Flaunting and Flouting the Law of Gift: Canada Customs and Revenue Agency's Philanthrophobia

Law, Strategy, Compliance

Flaunting and Flouting the Law of Gift: Canada Customs and Revenue Agency’s Philanthrophobia by Blake Bromley 2001

Benefic Group Inc.

#1250 – 1500 West Georgia Street

Box 62

Vancouver, BC

Canada, V6G 2Z6

T 604 683 7006

F 604 683 5676

beneficgroup.com

Introduction

The success charities have enjoyed in recent years in attracting large gifts has, in the author’s view,

triggered philanthrophobia (fear of philanthropy) in the Canada Customs and Revenue Agency

(“CCRA”), reflected in its auditor’s attack on large gifts. These attacks seem to be ideologically driven,

based on the assumption that any sizeable contribution to a charity must be motivated by some

fraudulent tax scheme or personal benefit to the donor. CCRA grounds these attacks on charitable

donations by a purported invocation of the legal definition of a gift, alleging that the donor is receiving

consideration or other benefits.

CCRA claims to apply “the law” when regulating the activities of charities and donors. However, CCRA

flaunts the common law by imposing the narrowest judicial interpretations of the word “gift”. At the

same time, the agency flouts the rule of law, first, by ignoring the civil law which both legislation and

court decisions say also applies to what is a gift and, secondly, by adopting administrative policies that

ignore decided cases. The best evidence of CCRA’s philanthrophobia is its capricious application of the

legal definition of “gift”.

CCRA’s philanthrophobically motivated policies are contrary to the policies which underlie the stated

intent of Parliament in passing many of the generous Income Tax Act1 provisions encouraging gifts to

charities. CCRA has removed the rule of law that provides donors with the certainty they need to have

before making million-dollar gifts. Consequently, it is impossible for professional advisers and donors to

predict when an act of generosity will be attacked as a sham or for providing a benefit to the donor. As

a result, Parliament’s significant tax incentives to encourage large gifts are not generating the funds

needed by charities.

In the past, CCRA’s administrative policy towards charitable gifts was best characterized as one of

pragmatism, rather than one of philanthrophobia. Pragmatism generally produced benevolent and

reasonable responses to charitable gifts by relying on common sense and goodwill to resolve issues,

on the basis that it is in the best interests of the charitable sector to retain public confidence by

preventing abuse. By contrast, a philanthrophobic policy deters donors from engaging in creative and

tax-efficient gift planning by engendering fear of public humiliation should CCRA allege that a

contribution was not a “gift” and might even be fraudulent.

1 R.S.C. 1985, c. 1 (5th Supp.).

Flaunting and Flouting the Law of Gift: Canada

Customs and Revenue Agency’s Philanthrophobia

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CCRA’s philanthrophobic policy is extremely effective because the Income Tax Act contains no

definition of the word “gift”. CCRA refuses to consider what can be determined about the meaning of

the word from its usage in many different provisions of the Income Tax Act. Instead, CCRA applies an

exclusively common law definition of the word “gift”. The agency’s continual rejection of the application

of the civil law to the definition of “gift” is reflective of a systemic and deeply entrenched culture. No

interpretation bulletins, information circulars, pamphlets, information guides or registered charity

newsletters even mention Quebec law with regard to gifts.

The bureaucratic culture, which has enjoyed complete success in excluding civil law concepts, has, as

a consequence, effectively excluded the rule of law, for it neglects to inform the charitable sector about

judicial decisions which unequivocally affirm the application of Quebec civil law principles to the making

of a gift.2 By way of example, in Canada v. Lagueux & Freres Inc.,3 Décary J. stated:

I do not think it is necessary or even useful to refer to the provisions of section 137(1) of the

Income Tax Act to determine whether deduction of the costs associated with the various contracts

unduly or artificially reduces defendant’s income. In my view, the nature of the rights and

obligations created by the contracts concluded by defendant must be arrived at by reference to

the provisions of the Civil Code.

The exclusion of the civil law from CCRA publications suggests that CCRA lawyers must take a vow of

legal chastity, promising never to recognize the Quebec factor when dealing with donors and gifts. If so,

it serves as a simultaneous vow of legal poverty because certain aspects of the civil law of gift are

superior to the common law of gift and would result in better public policy. For example, fundraising

events which include a gift portion in the price of a ticket to a charity-sponsored gala or concert are

possible because of a Quebec case that applied the civil law.4

CCRA’s flouting of civil law is in complete contradiction of recent federal government initiatives such as

the Federal Law—Civil Law Harmonization Act, No. 1,5 the preamble of which declares that “all

Canadians are entitled to access to federal legislation in keeping with the common law and civil law

traditions”. This article will substantially ignore this new legislation and deal with the meaning of “gift”

primarily as it has developed under the common law and according to its usage in the Income Tax Act.

In dealing with the meaning of “gift” in the Income Tax Act, this article will adopt Walsh J.’s stated

position in Gervais v. Canada,6 that is, “in the present case we are dealing with a taxing statute which

must be applied in the same manner throughout Canada”.

It is difficult to determine the legal meaning of “gift”, given the unique bijural nature of Canadian

federalism. However, Parliament is deemed to know all of the law with which its statutory provisions

2 See Marcoux-Côté v. Canada, 2000 D.T.C. 6615 (F.C.A.). 3 [1974] 2 F.C. 97 at p. 103, 74 D.T.C. 6569 (T.D.) [emphasis added]. 4 Aspinall v. M.N.R., 70 D.T.C. 1669 (Tax App. Bd.). 5 S.C. 2001, c. 4 (in force June 1, 2001). 6 [1984] C.T.C. 661, 85 D.T.C. 5004 (F.C.T.D.). It is doubtful this case would have been decided the same way if the Federal Law—Civil Law Harmonization Act, No. 1 had been in effect.



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interact. The Federal Court of Appeal made this point in Brouillette v. Canada:7 “Parliament is deemed

to know the existing law. In 1987 it must have known, that at least in Quebec, a transfer of property to

a minor child could be made by trust pursuant to art. 981a. of the Civil Code of Lower Canada.”

The fundamental question regarding the meaning of “gift” is whether the word is used in its “ordinary”

or “popular” sense, or in a technical sense peculiar to law. Both common law cases8 and civil law

cases9 have shunned a technical meaning. If the issue is reconsidered by the common law courts, the

result may change if reference is made to the principle asserted in Commissioners of Income Tax v.

Pemsel10 that “words must be taken in their legal sense unless a contrary intention appears”. It is

difficult to understand the legal logic which holds that the word “gift” must be given its “ordinary”

meaning whereas “charity” is given a technical legal meaning. If “charity” were interpreted according to

its ordinary meaning, the charitable sector would be limited to organizations working with those “in a

state of indigence”,11 because charity “always does involve the relief of poverty”.12 This would mean that

all of the organizations which exist only to promote beauty, music and culture would be excluded from

the charitable sector.13 This article will not speculate on the changes that would result if “gift” were

given a technical legal meaning.

The problems involved in the definition of “charity” are not the subject of this article but are relevant in

demonstrating how difficult it is to know what legal principles apply to the legal definition of “gift”. This

confusion as to the law has given CCRA licence to impose a double standard on donors in determining

what is a gift. Where the CCRA approves of the recipient, the donor or the particular type of

transaction, pragmatism prevails and CCRA promulgates and applies its own benevolent administrative

interpretations of what is a gift. However, where donations are disliked, philanthrophobia prevails.

Because donors cannot predict whether CCRA’s approach to their transaction will be philanthrophobic

or pragmatic, there is no rule of law.

When driven by its philanthrophobia, CCRA assumes that large donors, especially those who give to

private foundations, are engaged in tax-driven scams. Such philanthrophobia blinds CCRA to the view

that donors whose deductions for charitable gifts are denied may be doing nothing more sinister than

trying to provide more funding to charities on a tax-efficient basis. This prejudice seems strikingly at

odds with the type of sentiment expressed by the court in Jabs Construction Ltd. v. Canada,14 where

the donors under attack by CCRA were described as follows:

7 99 D.T.C. 5728 (F.C.A.), at p. 5731. 8 R. v. McBurney, [1985] 2 C.T.C. 214, 85 D.T.C. 5433 at p. 5435, 62 N.R. 104 (F.C.A.), leave to appeal to S.C.C. refused February 28, 1986, applied the “ordinary meaning”.

9 Plante v. Canada, [1999] 2 C.T.C. 2631 (T.C.C.), applied the “usual meaning”. 10 [1891] A.C. 531 (H.L.), at p. 580, per Lord Macnaghten, in the majority judgment. 11 Morice v. Bishop of Durham (1805), 10 Ves. Jun. 522 at p. 532, 32 E.R. 947 (Ch.). 12 Pemsel, supra, footnote 10, at p. 552, per Lord Halsbury L.C., in a minority judgment. 13 The statement of law, which was disapproved by the House of Lords in Pemsel, supra, was articulated by Lord President Inglis in the Court of Session in Baird’s Trustees v. Lord Advocate, 15 Sess.

