Here is a case comment on Maréchaux v. The Queen that recently appeared in Valuation Law Review.

“Valuation Law Review Volume 17, Issue 2, copyright by The Canadian Institute of Chartered Business Valuators, www.cicbv.ca 277 Wellington St. West, Suite 710, Toronto, ON, M5V 3H2, is reproduced with permission.”
Editor:
Dennis Turnbull, CBV
September 2011

Maréchaux v. The Queen
2009 TCC 587
2010 FCA 287
Application for Leave to Appeal to the Supreme Court of Canada dismissed
The first paragraph of the Federal Court of Appeals decision in this case gives a succinct outline the issue at trial:
[1] F. Max E. Maréchaux participated in a “leveraged donation” scheme. The essence of the scheme was that, for an expenditure of $30,000, he received a charitable donation tax receipt for $100,000, and claimed a tax credit of $44,218, a potential return on his outlay of nearly 50% in a matter of months. Very little of the money was retained by charities to advance their purposes.
The question considered by the Tax Court was whether the Appellant was entitled to a charitable donation tax credit under the Income Tax Act in respect of a $100,000 payment he made under an arrangement known as the 2001 Donation Program for Medical Science and Technology (the “Program”). The Program involved what were called “leveraged donations.” In general, prospective donors were invited to make a donation of at least $100,000 to a registered charity, and were to be provided favourable financing for a large part of the outlay. The Program was implemented on December 31, 2001, and, over the three year period 2001 to 2003, there was a total of about $218,000,000 in donation receipts issued under this one program.
The overall structure of the scheme was very complicated. It involved a Canadian and an American charity, medical technology transfers, a number of intermediary companies, a daylight loan from a Canadian financial services company, and a circular flow of funds that left only a very small amount of the total donated funds retained by the charities. It is not necessary to go into the details of these various transactions for the purpose of this review.
While some features of the Program changed during its lifetime the arrangement in effect at the time the Appellant made his donation was that a donor who made a $100,000 donation was required to contribute only $30,000 from his own funds and would receive a twenty year interest-free loan to finance the remaining $70,000 obligation. The loan did not require periodic repayments but instead required only a single lump-sum repayment at the end of the twenty year period. The donor also received an additional $10,000 interest-free loan which was used for two purposes. The first was to invest $8,000 in a security deposit which was intended, through investments, to increase to at least $80,000 by the end of the twenty year period. These accumulated investment earnings were to be used to pay off the donor’s loan. The remaining $2,000 of the loan was to be used to purchase a Bermuda issued insurance policy (the “Put Option”) which guaranteed the repayment of the entire $80,000 loan if the return from the security deposit fell short. Donors could, at their option, assign the security deposit and Put Option to the holder of their interest-free loans at any time after January 15, 2002 and the holder would be required to accept the assignment as payment in full for the loan. All of the above steps were pre-determined.
The relevant agreements did not give Mr. Maréchaux a contractual right to be granted a Put Option. While he was entitled to apply to the lender for a Put Option the lender was under no legal obligation to accept his application. However Mr. Maréchaux’s application was accepted and a Put Option was issued to him. On January 16, 2002 Mr. Maréchaux assigned his Put Option and his security deposit to the lender as payment in full for the $80,000 loan. The net result was that Mr. Maréchaux was issued a $100,000 charitable donation receipt after paying out only $30,000 of his own funds. The 20 year term loan which financed the remaining portion of the donation existed for only slightly more than two weeks and was extinguished at no net cost to the Appellant.

