The decision of David, R. et al. v. The Queen (TCC) discusses six separate appeals which concern the disallowance of a tax credit for a purported charitable gift to CanAfrica International Foundation (“CanAfrica”).  CanAfrica issued to each of the appellants (or a spouse) a donation tax receipt which formed the basis for tax credits claimed in the appellants’ income tax returns. In reassessments issued by CRA for the 2006 taxation year, the credits were disallowed in their entirety.  We have covered CanAfrica before (here, here, and here)  The surprising part of this case was that the judge waived penalties and allowed the cash contribution (the 10%) of the individuals. 

At the time that the donations were made, CanAfrica was a registered charity, however its status was later revoked by CRA in 2007 after an investigation. The appellants suggested they would not have entered into the transactions if they knew of CRA’s concerns at the time. The appellants acknowledged that the tax receipts issued to them were false but were seeking relief from CRA to have a portion of the tax credit allowed as well as a waiver of penalties.

The main issue in this case surrounded whether or not the issuance of an inflated tax receipt as part of a fraudulent scheme should be considered a benefit that negates a gift. The respondent submitted that the amounts given by the appellants as donations were not true “gifts” because they were given on the expectation of receiving a benefit in return. The benefit, the respondent suggested, is the expectation of an inflated tax credit based on an inflated donation receipt. The judge disagreed and concluded that the issuance of an inflated tax receipt should not usually be considered a benefit that negates a gift. Each of the appellants (or a spouse) were found to have paid 10 percent of the face amount of the tax receipts as a donation to CanAfrica in the 2006 taxation year. The appellants were allowed the charitable tax credits with respect to 10 percent of the face amount of the tax receipts, and any penalties imposed were deleted.

Here is an interesting quote from the case:

6]            Many of the appellants appear to acknowledge that the tax receipts issued to them were false, and they seek relief on the basis that the CRA should bear some responsibility. It was wrong, it is suggested, for the CRA to list CanAfrica as a registered charity on its website without warning taxpayers of the concerns that the CRA had at the time.

[7]            If the CRA had issued a warning, the appellants suggest, they would not have entered into these transactions. The appellants generally seek to have at least a portion of the tax credit allowed, as well as a waiver of interest and penalties.

[8]            The respondent did not address this argument in the replies. Instead, the respondent submitted that the tax credits should be disallowed on the basis that no gifts were made.

[9]            The respondent submits that to be a true gift, the donation must be made without a benefit in return. It is suggested that the tax receipts issued by CanAfrica were inflated and that the appellants expected to benefit by receiving inflated tax credits as a result. These benefits negate any gift, it is suggested.

What I think is most interesting about this quote is that the judge mentions the appellants arguments that “the CRA should bear some responsibility” for the CRA as “It was wrong, it is suggested, for the CRA to list CanAfrica as a registered charity on its website without warning taxpayers of the concerns that the CRA had at the time.”  CRA presumably new about CanAfrica but was only able to revoke them in 2007.   If CRA had notified the public about concerns about CanAfrica they would have violated the confidentiality provisions of s. 241 of the Income Tax Act and whoever at CRA did that would be sent to jail to spend time with Mr. Dapah who issued tens of millions in false receipts.   The judge ultimately gives the individuals their 10% cash contribution and waives the penalties but does not address the argument except to say “The respondent did not address this argument in the replies.”  

Should CRA have to warn people about specific charities that are up to no good.   Personally I think so –  but that would require a change in the law which I have argued for on numerous occasions and here is one example at the Finance Committee.   

Hopefully CRA will appeal this decision to the Federal Court of Appeal as it seems to be a very different result from a number of other CanAfrica cases.   Also I am interested if the Federal Court of Appeal agrees that CRA should have provided warnings to the public about this particular charity.  In terms of the bigger picture, the Dept. of Finance should change section 241 and the confidentiality provisions of the Income Tax Act to allow CRA to disclose information on serious abuse of charities.  If the case is not appealed or if the FCA does not overturn the decision I think that there will be some significant proposals from Finance as paying a tax preparer to prepare a fraudulent official donation receipt is not a donation.

If you are interested here is another blog on this case from William Innes.