Cas. 4th Series, 682: “Charity is relief of poverty, and a charitable act or a charitable purpose consists in relieving poverty, and whatever goes beyond that is not within the meaning of the word ‘charity’

as it occurs in this statute.” 14 [1999] 3 C.T.C. 2556, 99 D.T.C. 729 at p. 731 (T.C.C.), per Bowman J.T.C.C. (The author is the lawyer who had advised Eric Jabs on his gift planning.)



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Mr. Jabs and his wife, Toni Alwine F. Jabs, are committed Christians. They have devoted

substantial amounts of their time and considerable wealth to charitable causes and have made

substantial contributions to charities carrying on activities in Canada and throughout the world.

Auditors appear to select candidates for assessment as much for their prominence and the deterrent

impact on other donors as for the alleged offence. Unfortunately, an article such as this has no means

of restoring the reputation of persons accused by CCRA but ultimately exonerated by the courts.

There are circumstances which may justify litigating whether certain transactions are gifts. However, it is

usually unjust to characterize the donor as seeking to abuse the national treasury in the name of charity.

When reading such cases only for their legal principles, one forgets that the people named in most of

the following leading cases were honest citizens trying to maximize tax efficiency in their giving. Phillip

Aspinall paid the National Ballet Guild of Canada $150 for tickets to a dinner and concert as a

contribution towards its goal of raising $25,000. Albert D. Friedberg responded to a request from the

Royal Ontario Museum to purchase the Wilkinson Collection of Coptic textiles, specifically for the

purpose of donating it for the enjoyment of Canadians visiting the museum. Mr. and Mrs. Eric Jabs

donated almost $10 million of real estate to their private foundation so that the proceeds of sale could

be added to the foundation’s capital to help them achieve their goal of distributing $1 million to

Canadian charities each year, in perpetuity. The courts declared all of these impugned transactions to

be gifts.15

CCRA has lost the majority of court decisions that turned on definitional issues in determining whether

the donor had made a gift. However, it has won the majority that turned on valuation issues.

Philanthrophobia caused CCRA to seek, successfully, anti-avoidance legislation from Parliament, which

allows CCRA to reassess the tax benefit of any transaction not undertaken “primarily for bona fide

purposes other than to obtain the tax benefit”.16 The discretionary general anti-avoidance rule (“GAAR”)

has been used by CCRA to attack any donor whose tax structure it did not like but which was

technically effective. In this rather frightening Orwellian environment, it does not matter whether donors

are right or wrong as a matter of law. CCRA simply relies on s. 245 of the Income Tax Act as legislative

authority for its administrative policy of philanthrophobia.

Fortunately, the courts have rejected the view that s. 245 is a “catch-all” sanction against tax-effective

charitable donations. At the outset of the Jabs Construction Ltd. reassessment, the CCRA auditor told

the author that the case would be prosecuted under the GAAR because, technically, there was nothing

wrong with the tax planning. The court strongly rejected this characterization of the Jabs’ donation:

I can discern nothing else in the entire series of transactions that could possibly justify their being

avoidance transactions, either separately or collectively. This transaction is the last one that would

have occurred to me as subject to attack under section 245. Section 245 is an extreme sanction.

15 See Aspinall v. M.N.R., supra, footnote 4; Friedberg v. Canada, [1992] 1 C.T.C. 1, 92 D.T.C. 6031, 135 N.R. 61 (F.C.A.), affd [1993] 4 S.C.R. 285, [1993] 2 C.T.C. 306, 93 D.T.C. 5507; Jabs

Construction Ltd. v. Canada, supra. 16 Income Tax Act, s. 245(3).].



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It should not be used routinely every time the Minister gets upset just because a taxpayer

structures a transaction in a tax effective way, or does not structure it in a manner that maximizes

the tax.17

Rather than being chastised by this judicial rebuke of philanthrophobia, CCRA sought an even more

extreme sanction from Parliament: civil penalties for donors and charities, as well as for their advisers,

who are involved in gifts CCRA does not like. The introduction of the gift penalty in s. 163.2 of the

Income Tax Act has fundamentally changed the legal landscape in Canada. With this penalty on gift

planning, CCRA has the legislative authority to implement its philanthrophobic policies. The law of gift in

Canada under CCRA’s pragmatic administrative policies and selective application of legal principles has

long been unclear. CCRA now uses the threat of civil penalties to discourage taxpayers from taking

advantage of the generous provisions put in the Income Tax Act to encourage charitable gifts. The gift

penalty is deterring large gifts the charitable sector needs in order to survive and flourish.

The gift penalty repudiates principles of fundamental fairness. It is one thing to have different legal

definitions of “gift” in common law and civil law provinces. It is quite another to legislate civil penalties

which will apply to donors and charities depending on which definition applies to their gift. This is a

shocking negation of CCRA’s “Fairness Pledge” to “apply laws consistently and equitably” and to

“ensure our clients are treated equally under similar circumstances”.

Evolution of Interpretation Bulletin IT-110R3

It is useful to review the historical evolution of the series of information and interpretation bulletins on

gifts and official donation receipts, which remain CCRA’s primary publication on gifts. IT-110R3 is the

principal publication disseminated to the charitable sector by CCRA. It is also the principal promulgator

of CCRA policies that concurrently flaunt and flout the law.

IT-110R3 was issued August 20, 1968, as Information Bulletin No. 42. It was issued to impose an

exclusively common law definition of “gift” on Quebec donors. The previous year a Quebec charity had

sold tickets for considerably more money than the cost of a fundraising gala and concert, and issued a

charitable donation receipt for the balance of the price above the costs. This was perfectly acceptable

under civil law, which allows partial consideration.18 Phillip Aspinall claimed a charitable deduction for

such a gift. After the gift but before the assessment was issued denying his charitable deduction, the

Minister of National Revenue issued Information Bulletin No. 42. The court quite properly rejected this

attempt to deny the application of Quebec’s Civil Code to Aspinall’s gift, by fabricating an information

bulletin, stating: “The directives given by the Minister of National Revenue to his employees in 1968

neither change the Act nor are they law. Furthermore, the said directives are subsequent to the year in

question.”19

17 Jabs Construction Ltd., supra, footnote 14, at p. 738 [emphasis added]. 18 See Aspinall v. M.N.R., supra, footnote 4. The Tax Appeal Board applied Gagnon v. M.N.R., 60 D.T.C. 347, 24 Tax A.B.C. 309. 19 Aspinall v. M.N.R., supra, at p. 1673.



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Information Bulletin No. 42 was the beginning of CCRA’s tradition of trying to simultaneously flout and

create the law of gift through departmental publications. However, CCRA could not be seen to ignore

the court’s explicit rejection of its attempt to apply the English common law in Quebec. Consequently,

on April 15, 1971, Information Bulletin IT-6 was issued to cancel and replace Information Bulletin No.

42. It made no reference to Aspinall, in stating: “It is the Department’s view that payments made to

purchase tickets for dinners, balls, concerts, shows or other like functions or events are not gifts or

donations within the usual meaning of these words even though a portion of the payments may accrue

to a charitable organization.” The bulletin contains no acknowledgment of the Civil Code. However,

Information Bulletin IT-6 follows the Aspinall judgment in fact, if not in legal theory, by allowing a receipt

for the gift portion of a concert ticket in circumstances similar to Aspinall. Information Bulletin IT-6 came

across as a baseless — and benevolent — administrative exception to the law of gift. In issuing it,

CCRA threw the law of gift into confusion by allowing consideration in a gift at common law without

either acknowledging the civil law origin of the doctrine or articulating any legal basis for its

administrative policy.

Information Bulletin IT-110, which in 1973 replaced and cancelled Information Bulletin IT-6, retained

substantially the same wording. In paragraph 2 of IT-110R, issued February 20, 1984, CCRA

abandoned the position that overpriced concert tickets are not gifts and said they “may be purported to

be gifts or donations”. However, a lawyer operating exclusively within the common law tradition would

continue to reject this definition of gift because it involves “consideration” as part of the gift transaction.

CCRA continues to deny the civil law origins of this deviation from the common law, expressing the

overpriced tickets exception in the following terms: “However, in recognition of certain widely accepted

fund-raising practices, a gift is considered to have been made in the circumstances outlined in s. 5 to

10 below.”20

Anyone who reflects on the history of Information Bulletin IT-110 and the Aspinall case must be

shocked by CCRA’s willingness to ignore court decisions it does not like and its willingness to “change”

the law through official publications distributed to the charitable sector. Charities and donors are far

more inclined to base their conduct on advice provided by CCRA than are ordinary taxpayers. CCRA is

well aware of this and regularly abuses its position of power by communicating only those judicial

holdings that support its administrative policies.