Mr. Maréchaux claimed a $44,218 tax credit in his 2001 income tax return. He was later reassessed disallowing the claimed tax credit in its entirety. There were two issues at trial, whether the donation was a gift, and whether the general anti-avoidance rule (GAAR) was applicable to the transaction.
The Income Tax Act does not define the word “gift” so the Tax Court was required to give “gift” its general meaning for the purpose of the appeal. The Tax Court considered it sufficient to refer to the description of “gift” as stated by Linden J.A. in The Queen v. Friedberg, 92 DTC 6031 (FCA):
The word gift is not defined in the statute. I can find nothing in the context to suggest that it is used in a technical rather than its ordinary sense.
Thus, 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 (see Heald, J. in The Queen v. Zandstra [74 DTC 6416] [1974] 2 F.C. 254, at p. 261). 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.
It was the Crown’s position that none of the Appellant’s donated amount qualified as a gift under Section 118.1 of the Income Tax Act because the Appellant had received back valuable consideration. This was the interest-free loan and the Put Option. At trial the Crown entered expert evidence from a valuator giving an opinion on the fair market value of the Appellant’s interest-free loan. The Tax Court agreed with the Crown’s position and concluded, in applying the Friedberg definition to the facts of this appeal, that it was clear the Appellant did not make a gift to the Foundation because the Appellant received a significant benefit in return for the donation. This benefit was the $80,000 interest-free loan coupled with the expectation that the Put Option would be issued. The Tax Court concluded that the financing arrangement had not been provided in isolation to the donation. The two were inextricably tied together by the relevant agreements. The Tax Court said that it was not necessary for the purpose of the appeal to place a value on the benefit, however it appeared to be approximately $70,000 ($80,000 loan received less outlays of $10,000) less a slight discount for the risk that the Put Option would not be effective. The Tax Court commented that, even without the issuance of the Put Option, the financing provided a significant benefit since it was self-evident that an interest-free loan for 20 years provided a valuable benefit to the debtor.

The Tax Court also noted that the $8,000 security deposit could not have been reasonably expected to increase to anywhere near $80,000 in 20 years. The evidence of the Crown’s expert clearly showed this even taking into account differences of opinion regarding some of his assumptions. 
The Tax Court also considered whether the Appellant had made a partial gift of his $30,000 cash payment but, on the particular facts of the appeal, felt it was not appropriate to separate the transaction. There was just one interconnected arrangement, and no part of it could be considered a gift that the Appellant gave in expectation of no return. Based on these reasons the Tax Court dismissed the appeal and disallowed the entire donation including the Appellant’s $30,000 cash amount.
This decision was appealed to the Federal Court of Appeal (FCA) where the Appellant argued that the Tax Court had made four errors in concluding that he had not made a gift.

First, the Appellant claimed that a benefit provided in return for a payment only prevented it from being a gift if the benefit was provided by the donee. In this case the benefits received by Mr. Maréchaux, the interest-free loan and the Put Option, were provided by the lender, not the donee. The FCA was not persuaded that the trial judge had made an error in law. The Appellant’s counsel cited no authority for the proposition that only a benefit provided to a donor by the donee could prevent a payment to a charity from being a gift for
the purpose of section 118.1 of the Income Tax Act. Nor did the FCA see any principled reason for disregarding a benefit simply because it was provided by a third party particularly where, as the Tax Court found in this case, the donation was conditional on the provision of the benefit.
Second, the Appellant submitted that the interest-free loan did not constitute a significant benefit so as to prevent the payment to the charitable foundation from being a gift. Since this was a question of fact or mixed fact and law, the FCA stated it would only interfere with the Tax Court’s conclusion if satisfied that it was vitiated by a palpable and overriding error. However, in the FCA’s opinion, there was ample evidence in the record to support the Tax Court’s finding that the $80,000 interest-free loan was a significant benefit to Mr.
Maréchaux and that it was provided in return for the donation. It seemed self-evident to the FCA that a person who had the use of borrowed money, repayable in twenty years time without having to pay interest, had thereby received a significant benefit. The interest-free loan in this case enabled Mr. Maréchaux to transfer $100,000 to the foundation without having to use more than $30,000 of his own assets or to pay interest on a commercial loan for the balance.
Third, Mr. Maréchaux said that the Judge erred in regarding the Put Option as a benefit that disqualified the payment from being a gift because, at the time he agreed to make the donation, there was no contractual guarantee that he would be issued the option. Hence, any benefit derived from the Put Option was speculative. Again the FCA disagreed stating that even if the promoters had not contractually undertaken that a Put Option policy would be issued to participants in the scheme, the donors, including the Appellant, had good reason to believe that it would. In any case a Put Option had in fact been issued to the Appellant who had assigned it and the security deposit to the lender in full satisfaction of the $80,000 loan. On these facts, the Tax Court could not be said to have committed a palpable and overriding error in finding that the Put Option was a significant benefit provided to the Appellant by the lender in return for the $30,000 payment.
Fourth, Mr. Maréchaux argued that, if the Court concludes that he obtained a benefit in return for the $100,000 payment to the foundation, he was still entitled to receive a tax credit in respect of his cash payment of $30,000. The FCA saw no reviewable error in the Tax Court’s conclusion that none of the donation was a gift. For these reasons, the appeal was dismissed with costs.
Mr. Maréchaux filed for Leave to Appeal at the Supreme Court of Canada. The application was dismissed with costs on June 9th, 2011.