Here is an article entitled Valuation Based Charitable Donations” that appeared in the Valuation Law Review.

“Valuation Law Review Volume 17, Issue 2, copyright by The Canadian Institute of Chartered Business Valuators, 277 Wellington St. West, Suite 710, Toronto, ON, M5V 3H2, is reproduced with permission.”

Dennis Turnbull, CBV

September 2011

Valuation Based Charitable Donations

Past editions of this publication have reviewed artwork donation cases in which the claimed values for original artwork or limited edition prints were supported by appraisal opinions. The Courts allowed taxpayers, at most, only their actual cash purchase price. However, as noted in an editorial in Valuation Law Review — Taxation Volume 11, Issue 2, March 2005, the artwork cases were only one variant of numerous valuation-based donation cases then under assessment review or appeal. In that edition we commented that: While the donation cases reviewed in this issue involved artwork virtually any property could be used as long as the fair market value could be supported by an appraisal or valuation. Typically the value spread has been defended on the basis that the properties were acquired at wholesale prices but the fair market value should be determined on a retail price basis. Properties donated in these arrangements have included artwork, foodstuffs, comic books, collectable trading cards, pharmaceuticals and medical supplies.

Some of these other cases are now being heard by the Tax Court. This edition of the VLR-Taxation reviews Lockie v. The Queen, a charitable donation tax shelter case which involved the fair market values of various sundry items such as gel pens, toothbrushes and school packs. Since this was the first donation tax shelter decision which involved tangible property other than artwork it was of interest to see how the Tax Court’s analysis would compare to that of the artwork decisions. The Tax Court concluded that the fair market value of the items was their actual cost to the taxpayer, the same position the court had taken in the past with the artwork decisions.

There are numerous other examples of failed valuation-based donation arrangements which have been disallowed by the CRA. The Millennium Charitable Foundation, at one time a qualified donee for tax purposes, issued in excess of $169 million in receipts for cash and property received through its tax shelter arrangement. In this program participants who donated cash to Millennium were given, as the purported beneficiaries of a trust, computer software with a stated value of three to five times the amounts of the cash donations. This software was donated to International Charity Association Network, another qualified donee. The CRA concluded that the donors never owned the software and so could not have donated it to the charity. As a secondary position the CRA held that the software had no fair market value. Based on this the CRA denied the full charitable donation tax credits claimed by participants. The CRA disallowance letters stated that there was a lack of donative intent on the part of donors/participants. The primary motivation of donors was not to enrich charities and assist in fundraising, but to make a profit from the tax credits obtained. The Canada Revenue Agency revoked the charitable registration of the Millennium Charitable Foundation effective January 10, 2009.

The Canadian Humanitarian Trust (CHT) Donation Program involved the donation of pharmaceuticals to third world countries. The Participants in the program made a cash charitable donation and also applied to become capital beneficiaries of a trust. They received a capital distribution from the trust in the form of pharmaceuticals purchased in bulk by the trust in foreign markets. These pharmaceuticals were then also donated to a registered charity and participants in the program received two charitable tax receipts, one for their cash donation and the other for the claimed fair market value of the pharmaceuticals. This value was apparently based on the Ontario health ministry’s wholesale price for the same drugs.

The CRA reassessed all of the individuals who had participated in the CHT Donation Program denying their entire claimed charitable deductions on the basis that there was no donative intent. Internet reports indicate that approximately 25,000 Canadians participated in the CHT Donation Program.
The weakness of these donation in kind arrangements was that they could fail because they relied on subjective opinions of value which had no discernable relationship to the actual price the taxpayers or the program promoters had just paid for the donated property. The scheme employed in Maréchaux (reviewed in this edition), avoided the problem of the valuation of the donated property by involving only cash donations. The tax advantage in this scheme lay in the donors personally paying only 30% of their total donation amounts. The remaining 70% of the donations were financed by a third-party through 20 year interest-free loans with no principal repayment until the end of the term. The Tax Court dismissed the Maréchaux appeal on the basis of both law and value. This decision was upheld by the Federal Court of Appeal. Mr. Maréchaux sought Leave to Appeal to the Supreme Court of Canada. This was dismissed with costs on June 9, 2011.

Maréchaux is a significant case because it is the first of a number of appeals involving the “levered donation” schemes which used interest-free loans to enhance claimed donation amounts. The determining legal principle in the Maréchaux decision, that there was no gift and therefore no charitable donation, might well be applicable to all of the levered donation schemes currently under appeal. These donation programs can involve very large amounts of tax. While Mr. Maréchaux personally claimed only a $100,000 donation amount he was the lead Appellant for a group of taxpayers in the same scheme who, in a three year period, claimed total charitable donations of about $218,000,000.  A similar program was offered by the Ideas Canada Foundation which appears to have involved both interest-free loans and a valuation component. In this plan individuals indirectly donated cash to the Canadian Art Gallery. The donation included both the donor’s own money and funds provided through a 25 year interest-free loan. Under the terms of the donation arrangement the art gallery was required to use the funds to purchase twelve bronze sculptures for USD$108,840,000. The CRA determined that the sculptures had been sold for USD$6,000,000 in an arm’s length transaction just prior to their purchase by the Canadian Art Gallery. The CRA subsequently held that the fair market value of the bronzes was only $6,000,000 and that the inflated price paid by the art gallery was used to support a circular transfer of funds to provide the interest-free loan financing. The CRA apparently reassessed all of the participants in this program denying them any charitable donation amounts.