CCRA’s penchant for using official publications to promote definitions of “gift” contrary to law is not

limited to Interpretation Bulletin IT-110R3. In Registered Charities Newsletter No. 6,21 CCRA states:

As defined at law, a gift is a voluntary transfer of property which a donor makes without expecting

a benefit in return. A payment for the cost of a child’s education in a religiously based school is not

a gift. However, it is our administrative policy to treat as a charitable gift a part of a parent’s

payment for instruction at a private elementary or secondary school which offers both secular

(academic) and religious education. The part we treat as a gift is for the religious education only.

20 Interpretation Bulletin IT-110R3, at para. 4. 21 (CCRA, Summer 1996).



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We do this even though it gives an economic advantage to the students or their parents. We

explain this policy in Information Circular 75-23.

On occasion, CCRA gets caught out in its own game. In Woolner v. Canada,22 the donor argued that

Information Circular 75-23 was the law while CCRA argued that the court was bound to apply the law,

not the policies of Revenue Canada as outlined in information circulars. The court sided with the donor,

more likely out of a desire to punish CCRA for its duplicity than to agree that Information Circular 75-23

reflects the common law (which, in the author’s view, it does not). None the less, the Woolner case

clearly illustrates that CCRA’s philanthrophobia will drive it to argue against its own publications when it

seeks to punish a particular taxpayer.

The courts have generally acknowledged both the common law and civil law definitions of a “gift” in

cases arising under the Income Tax Act. In Duguay v. Canada,23 for example, the Tax Court of Canada

cited the definition of “gift” set out in arts. 755 and 776 of the Civil Code of Lower Canada as well as

the traditional common law definition of “gift” articulated by the Federal Court of Appeal in Friedberg v.

Canada.24 The problem is there have been no satisfactory attempts to reconcile the differences

between the two definitions.

“Technical” versus “Ordinary” Meaning of Gift

There is a significant difference in applying the “ordinary” meaning of “gift” rather than a “technical” legal

meaning. Canadian common law jurisprudence most often cites the following passage from the Federal

Court of Appeal judgment in R. v. McBurney:25

The word “gifts” is not defined in the statute. I can find nothing in the context to suggest that it is

used in a technical rather than in its ordinary sense. This latter sense was attributed to that word

by courts of Australia as it appeared in a like context of an Australian taxing statute allowing “gifts”

to be deducted from income in certain circumstances . . .

This is a surprising statement when one considers how many times Canadian courts have adopted

Lord Macnaghten’s decision in Pemsel.26 Pemsel stands for the proposition that, in a taxing statute

without a definition of “charity”, the term must be interpreted according to the meaning “peculiar to the

law”.27 Lord Macnaghten held that “in construing Acts of Parliament, it is a general rule . . . that words

must be taken in their legal sense unless a contrary intention appears”.28 His judgment continues with

the most oft-quoted passage in the law of charity:

22 [1999] 4 C.T.C. 2512, 2000 D.T.C. 1956 at para. 31 (T.C.C.), affd [2000] 1 C.T.C. 35, 99 D.T.C. 5722, 249 N.R. 129 (F.C.A.). 23 [1999] 3 C.T.C. 2432 (T.C.C.), affd 268 N.R. 313 (F.C.A.). 24 Supra, footnote 15, at p. 6032 (F.C.A.). 25 Supra, footnote 8, at p. 5435, citing Commissioner of Taxation of the Commonwealth v. McPhail (1967-68), 41 A.L.J.R. 346 at p. 347; Leary v. Federal Commissioner of Taxation (1980), 32 A.L.R. 221

at pp. 221, 237 and 241. 26 Supra, footnote 10. 27 Supra, at p. 581. 28 Supra, at p. 580.



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How far then, it may be asked, does the popular meaning of the word “charity” correspond with

the legal meaning? “Charity” in its legal sense comprises four principal divisions: trusts for the relief

of poverty; trusts for the advancement of education; trusts for the advancement of religion; and

trusts for other purposes beneficial to the community, not falling under any of the preceding

heads. The trusts last referred to are not the less charitable in the eye of the law, because

incidentally they benefit the rich as well as the poor, as indeed, every charity that deserves the

name must do either directly or indirectly.29

Many commentators have expressed the opinion that Lord Macnaghten was simply adopting Sir

Samuel Romilly’s classification of charitable objects in Morice v. Bishop of Durham30 when he made his

famous pronouncement on the four principal divisions of charity. In the author’s opinion, however,

focusing on the similarity between the two descriptions of the four heads of charity ignores the true

import of Lord Macnaghten’s decision, for while the respective passages in Morice and Pemsel may be

descriptively similar, they are functionally distinct.

The true significance of Pemsel is not Lord Macnaghten’s similar view of the categories of charity but

his distinct view of the broader concept of charity of which they are a part. Having set out the four

heads of charity, Sir Samuel Romilly, as counsel for the plaintiffs, argued that assistance of individuals

possessing the comforts of life is not charity. He convinced the Lord Chancellor to apply charity

“according to the ordinary sense”.31 Until 1891, therefore, Morice v. Bishop of Durham ensured that

charity was confined to its popular meaning of eleemosynary charity.

Pemsel fundamentally changed this state of the law. Unlike Sir Romilly, Lord Macnaghten approached

his list of the heads of charity from the perspective that the word “charity” was to be applied in its

broader legal sense. He rejected the narrow Morice interpretation of charity and the view of his

colleague on the bench that “the real ordinary use of the word ‘charitable’ as distinguished from any

technicalities whatsoever, always does involve the relief of poverty”.32 In doing so, Lord Macnaghten

moved the future evolution of the common law of charity to what he called the fourth head — “other

purposes beneficial to the community”. This led to what the author calls “Renaissance philanthropy”33

— the philanthropy of those whose objects are, in the words of Lord Goodman, “of a more hedonistic

nature which contribute to the quality of life”.34 Lord Macnaghten did this not by using words which

provided a substantially different definition but by utilizing the word “charity” in its technical legal sense,

rather than in its ordinary sense.

29 Supra, at p. 583 [emphasis added]. 30 Supra, footnote 11, at p. 532:

There are four objects, within one of which all charity, to be administered in this Court, must fall: 1st, relief of the indigent; in various ways: money: provisions: education: medical assistance;

&c.: 2dly, the advancement of learning: 3dly, the advancement of religion; and, 4thly, which is the most difficult, the advancement of objects of general public utility. A just application of this

property within the meaning of this testatrix will not fall within any of those objects: for instance, assisting individuals, not in a state of indigence, but possessing the comforts of life, is

liberality; but not charity in any of those senses. [Emphasis added.] 31 Morice, supra, at p. 543. 32 Pemsel, supra, footnote 10, at p. 552, per Lord Halsbury L.C. (dissenting). 33 See B. Bromley, “Religious, Reformation, Remedial and Renaissance Philanthropy” in P. 6 and I. Vidal, eds., Delivering Welfare — repositioning non-profit and co-operative action in western European

welfare states (Barcelona: Centre d’Iniciatives de l’Economia Social, 1994); also in (1993/94), 2 Charity Law and Practice Review 53. 34 Lord Goodman, National Council of Social Services Committee of Inquiry into the Effect of Charity Law and Practice on Voluntary Organizations (London: Bedford Square Press, 1976), at p. i.



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McBurney was correct in observing that Australian courts have preferred to use words in their ordinary

sense. In Chesterman v. Federal Commisioner of Taxation,35 Isaacs J. of the High Court of Australia

rejected the technical legal meaning of “charity” in strong terms:

. . . I am very distinctly of opinion that to prevent tautology and to give each word a sensible

meaning the word “charitable” in . . . the Estate Duty Assessment Act has not the extensive

Elizabethan meaning, but . . . its eleemosynary meaning . . . “Charitable” must therefore, in the

sub-section referred to, be understood in its “popular” sense . . . I exclude the idea that is involved

in the technical meaning of “charity” that except in trusts directly for the relief of “poverty” the

distinction between rich and poor has no relevance.

However, the Privy Council overruled the High Court of Australia and reimposed the technical legal

definition of charity. Chesterman affirms that “in approaching this question the starting point is found in

Lord Macnaghten’s words: ‘In constructing Acts of Parliament it is a general rule . . . that words must

be taken in their legal sense unless a contrary intention appears’.”36

In the author’s opinion, the primary holding of Pemsel is that when interpreting a word that is not

defined in a statute the common law requires courts to apply the meaning that is “peculiar to the law”.

