appeal (or its predecessor, the Federal Court of Canada – Appeal Division) has indicated that:
a) A would-be donor must make a voluntary, gratuitous transfer of property “without anticipation or expectation of material benefit.” [44]
b) A gift is to be given “in expectation of no return.” [45]
c) There is no gift if a would-be donor makes a payment to a charity expecting to receive a significant benefit in return. [46]
d) A would-be donor who does not intend to impoverish himself or herself does not have the requisite donative intent for the purposes of section 118.1 of the ITA. [47]
Thus, it is necessary to determine whether Mr. van der Steen had the requisite donative intent, i.e., whether he made the $65,000 payment to CLES intending to impoverish himself to the full extent of that payment, or whether he expected to receive, directly or indirectly, a kickback or other benefit.
[53] In order to determine whether Mr. van der Steen had a donative intent, I must do more than simply consider the oral assertions that he has made about his intent. Concerning the proof of purpose or intention, Justice Iacobucci stated the following in Symes:
As in other areas of law where purpose or intention behind actions is to be ascertained, it must not be supposed that in responding to this question, courts will be guided only by a taxpayer’s statements, ex post facto or otherwise, as to the subjective purpose of a particular expenditure. Courts will, instead, look for objective manifestations of purpose, and purpose is ultimately a question of fact to be decided with due regard for all of the circumstances. [48]
[54] In discussing the “dual requirement of a gratuitous transfer of property and of donative intent,” [49] in Cassan, Justice Owen stated:
270. … for a transfer of property to be a gift, the transferor must have the requisite donative intent….
271. In order for there to be a gift, the transferor must objectively make a gratuitous transfer and must subjectively intend to make a gratuitous transfer. [50]
[55] The requirement that there be no benefit, in the context of a gift, has been modified by amendments enacted in 2013 (with effect as of December 21, 2002) to the ITA, which, in essence, provide that, in certain circumstances, “the existence of an advantage or a benefit will not disqualify a transfer of property from being a gift.” [51] Under the rules set out in subsections 248(30) to (32) of the ITA, a donor may receive an advantage in respect of a transfer of property, without that advantage disqualifying the transfer from being a gift to a qualified donee, provided that the amount of the advantage does not exceed 80% of the fair market value of the transferred property. This type of situation is sometimes referred to as “split gifting,” and could be applicable in the context of Mr. van der Steen, if he received, or intended to receive, the 70%-75% kickback that the Minister assumed. However, neither Party argued that there was a split gift or that subsections 248(30) to (32) applied. The Crown took the position that the assumed kickback vitiated the entire gift, while Mr. van der Steen took the position that he did not receive, nor did he intend to receive, any benefit or advantage, including the assumed kickback. Accordingly, as neither Party has suggested that subsections 248(30) to (32) apply in this Appeal, I will not consider those provisions.
(2) Minister’s Assumptions and Taxpayer’s Burden of Proof
[56] When the Minister, as represented by the CRA, assesses or reassesses a taxpayer, the Minister generally makes assumptions of fact, on which the assessment or reassessment is based. The taxpayer has the burden of proving, on a balance of probabilities, such facts as may be required to demolish the Minister’s assumptions. [52]
[57] In some situations, it will be clear that the party with the burden of proof has failed to satisfy that burden. In other situations, the evidence might be more evenly balanced, in which case the principle enunciated by the Privy Council in Robins v National Trust might be applicable:
But onus as a determining factor of the whole case can only arise if the tribunal finds the evidence pro and con so evenly balanced that it can come to no sure conclusion. Then the onus will determine the matter. [53