Published: April 22, 2025
Introduction: Reassessments for Charitable Gifts
Ayre v The King 2025 TCC 41 (Ayre) involves an appeal to the Tax Court of Canada of the Minister of National Revenue’s assessments, which denied claims for charitable donation tax credits under section 118.1 of the Income Tax Act (the “Tax Act”).
These donations were made through certain programs, the MissionLife Financial Inc (“MLF”) and Relief Lending Group Inc (“RLG”) programs. Essentially, the programs purported to work through donors borrowing money from the programs and buying pharmaceuticals with the borrowed money with a fair market value of the loan amount. Subsequently, the pharmaceuticals would be donated, and the donees would receive a charitable donation receipt and would settle the loan at the end of the loan term.
Issues: Donative Intent and Sham Transactions
There were three issues for the Court to consider:
- Whether the appellants made valid gifts of cash and pharmaceuticals;
- Whether the financing arrangement for the purchase of pharmaceuticals was a sham; and
- If the appellants made valid gifts through the programs, what the fair market value of the donated pharmaceuticals was, and whether the eligible amount of the gift was nil.
On these issues, the Court found that there were never any loans, and the fair market value of the pharmaceuticals purchased could not have exceeded the price paid for them. Moreover, the Court held that the appellants did not have the donative intent to make charitable gifts under section 118.1.
Review of the Relevant Law Relating to Valid Charitable Gifts and Sham Transactions
Requirements for Making a Valid Charitable Gift
Section 118.1(3) of the Tax Act allows individuals to claim a credit for charitable gifts that they have made in the year to qualified donees. “Qualified donees” are defined in section 148.1(1), and they include, for example, a registered charity or a municipality in Canada.
In addition, there must be donative intent. Donative intent is an essential element in making a charitable gift. It is present when the intent behind the donor’s gift is impoverishment. In other words, the intent behind making the gift cannot be to profit from the gift.
Sham Transactions
In Stubart Investments Ltd v The Queen [1984] 1 SCR 536, a “sham” was defined as a transaction with an element of deceit, and the parties to the transaction know that the reality of the transaction is different than what is presented.
Knowledge of the deceit can be either actual knowledge or knowledge that can be imputed through the taxpayer’s wilful blindness. Specifically, a taxpayer is willfully blind when aware of certain facts that indicate a need to investigate further but instead chooses to ignore the issues. To determine if there is a sham transaction, the Court must examine the objective reality of the transactions to ascertain whether they truly reflect the parties’ intent.
Findings: The Court Invalidates Charitable Gifts For Lack of Donative Intent and Falsified Transactions
Were Valid Charitable Gifts Made?
On the first issue, the Court found that no valid gifts were made because the donors lacked the requisite donative intent to make a gift. To ascertain intent, the Court will look to objective manifestations of purpose while having regard to all the circumstances. Subjective intent of the taxpayers will not have more weight than objective manifestations of intent.
The appellants relied on The Queen v Friedberg 1991 CanLII 14017 (FCA), which provided the test for determining whether a charitable gift has been made. An interpretation of the test for a valid charitable gift in Jensen v The Queen 2018 TCC 60 was also relied on.
From Jensen, only non-tax benefits would vitiate donative intent. The Court disposed of this argument on the basis that the Court in Walby v The King 2023 TCC 164 had already rejected it. Similarly, the appellants relied on paragraph 248(30)(a) of the Tax Act that states lack of donative intent would not disqualify a gift from being valid if the amount of the advantage does not exceed 80% of the fair market value of the transferred property.
However, this argument failed as well because the amount of their advantage exceeded 80% of the fair market value of the property donated.
The decision in Markou v Canada 2019 FCA 299 provided a basis for finding that the gift lacked donative intent. Specifically, Markou stands for the proposition that a person who anticipates receiving tax benefits that exceed the value of an alleged gift will lack donative intent.
However, this does not mean that any tax benefit would invalidate a gift. The distinguishing feature of a valid charitable gift and an invalid one that the Court focused on is the intention to impoverish oneself rather than to profit. In this case, the taxpayers’ intentions were to profit from their “gifts.”
Were the Transactions a Sham?
On the second issue, the Court concluded the programs operated differently than how the appellants stated they worked.
First, the loans that the appellants received were fictitious. Second, $329.28 was paid by the donees for the purchase of pharmaceuticals, but the fair market value of the pharmaceuticals did not reflect the $10,976 on the tax receipt.
The appellants either knew or were willfully blind to the fact that the cash paid, as what they say was four years of prepaid interest, was used to purchase the pharmaceuticals. In conclusion, a valid charitable gift was never made, and thus, the Minister’s assessments and reassessments were correct.
Pro Tax Tip
Credits for charitable donations can be seen as incentives for individuals to donate money because tax benefits are received in return. However, Ayre is a cautionary example for people who plan on making gifts for the primary purpose of tax credits and profit.
The jurisprudence on the requirements for donative intent focuses on the altruistic nature of gifts. When donations are made with the intent to profit, these gifts may be invalidated. Further, donors should be aware of shams, whereby organizations may offer tax receipts reflecting greater amounts than what was truly donated. Consultation with a knowledgeable Canadian tax lawyer prior to entering into transactions with tax benefits can save a lot of tax grief.
FAQ
What is the amount of credit available for charitable gifts?
Section 118.1 of the Tax Act provides individual taxpayers with the opportunity to claim a tax credit through making charitable donations to qualified donees. The credit is calculated using the formula in section 118.1(3). There are different types of donations that will qualify for different credits.
Can I claim a credit if I received something in return for my gift?
If you receive something in return for your donation or gift, then this may be considered to be an “advantage” under section 248(32) of the Tax Act. Advantages are excluded from the eligible amounts that can be claimed.
The “eligible amount,” defined in section 248(31), is the amount by which the fair market value of the property that is the subject of the gift exceeds the amount of advantage. In other words, as long as the value of the advantage received does not exceed the value of the donation or gift, then there would be an amount eligible for the credit under section 118.1.
DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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