Had Lord Macnaghten applied the four heads of charity in their ordinary popular sense, the law would

have remained as set out in Morice v. Bishop of Durham. Lord Halsbury L.C. would not have dissented

from that view. This article does not presume to say that the Federal Court of Appeal in McBurney erred

in holding that the word “gifts” in the Income Tax Act is used in its ordinary sense. However, the

interpretation is incongruous with the Pemsel holding that the related term “charity” is used in its

technical sense, a holding accepted as law many times by the Supreme Court of Canada.37 The

Canadian judiciary itself has expressed differing views on how the term “gift” should be interpreted.38 As

a practical matter, the law of charity in Canada would be thrown into absolute chaos if the courts were

to adopt the McBurney approach and apply the ordinary meaning of the word “charity”.

Notwithstanding CCRA’s promulgation of McBurney as the leading case on the definition of “gift”, the

Pemsel case makes it reasonable for legal advisers and donors to question whether “gift” should be

interpreted according to its “ordinary” meaning under the Income Tax Act.39

Meaning of Gift in Canadian Taxing Statutes

While the Federal Court of Appeal referred to Australian law to determine whether Lyle McBurney had

made a gift for purposes of the Income Tax Act, it more recently began consideration of whether Ken

35 [1923] 32 C.L.R. 362 at pp. 384-5 (H.C.A.), revd [1926] A.C. 128 (P.C.). 36 Supra, at p. 131. 37 The Supreme Court of Canada recently reaffirmed its preference for applying technical meanings to undefined words in Will-Kare Paving & Contracting Ltd. v. Canada (2000), 188 D.L.R. (4th) 242,

[2000] 1 S.C.R. 915, 2000 D.T.C. 6467 at p. 6474. The minority judgment of Binnie J., which stated that a taxpayer “is entitled, in my opinion, to the benefit of the plain meaning of an everyday word like

‘sale’”, was overruled by a majority of the court. 38 See the judgment of Dubinsky J. in R. v. Littler, [1978] C.T.C. 235, 78 D.T.C. 6179, 20 N.R. 541 (F.C.A.), discussed later in this article. 39 In a unanimous decision, the Supreme Court of Canada held, in Backman v. Canada (2001), 196 D.L.R. (4th) 193 at para. 17, [2001] 1 S.C.R. 367, [2001] 2 C.T.C. 11, that as a matter of statutory

interpretation it is presumed that Parliament intended that the term “partnership” be given its legal meaning for the purposes of the Income Tax Act.



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Whent had made a gift by referring to the House of Commons Debates.40 It is surprising that there has

not been more willingness to look to parliamentary debates, case law arising under other taxing

statutes or the Income Tax Act itself to discern the meaning of the word “gift”.

There is a long line of Canadian authority establishing that the word “gift” may have had a meaning

other than its common law meaning when used in earlier taxing statutes. In Attorney-General for

Ontario v. Perry,41 a case which arose under a provision of the Ontario Succession Duty Act, Lord

Blanesburgh said: “On that part of the section it has been held that a gift does not cease to be a gift

although there is some consideration for it received by the donor: a gift, it has been said, may be

something which is not ‘a pure and simple gift’.”

In Attorney General v. Worrall,42 Lopes L.J. held that there was a “gift” of property within the meaning of

the Act, notwithstanding the existence of “a collateral covenant by the son to pay to the father an

annuity”. As his colleague stated, “it seems clear that the legislature in using the word ‘gift’ in [s. 11(1)]

contemplated cases where the donee enters into a covenant such as this”.43 In Attorney-General v.

Johnson,44 the Court of King’s Bench considered s. 11 of the Customs and Inland Revenue Act, 1889,

“which speaks of a benefit to the donor by contract”, and concluded that “the Legislature intends that

property shall be treated as taken under a ‘gift,’ although such gift may have been made under a

contract by which the donor takes a benefit”. It is also established that payments may fall outside the

meaning of the word gift as it is used in a statute, even if they fall within the common law concept of a

gift.45

Finding there was no comprehensive definition of “gift” in the Income Tax Act, the Exchequer Court in

M.N.R. v. Watts46 relied on the definition of a gift inter vivos from Halsbury’s Laws of England.47

However, Gibson J. was quick to point out that Halsbury’s general definition was not a comprehensive

statement of the law of gift:

There are many qualifications to this general statement in the decided cases. For example, the

gratuitous aspect for the purposes of taxation may include contract cases where the consideration

given is substantially out of proportion to the benefit received, in which event the differential is

often considered a gift by the taxing authorities.48

The foregoing examples indicate the frequency with which Canadian courts have applied something

other than the ordinary meaning of the word “gift” in the context of tax statutes. The proposition was

40 See Canada v. Zelinski, [2000] 1 C.T.C. 329, 2000 D.T.C. 6001, 251 N.R. 252 (F.C.A.), leave to appeal to S.C.C. refused 266 N.R. 393n. 41 [1934] A.C. 477 at p. 486, [1934] 4 D.L.R. 65 (P.C). 42 [1895] 1 Q.B. 99 at p. 105. 43 Supra, at p. 108, per Smith L.J. 44 [1903] 1 K.B. 617 at p. 624. 45 See Montreal Trust Co. v. M.N.R., [1967] 1 Ex. C.R. 297, which considered the Estate Tax Act, S.C. 1958, c. 29. 46 [1966] Ex. C.R. 1043. 47 3rd ed., Vol. 18, p. 364. 48 Watts, supra, footnote 46, at p. 1045.



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stated very plainly in the dissenting judgment of Dubinsky J. in R. v. Littler:49 “At the risk of repeating

myself, may I say that the word ‘gift’ ordinarily does connote the gratuitous transfer of property, but not

in a taxing statute.”

R. v. Littler is a Federal Court of Appeal ruling with three separate judgments, making it somewhat

difficult to decipher how the court split on the meaning of the word “gift”. While Le Dain J. concurred

with Jackett C.J.’s dismissal of the appeal,50 his agreement seems to be based exclusively on the

ground that the difference between value and price was not property. In the author’s opinion, Le Dain J.

was in agreement with Dubinsky J. on the issue of whether the transfer was a gift, apart from the

property issue. It is submitted that Dubinsky J. said the word “gift” should not be given its ordinary

meaning in a taxing statute, just as Lord Macnaghten said that “charity” should not be given its ordinary

meaning in a taxing statute. As there are at least reasonable grounds for disagreement over which view

is held by a majority of the Federal Court of Appeal, the current state of the law is in need of judicial

clarification.

Use of “Gift” in Income Tax Act

Although the Income Tax Act does not define “gift”, it uses the term in ways which are frequently in

conflict with the common law definition. At common law, a gift does not take place until the property is

transferred. However, s. 118.1(5) of the Income Tax Act provides that a gift set out in a will is deemed

to have been made by the testator immediately before death. This is inconsistent with the common law

definition because no transfer of property takes place until the will is effective, and the will is not

effective until the testator dies. The situation is further confused by s. 118.1(15) if a donor dies after

giving a non-qualifying security but before the gift is monetized.51

The Income Tax Act deems some gifts not to be gifts. Even though the statute contains no general

definition of a “gift”, it none the less provides that gifts of non-qualifying securities are gifts for the

purpose of transferring property to the recipient charity, but not for the purpose of calculating the

donor’s donation tax credit. This bizarre state of affairs is the result of s. 40(1.01), which states that the

taxpayer realizes a gain from a disposition of a non-qualifying security “that is the making of a gift” to a

qualified donee. As a result of amendments made in 1997, non-qualifying securities are considered

“gifts” throughout the entire Income Tax Act, except for purposes of s. 118.1. This result is achieved by

some statutory “hocus-pocus” in s. 118.1(13), which says “the gift is deemed not to have been made”.

The ideological zeal of the opponents of loan-backs was far in excess of their ability to draft

comprehensible provisions. The “powers that be” determined that, because non-qualifying securities

provide a benefit to the donor, they could not be a gift for purposes of s. 118.1. However, the

description of these dispositions as gifts to qualified donees in s. 40(1.01) suggests that a “gift” in the

Income Tax Act can include an element of consideration.

49 Supra, footnote 38, at p. 6189. 50 It is doubtful that Jackett C.J. would have disposed of the appeal in this way if the Federal Law—Civil Law Harmonization Act, No. 1 had been in effect. 51 “Monetized” is the term used to describe the Income Tax Act’s required liquidation of non-qualified securities within a 60- month period under s. 118.1.



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CCRA consistently relies on s. 69 of the Income Tax Act to determine the amount that should be on the

official charitable gift receipt as the value of the gift. The case law suggests that the principle underlying

s. 69 is that a gift gives rise to “recuperation”.52 In Brouillette v. Canada,53 Archambault J.T.C.C. found

the application of s. 69(1)(b)(i) meant the appellants were deemed to have received consideration equal

to the fair market value whether dealing with a gift or a sale. However, the Federal Court of Appeal

recently stated that “obtaining a receipt from the recipient organization could not be viewed as

consideration that eliminated the gratuitous and liberal nature of the transaction”.54 This statement

appears to confirm the view that a gift triggers consideration for a donor based on s. 69, but that this

consideration does not vitiate the gift for purposes of ss. 110.1 and 118.1.

The issue is further complicated by the “inadequate consideration” or “partial consideration” aspect of

s. 69(1)(b)(i) of the Act, which applies where a taxpayer has disposed of anything to a person with

whom the taxpayer was not dealing at arm’s length for no proceeds or for proceeds less than the fair

market value. In Gorkin v. M.N.R.,55 the Supreme Court of Canada considered circumstances in which

there “was certainly an element of bounty involved but [also] an agreement to pay a partial

consideration for the transfer of property”, and held the transaction did not constitute a gift within the

meaning of s. 3(1)(d) of the Dominion Succession Duty Act. This would appear to present a challenge to

the Aspinall56 and Watts57 cases, both of which allowed a contribution to be a gift even when there was

partial consideration.

It is also worth mentioning that under former s. 245(2) any transaction that resulted in a benefit being

conferred by one person on another was deemed to be a disposition by way of gift, “notwithstanding

the form or legal effect of the transactions or that one or more other persons were also parties thereto”.

While this part of s. 245(2) was repealed in 1988, it is clear that the word gift has been used in the

Income Tax Act without regard for common law or civil law formalities and principles.

The Issue of “Consideration”

The most contentious issue in disputes over whether a particular disposition constitutes a gift at law is

normally whether the donor has received consideration. The most frequently cited judicial statement on

this issue is found in the Federal Court of Appeal decision in R. v. McBurney:58

“If a transfer of property is in return for valuable consideration received by the transferor from the

transferee, it will not be a gift by the transferor. If the relevant property is not, for that reason,

precluded from being properly regarded as a gift, the above-mentioned considerations indicate

usual attributes of a gift, namely, that a gift will ordinarily be by way of benefaction, that a gift will

52 See Lord Elgin Hotel Ltd. v. M.N.R. (1964), 64 D.T.C. 637 (Tax App. Bd.), at p. 641, where the board considered a provision comparable to s. 69 of the Income Tax Act. 53 97 D.T.C. 624 (T.C.C.), revd 99 D.T.C. 5428 (F.C.A). 54 Duguay v. Canada, supra, footnote 23, at para. 8 (F.C.A.). 55 (1962), 33 D.L.R. (2d) 250, [1962] S.C.R. 363 at p. 370, [1962] C.T.C. 245. 56 Supra, footnote 4. 57 Supra, footnote 46. 58 Supra, footnote 8, at p. 5436, citing Leary, supra, footnote 25, at p. 243.



13

usually be not made in pursuance of a contractual obligation and that a gift will ordinarily be

without any advantage of a material character being received in return.”

Almost every charitable gift in Canada is given in anticipation of receipt by the donor of a direct financial

benefit by way of a tax credit. This benefit constitutes “valuable consideration”; it is monetary and not

immaterial. It is promoted not only by charities but also by CCRA in publications such as P113 — Gifts

and Income Tax. In Canada v. Zelinski,59 Sexton J.A. explained the important and deliberate role that

tax credits play in government schemes:

When the Government of Canada introduced the Cultural Property Export and Import Act to

Parliament, it announced that “various tax incentives to encourage gifts and the sale of national

treasures . . . .” would be required “in order to encourage the movement of national treasures into

those institutions best able to preserve them.” The Government explained that the tax incentives

“are central to the operation of the whole scheme.”

Sexton J.A. added that the taxpayers’ donations were “entirely consistent” with the joint operation of

the statutes and that “to forbid the deductions sought by the taxpayers in the circumstances of this

appeal would effectively frustrate those objectives”.60

In Friedberg,61 the Federal Court of Appeal clarified that “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”. This conclusion is logical because the

consideration is not paid by the donee. As the Tax Court of Canada held in Langlois v. Canada:62 “The

fact that the donor was able to incidentally derive a monetary benefit from the transactions is of no

consequence, since the donee paid no consideration.”

The McBurney63 decision repeatedly states that the consideration which is offensive to a gift is

consideration “received by the transferor by way of return”. Seven months after McBurney was

released, CCRA issued Information Bulletin IT-110R2, which introduces the words “in return” into its

statement of the general rule defining gift. Neither the phrase nor the concept of “in return” was

included in the definitions of “gift” set out in Information Bulletin IT-110 or IT-110R.

The Issues of Linkage and Benefit

The courts have often stated the common law principle that a gift must be “voluntary”. The exact

meaning of this term at the present time is problematic because so often there is an implied link

between the gift and some subsequent event. CCRA itself came very close to accepting certain quasi-

contractual arrangements as gifts in Information Bulletin IT-110R2, which stated: “There is nothing to

59 Supra, footnote 40, at para. 1 (Sexton J.A. was referring to transcripts from the House of Commons Debates in February 1975). 60 Supra, at para. 28. 61 Supra, footnote 15, at p. 6032 (F.C.A.). 62 [1999] 3 C.T.C. 2589 (T.C.C.), at para. 115 [emphasis added]. 63 Supra, footnote 8.



14

prohibit a charity from paying for services and later accepting the return of all or a portion of the

payment as a gift — provided it is returned voluntarily.”64

This administrative provision illustrates the double standard that characterizes CCRA’s interpretation of

the law of gift. The words articulate the legal position that a gift must be “voluntary”. However, the

impact of the statement is quite the opposite. Most people in the real world know there is usually an

informal, but not legally binding, agreement or link in such “voluntary” transactions. A service provider

frequently agrees that the payment will be returned to the charity by way of donation prior to agreement

by the charity to pay for services. Many donors rely on IT-110R2 as the basis for believing that

negotiating a clear understanding between the donor and the charity as to the application of donated

funds is acceptable, as long as the agreement is not legally binding.

There is a perception that linkage is less acceptable if it involves some personal benefit to the donor.

However, that notion is contradicted by the position cited in IT-110R2 because there is no doubt that

payment for services is a personal benefit to the payee. While some commentators have analyzed this

statement to mean its application turns on the timing of the payment, that distinction is somewhat

disingenuous in the real world. Furthermore, it is bad policy, as it means that a charity must pay out first

and assume the risk the payment will be returned “voluntarily”, rather than having the service provider

make the gift first and assume the risk the charity will “voluntarily” use the funds to make the payment.

CCRA’s publications reflect an interpretation of the term “gift” that seems to allow for a link in a gift from

a donor service provider. However, it provides no legal analysis supporting the logical consistency of its

opposition to a link in a gift to a charity service provider. In Woolner v. Canada,65 donors at First

Mennonite church had made contributions to their church with the expectation that their children would

be provided with a bursary to a related Christian school. CCRA apparently decided that this type of

“understanding” was offensive and should not enjoy the protection of its administrative policy. The

Federal Court of Appeal found that a link existed between the contributions made and the bursaries

awarded and so held that the contributions did not constitute a gift.

Woolner has a qualification in Sexton J.A.’s definition of gift:

This Court has held that a gift, within the meaning of the common law, is a voluntary transfer of

property from one person to another gratuitously and not as the result of a contractual obligation

without anticipation or expectation of material benefit.66

A traditional articulation of the common law rule would have said that the gift must be “voluntary”.

Without saying it is doing so, the Woolner decision explicitly rejects the civil law concept that a gift can

be a contract by substituting “contractual obligation”67 for “voluntary”. Nothing in the Woolner decision

restricts its application geographically to a common law province. This is consistent with s. 8(1) of the

64 IT-110R2, para. 3. See now IT-110R3, para. 15(e). 65 Supra, footnote 22. 66 Supra, at para. 7, per Sexton J.A. [emphasis added]. See also para. 8 where Sexton J.A. cites McBurney, supra, footnote 8, as authority for the definition. 67 The Civil Code of Québec, S.Q. 1991, c. 64, art. 1806, provides: “Gift is a contract by which a person, the donor, transfers ownership of property by gratuitous title to another person, the donee; a

dismemberment of the right of ownership, or any other right held by the person, may also be transferred by gift. Gifts may be inter vivos or mortis causa.”



15

Interpretation Act,68 which states: “Every enactment applies to the whole of Canada, unless a contrary

intention is expressed in the enactment.”

The analysis as to what is a gift at law was made more difficult when, shortly after the Woolner decision,

in a case based in Quebec, the Federal Court of Appeal adopted an exclusively civil law definition of

gift, based on Quebec case law as well as the articles of the Civil Code of Lower Canada.69 One must

wonder about the application of CCRA’s Fairness Pledge. Is it really fair or consistent to reassess the

Woolner donors when similar donors in Quebec might have succeeded in arguing that this linkage was

an acceptable “contract” under the civil law concept of “gift”? When the strict application of the

common law results in a definition of “gift” qualified with the words “within the meaning of the common

law”, one wonders about the fairness of the result in a federal statute. Do donors in common law

provinces need to meet a higher standard as to what constitutes a gift? If so, is that the reason CCRA’s

philanthrophobia will acknowledge and promote only the common law definition of “gift”?

A more interesting question is whether the Woolner decision means that the common law now explicitly

allows consideration as a component of a gift. Hamlyn J.T.C.C. wrote that each donor parent did

“receive a consideration, that is, a secular education for their children”.70 He then went on to allow the

charitable donation tax credit for the component of the tuition payment that was for Christian

education. In affirming that judgment, the Federal Court of Appeal said: “We agree with the reasons of

the learned Tax Court Judge in this case.”71 At a minimum, Woolner has provided a common law

acceptance of the civil law concept of “partial consideration” or what common law lawyers call a “split

gift”.

The taxpayers in the Woolner case may have had a much better result if they had argued that neither

common law nor civil law applied. Instead, they could have invoked the statutory provisions in s. 168 of

the Income Tax Act to argue that the interpretation of “gift” allows a “link” in gifts to registered charities.

Section 168(1)(d) deals with the revocation of registration where a registered charity or a registered

Canadian amateur athletic association “issues a receipt for a gift or donation otherwise than in

accordance with this Act”. Section 168(1)(f) provides an additional ground for revocation for a registered

Canadian amateur athletic association that “accepts a gift or donation the granting of which was

expressly or impliedly conditional on the association making a gift or donation to another person, club,

society or association”. It is very likely that the scenarios s. 168(1)(f) was designed to prohibit would

have included the Woolner scenario.

The rules of statutory interpretation would suggest that a registered charity issues a receipt for a gift “in

accordance with this Act” if it “accepts a gift the granting of which was expressly or impliedly

conditional” on the charity “making a gift to another person, club, society or association”. Since s. 168

explicitly forbids such conditional gifts with “links” to registered Canadian amateur athletic associations,

68 R.S.C. 1985, c. I-21. 69 Duguay, supra, footnote 23, at para. 8 (F.C.A.). 70 Woolner, supra, footnote 22, at para. 28 (T.C.C.). 71 Supra, at para. 14 (F.C.A.).



16

one might argue that it thereby implicitly authorizes such conditional gifts to registered charities. This

legal analysis is much more consistent with the reasoning adopted by the House of Lords in Pemsel,72

and by the Supreme Court of Canada in Will-Kare Paving,73 that a taxing statute should apply a

technical meaning to words it does not define.

CCRA’S Unlawful Administrative Practice

Taxpayers can get into serious difficulty when they follow CCRA’s administrative policies which are

contrary to the law of gift. For example, it is well established that “ownership of the property is an

essential condition for a gift. A person cannot give what he or she does not own”.74 Albert Friedberg’s

disposition of antique Islamic textiles to the Royal Ontario Museum was not a gift because the donor

“did not hold the title to the textiles, nor did he ever acquire the title, and one cannot give what one

does not have”.75 Despite these statements of law, CCRA’s “1998 Information Guide for Taxpayers’

Returns” offered the following tax tip: “You can claim donations that your spouse made as long as your

spouse does not claim them”.

Poor Mr. Douziech accepted CCRA’s tax advice and claimed this donation tax credit during the first

year of his marriage. CCRA denied his claim on the basis that the taxpayer did not get married until

June 1998, the middle of the relevant taxation year. While the court was sympathetic with the

taxpayer’s appeal, it was forced to contend with the more fundamental issue that CCRA had no legal

authority for its administrative practice. The words with which Bowie J.T.C.C. ruled against Mr.

Douziech seem equally applicable to CCRA: “But where there is no ambiguity in the law, and I am afraid

I can find none in section 118.1, I am bound to apply the law as Parliament wrote it, and I have no

alternative but to dismiss your appeal.”76

In the Jabs Construction case,77 CCRA’s auditor simply ignored the penalty tax in s. 189, which applies

when private foundations charge insufficient interest rates on loan-backs. Section 189 was enacted

after CCRA lost its legal challenge to Antoine Guertin’s scheme, whereby his corporation made bonus

payments to employees who donated to his private foundation and then loaned the money back to the

corporation at a 7% interest rate.78 When it enacted s. 189, Parliament had an opportunity to forbid

loan- backs but did not do so. In Jabs Construction, the court obviously recognized the extent to which

CCRA was resisting this clear manifestation of legislative intent. Holding that the donations made by

Jabs Construction Ltd. were “valid and effective charitable gifts”, Bowman J.T.C.C. stated:

. . . the loaning of money by a private foundation to persons with which the foundation does not

deal at arm’s length is specifically contemplated by section 189 of the Act which in essence

72 Supra, footnote 10. 73 Supra, footnote 37. 74 Décarie v. Canada, [1999] 2 C.T.C. 2054 (T.C.C.), at p. 2061, per Lamarre Proulx J.T.C.C. 75 Friedberg, supra, footnote 15, at p. 6034 (F.C.A.). 76 Douziech v. R., 2000 CarswellNat 1000 (T.C.C.), at para. 6 (informal procedure). 77 Supra, footnote 14. 78 Antoine Guertin Ltee v. Canada, [1988] 2 F.C. 67, [1988] 1 C.T.C. 360, 88 D.T.C. 6126 (C.A.).



17

penalizes a non-arm’s length borrower from a private foundation to the extent that the interest

paid on the debt falls below the prescribed rate.79

The foregoing cases provide further evidence that CCRA’s interpretation of the term “gift” is not based

upon a disciplined adherence to the law. Rather, it is based upon random and ad hoc administrative

policies that are impossible for donors and charities either to understand or rely on. CCRA’s past

behaviour indicates that it will reject any claim that requires it to acknowledge Quebec law. Beyond that

certainty, the question of whether CCRA will apply law or pragmatism to a given transaction is

anybody’s guess. The taxpayer is at the mercy of CCRA auditors, who use a highly subjective standard

in determining whether a donor is to be embarrassed by a judicial proceeding or lauded as a

philanthropist.

CCRA is willing to allow consideration and economic advantage to the donor on gifts that it favours,

such as those contemplated in Information Circular 75-23. CCRA encourages gifts in situations where

the donor does not necessarily own the property, as indicated in its tax tip regarding transfers of

donation tax credits between spouses. It may be a mark of consistency that CCRA is just as bold in

ignoring legislative intent when it does not like gift planning, such as loan-backs. However, a taxpayer

has no reliable way of determining whether a proposed contribution is a gift because CCRA is so

capricious in its adherence to law rather than to pragmatism.

Introduction of Gift Penalty

When CCRA reassesses a taxpayer, it frequently chooses a high-profile situation with the objective of

deterring other would-be “offenders”. However with the enactment of the GAAR, CCRA can, in the

context of charities litigation, get around minor technicalities, such as a donor being correct on a point

of law. Alleging an infraction under the GAAR can be very damaging to a donor’s reputation because it

implies the donor has abused or misused the Income Tax Act. A policy of deterrence by litigation may

be appropriate with regard to offences designed to enrich the taxpayer at the expense of the national

treasury. It is itself an abuse when its use intimidates donors who rely on their reputation for integrity in

their community and whose “offence” is seeking to enrich the charitable sector.

Mr. and Mrs. Jabs engaged in sophisticated tax planning to save approximately $2,885,000 in taxes,

which enabled them to make a gift of nearly $10 million to their private foundation. Responding to the

Minister of Revenue’s argument in the Jabs Construction case that the planning violated s. 245 of the

Income Tax Act, Bowman J.T.C.C. wrote:

The Minister sees the whole series of transactions as an elaborate and sinister form of tax

avoidance. For the reasons that follow, I see it as no such thing. It is in my view a sensible and

carefully conceived plan carried out within the specific provisions of the Act designed to achieve

the overall charitable objectives of Mr. and Mrs. Jabs.80

79 Jabs Construction Ltd., supra, footnote 14, at p. 738. 80 Supra, at p. 733.



18

Holding that gifts such as those made by the Jabs are “precisely what subsection 110.1(3)

contemplates”, Bowman J.T.C.C. pointed out the important distinction between “use” and “misuse” of

the Act:

I fail to see how the use of a specific provision of the Act that allows the tax consequences of a

charitable gift to be mitigated can by any stretch of the imagination be a misuse of the provisions

of the Act or an abuse within the meaning of subsection 245(4). It is simply a use of a provision of

the Act — not a misuse or abuse — for the very purpose for which it was designed.81

Although it has thus been chastised by the court for abusing an anti-abuse provision, CCRA now has

an even more draconian weapon with which to intimidate and inhibit gift planning in Canada. The third

party civil penalty provisions in s. 163.2 of the Income Tax Act apply to all “statements” made after June

29, 2000. The author refers to them as the “gift penalty provisions” because CCRA explicitly states in

Information Circular 01-1 that a “statement” includes a donation receipt. This penalty applies not only to

donors but also to gift planners and advisers. The penalty can be as high as $100,000 more than the

gift planner’s gross compensation for the gift planning.82 Because of the magnitude of the tax savings

generated by the charitable donation receipt, it is very easy for gift planners dealing with million-dollar

gifts to trigger this level of penalty.

The problem for gift planners and for officials of charities who prepare donation receipts is that the vast

majority of highly coveted very large gifts do not meet the legal definition of “gift”. The courts and CCRA

have made it very clear that, if a donor receives a material benefit or consideration from the donee, the

transfer or disposition is not a gift. The fact remains, however, that almost every large donation to a

public charity results in some naming recognition (and frequently additional benefits) being offered to

the donor. Unlike tax credits, these material benefits are received directly from the donee. Donor

recognition arrangements are offered by charitable organizations on an escalating scale, according to

the quantum of the gift. They are negotiated in advance and are usually legally binding on the charity.

Prior to the introduction of the gift penalty provisions, a lawyer could rely on CCRA’s administrative

policies and past practices in advising a donor to file an official receipt for a charitable gift in spite of

holding the belief that the recognition provisions of a large gift amounted to consideration. The problem

since June 29, 2000, is that donors and their advisers run the risk of incurring a civil penalty if the

courts hold that donor recognition constitutes consideration. The gift penalty provisions make it clear

that a charity which issues a charitable gift receipt to a donor for a contribution that is not a gift at law is

making a “false statement” under s. 163.2(2). It is difficult to believe that naming recognition is not

consideration when one considers that a corporation in the same community may pay millions of dollars

to have its name placed on a public building for a limited number of years. It is disingenuous to argue

that a university is providing no material benefit to a bank whose gift it recognizes by putting the bank’s

name on a theatre.

81 Supra, at p. 738. 82 Income Tax Act, s. 163.2(5).



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Many charities place gift proposals before prospective funders that identify the same recognition as

“advertising” when the amount is to be claimed by a corporation as a business deduction, but as

“philanthropy” when the amount is to be claimed as a charitable donation. There seems to be no logical

reason for refusing to find consideration in the charity according recognition to the donor. Nor does

there seem to be a reason for reaching a different result in cases where the donor is an individual. Any

recognition opportunity granted to an individual is one less recognition opportunity available for a charity

to sell to a corporation.

This is not to allege that charities are being improper in framing solicitations in this way. In Olympia Floor

& Wall Tile (Quebec) Ltd. v. M.N.R.,83 Jackett P. stated: “While hitherto unforeseen . . . I can find no

inherent incompatibility between an ‘outlay . . . for the purpose of . . . producing income’ and a gift to a

charitable organization.” The court went on to hold:

In my view, when a taxpayer makes an outlay for the purpose of producing income — i.e. as part

of his profit making process — even though that outlay takes the form of a “gift” to a charitable

organization, it is not a “gift” within the meaning of that word in section 27(1)(a) which, by reason of

the place it holds in the process of computing taxable income, was obviously intended to confer a

benefit on persons who made contributions out of income and was not intended to provide

deductions for outlays made in the course of the income earning process.84

Charities engaged in such fundraising approaches can take comfort from the following obiter statement

by Iacobucci J. of the Supreme Court of Canada in Symes v. Canada:85

The decision of Jackett P. in Olympia Floor & Tile, supra, has recently been followed in Impenco

Ltd. v. Minister of National Revenue, [1988] 1 C.T.C. 2339, 88 D.T.C. 1242 (T.C.C.). I wish to

express neither approval nor disapproval of the approach taken in either case with respect to the

charitable donation issue per se. Instead, it is sufficient to highlight the real basis for the decision in

Olympia Floor & Tile. In my view, what that case says is that a particular expenditure, such as a

charitable donation, may be made for more than one purpose.

This seems to suggest that the Supreme Court of Canada recognizes that donor recognition has the

potential to provide a benefit that could amount to consideration. Jackett P. specifically held that “even

though [a business generating gift] outlay takes the form of a ‘gift’ to a charitable organization, it is not a

‘gift’ within the meaning of that word in [the Income Tax Act]”.86 CCRA’s administrative policy has

always been that donor recognition is not consideration. However, the CCRA publication Registered

Charities Newsletter No. 387 states that charities should not issue receipts for donations for which a

business receives a material advantage, such as promotion or advertising, because “the donation is not

83 [1970] Ex. C.R. 274 at p. 284, [1970] C.T.C. 99, 70 D.T.C. 6085. 84 Supra, at p. 284. 85 (1993), 110 D.L.R. (4th) 470 at p. 547, [1993] 4 S.C.R. 695, [1994] 1 C.T.C. 40. 86 Olympia Floor & Tile, supra, footnote 83, at p. 284. 87 (CCRA, Winter 1992-93).



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a gift at law”. There are many situations, such as the one in Olympia Floor & Tile, where it would not be

a false statement for the charity to issue the gift receipt but would be a false statement for the donor to

claim it.

CCRA’s recent information circular on s. 163.2 contains the following statement: “The legislation is not

intended to apply to . . . activities that are administratively acceptable to the CCRA.”88 Considering how

CCRA reassessed Mr. Woolner for relying on administrative policy, it is very difficult to rely upon the

“goodwill” of CCRA auditors. Most of CCRA’s “administratively acceptable” solutions are based on a

pragmatic but “incorrect” application of the law. Such solutions not only fall outside the stated principle,

but fall outside the realm of legality. As Mr. Douziech learned, when Canadian courts are asked to

enforce administrative policies that are not supported by law, they refuse to do so.89

It is also sobering to reflect on the fact that it would be “the correct application of the law” for CCRA to

charge the tax planners, donors and charities involved in the Woolner fact pattern with a civil penalty if

they had lost that case. The gift penalty would apply even though the court held the taxpayers’ false

statement related only to a “gift, within the meaning of the common law”.90 It says a great deal about

CCRA’s philanthrophobia that there is now a legislated civil penalty that does not apply equally to

taxpayers throughout our bijural country. The gift penalty could apply to a gift in a common law

province but not to a similar gift in Quebec.

Under s. 163.2(2), government officials who could “reasonably be expected to know” that a

contribution was not a gift at law would themselves be participating in the making of a false statement if

they let such a charitable gift receipt stand. Presumably, this would include the CCRA officials who

published the information guide that induced Mr. Douziech to claim his spouse’s charitable gifts

(although the gift penalty provision was not in place at that time). There is no ambiguity in the legal

principle that a person cannot donate what he or she does not own. Mr. Douziech sought a tax benefit

to which he was not entitled by making a false statement claiming the charitable donation tax credit.

But reliance on CCRA by a taxpayer (as opposed to a tax professional) would almost certainly not

constitute knowledge or “ought to” knowledge amounting to culpable conduct.

The legal issues raised in this article demonstrate that the meaning of “gift” under the Income Tax Act is

a subject for legitimate debate. The absence of a clear definition makes it impossible for a donor,

charity or adviser to determine whether a false statement is being made when an official charitable gift

receipt is issued by the charity and claimed by the donor. It is wrong to have a gift penalty to penalize

members of the charitable sector for failing to apply a strict legal definition of “gift” when CCRA has

been capricious in its adherence to the “law” of gift.

It is unfortunate for the charitable sector that CCRA auditors are either unaware of, or indifferent to, the

potentially adverse impact of their work on funding for the sector. In Jabs Construction Ltd., a written

88 See Information Circular 01-1, at para. 16. 89 See Douziech, supra, footnote 76. 90 Woolner, supra, footnote 22.



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agreement was reached long before the trial that, if CCRA succeeded in its claim that there had been

no gift at law, the charitable foundation would return $10 million to Jabs Construction91 and the

company would pay an additional $2,885,000 in taxes on the disposition of the gift. When CCRA

alleged that the transfer to Felsen (Mr. and Mrs. Jabs’ private foundation) was “ineffective”, it meant not

only that the donor should be denied a charitable deduction but also that the charity should be denied

the gift.

One’s perspective on the resulting litigation changes with the realization that Mr. and Mrs. Jabs were

spending their personal money in an attempt to benefit charity, while CCRA was spending taxpayers’

money to enrich itself (and Jabs Construction) at the expense of charity. CCRA would not allow its

Charities Division to take any steps to support the legal position of the recipient charity because the

agency can speak with only one voice. CCRA also took legal action to block Felsen Foundation’s

attempt to protect its right to the gift in the British Columbia Supreme Court,92 so the recipient charity

was not represented in CCRA’s court proceedings against Jabs Construction even though it stood to

lose $10 million. If the court had found that the Jabs’ transaction was not a gift at law, the $10 million

would have reverted to ownership by the donor, rather than being transferred to charity.

Philanthrophobia would have triumphed.

Conclusion

There are significant legal problems in the law of gift. The tragedy is that donors and charities

desperately need CCRA to help them address and solve these problems. Instead of working with the

sector to address the problems, CCRA continues to devise new and ever more hostile “solutions” to

“problems” that exist primarily in the minds of its auditors who do not understand either the law or the

sector. What ever happened to the education component of charity audits, historically one of the most

positive attributes of the process?

The courts have played a tremendously helpful role by stepping in to curb the excesses of auditors in

cases like those of Mr. and Mrs. Jabs. The problems with the definition of “gift” are largely attributable

to CCRA’s capricious fluctuation between law and pragmatism in its assessment of charitable

donations. The courts can decide only the cases placed before them. The unfortunate reality is that, if

CCRA chooses to ignore the civil law and refuses to communicate and apply decisions it does not like,

the ability of the courts to provide solutions is limited.

Parliament should amend the gift penalty provisions in order to protect the charitable sector from

CCRA’s administrative practices which seem to be intent upon blocking large gifts. The charitable

sector needs to understand that donors such as Mr. and Mrs. Jabs are victims rather than villains.

Overzealous auditors will prevent willing donors from utilizing sophisticated planning to provide multi-

million-dollar gifts. In the face of CCRA’s gift penalty weapon, charities must be concerned that offering

91 See Jabs Construction Ltd., supra, footnote 14, at p. 733: “The Minister assessed in the manner set out at the beginning of these reasons, on the basis that the transfer to Felsen was ineffective, [and]

the capital gain on the sale to Callahan belonged to the appellant [Jabs]”. 92 Felsen Foundation v. Jabs Construction Ltd., 98 D.T.C. 6454 (B.C.S.C.).



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“recognition” to large donors may constitute the making of a “false statement” in the form of a donation

receipt issued for such a gift. Any professional adviser tempted to believe that CCRA will never invoke

the gift penalty for advising on a gift involving recognition or other benefits for the donor need only

compare the comforting assurances provided by CCRA at the time of the introduction of the GAAR

with subsequent administrative practice.

The existence of the gift penalty means that there is great urgency to this issue. Already, thousands of

Canadians have relied on CCRA’s advice and claimed a charitable donation tax credit for a spouse’s

gift of property he or she did not own. The courts have clearly decided that such a disposition is not a

“gift” at law. If it is established that such donors relied on tax professionals, as opposed to a CCRA

publication, presumably they are liable to prosecution under s. 163.2 for having made false statements.

Before it unleashes a barrage of litigation on unsuspecting taxpayers, CCRA must clarify its position on

whether such tax filings fall within the scope of the gift penalty provisions.

There are many other situations in which it is unclear whether donors filing their tax returns for the year

2000 have made a false statement in claiming a charitable donation tax credit. The Minister of National

Revenue should stand up in the House of Commons and state that, given the current conflict between

the jurisprudence and CCRA’s administrative policy, it is impossible for a donor, charity or tax adviser to

know what constitutes a legal gift in Canada today. Still stronger protection would result if the Minister

of Finance were to immediately amend the Income Tax Act, retroactive to June 29, 2000, to exempt

charitable gifts from the civil penalty provisions of s. 163.2.

The charitable sector in Canada is large enough and important enough that it deserves a legal regime

allowing donors and charities to determine the definition of something as basic as a “gift”. It is

unacceptable that the risk of imposition of the gift penalty should dissuade the charitable sector from

accepting large gifts in exchange for donor recognition. The court made it very clear in Jabs

Construction that it is wrong for CCRA to utilize anti-avoidance provisions simply because it does not

like the tax benefits which Parliament legislated to encourage large gifts and sophisticated gift planning.

It is imperative for the well-being of the charitable sector in Canada that CCRA recognize that the rule of

law applies to CCRA, and that law is not just a weapon to be applied against donation arrangements

that CCRA does not like. It is quite likely that the decision to deny Quebec taxpayers the entitlement to

interpret “gift” according to civil law traditions was taken by senior politicians rather than by

bureaucrats. Once a political decision is made to flout the law, however, bureaucrats at the highest

level implement that decision by corrupting the law. A prime example of this is CCRA’s publication of

Information Bulletin No. 42,93 which attempted to change the law. This culture of administratively

rewriting the law was then extended by lesser bureaucrats who further flout the law in publications such

as Interpretation Bulletin IT-110R3 and Information Circular 75-23. Having created an environment in

which there is a systemic and profound belief that the rule of law applies only when it is convenient,

93 See the discussion earlier in this article under the heading, “Evolution of Interpretation Bulletin IT-110R3”.



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CCRA has lost all moral and legal authority to curb its auditors from implementing the agency’s

philanthrophobic policies.

Although the courts have struggled valiantly to respect civil law in cases such as Aspinall, they are

powerless to provide justice to taxpayers other than those involved in specific cases. The courts have

stood up valiantly for the taxpayer in the majority of the cases that turned on the definition of “gift”.

Unfortunately, the courts have been trumped by the enactment of philanthrophobic legislation, such as

the gift penalty provisions. Intervention at the political level will be required in order to enforce the rule of

law in CCRA’s operations and to reverse the entrenched administrative policies that flaunt and flout the

law of gift.

The solution may be to recognize that R. v. McBurney94 is not an accurate statement of the law on the

issue of whether the ordinary or technical meaning of the word “gift” should be used. This 1985

decision held: “The word ‘gifts’ is not defined in the statute. I can find nothing in the context to suggest

that it is used in a technical rather than in its ordinary sense.”95

This sounds similar to the words of Binnie J. of the Supreme Court of Canada in Will-Kare Paving &

Contracting Ltd. v. Canada,96 where he stated in 2000 that a taxpayer “is entitled, in my opinion, to the

benefit of the plain meaning of an everyday word like ‘sale’”. However, that statement was overruled by

a majority of the court. Even more recently, in a unanimous decision of the Supreme Court of Canada

on the meaning of the undefined word “partnership” in the Income Tax Act, the court held: “As a matter

of statutory interpretation, it is presumed that Parliament intended that the term be given its legal

meaning for the purposes of the Act”.97 The Supreme Court of Canada did not refer to, but completely

supports, the judgment in 1978 of Dubinsky J. in R. v. Littler,98 stating that “the word ‘gift’ ordinarily

does connote the gratuitous transfer of property, but not in a taxing statute”.

One might add CCRA’s refusal to acknowledge Dubinsky J.’s statement on the law of gift to the list of

examples of cases which the Charities Directorate ignores because they were decided in Quebec.

However, Dubinsky J.’s statement is consistent with Lord Macnaghten’s majority decision in Pemsel

that in a taxing statute “words must be taken in their legal sense unless a contrary intention appears”.99

Pemsel stands for the proposition that, in a taxing statute without a definition of “charity”, the term must

be interpreted according to the meaning “peculiar to the law”.100

It is possible that the meaning “peculiar to the law” of the word “gift” in the Income Tax Act is that a gift

is actually a “contract”. In a bijural country, this interpretation has the benefit of “harmonizing” with the

civil law concept that a gift is a “bilatéralité”. The definition of gift in the Quebec Civil Code begins: “Gift

94 Supra, footnote 8. 95 Supra, at p. 5435. 96 Supra, footnote 37, at p. 6474. 97 Backman v. Canada, supra, footnote 39, at para. 17. 98 Supra, footnote 38. 99 Supra, footnote 10, at p. 580. 100 Supra, at p. 581.



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is a contract”.101 Following this analysis, the technical legal meaning of “charitable gift” could be defined

as “a voluntary transfer of property to a qualified donee in consideration of defined tax benefits and

unspecified recognition, privilege and remunerative benefits”. The tax benefits are clearly defined in the

Income Tax Act and are provided by the government upon the donor filing an official receipt containing

prescribed information. It is an implied term of almost all charitable gifts that the charity will provide the

donor with a receipt that complies with those requirements and which will enable the donor to receive

financial benefits from the government in the form of tax credits or deductions. It is an express term of

most large charitable gifts that the donor will receive certain recognition benefits. This recognition

ranges from naming buildings or chairs after the donor to being ranked on the “donor tree” in the lobby

or in the list of patrons in programs. In addition to recognition, these donors frequently receive

privileges, such as special access to guest performers and restricted programs, and free parking

privileges. CCRA now openly recognizes the concept of a “remunerative gift”, even though it has no

basis in common law. This is a gift made as a result of the charity promising to send the donor a book

or other promotional item. It also includes the gala dinners and concert tickets that are components of

certain gifts.

It will likely be necessary for Parliament to introduce a definition of “gift” and/or “charitable gift” into the

Income Tax Act. Presumably, a statutory definition will remind CCRA of the rule of law and that it must

curb its use of administrative practice to promulgate its policy of philanthrophobia.

101 Civil Code of Québec, art. 1806.

Flaunting and Flouting the Law of Gift: Canada Customs and Revenue Agency's Philanthrophobia

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