Appeal dismissed in Canadian ‘leveraged donation scheme’

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The Tax Court of Canada has issued a set of public warnings in a case involving a “leveraged donation scheme” where prospective donors were lured with promises that their tax breaks would eclipse their contributions, but in reality they ended up ineligible for charitable donation tax credits.

“Avoid fast talking, smooth ‘people of commerce’ promoting charitable donation ‘programs’ who may omit the fact they are being paid to promote the program,” Justice Randall Bocock wrote in a recent decision out of Ottawa.

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The case involves a family’s unsuccessful appeal of a decision denying them tax breaks for contributions to the Global Learning and Gifting Initiative, also known as GLGI.

“GLGI likely competes for the title of most litigated charitable donation program/initiative/scheme/sham (depending on one’s perspective) before the Tax Court,” Bocock said. “The program’s longevity is notable as well; the seminal lead case concerning GLGI was heard and decided a decade ago.”

In the recent decision, the judge dismissed Barry, Barbara and Brandon Malone’s appeal of a Canada Revenue Agency decision that nixed thousands of dollars’ worth of donations claimed in their 2006, 2010, 2011 and 2012 taxation years as “ineligible” because they “did not have donative intent, at law, to make a charitable gift.”

Avoid fast talking, smooth ‘people of commerce’ promoting charitable donation ‘programs’

Bocock explained how GLGI donations worked in his decision dated March 27.

The process involved “GLGI’s offshore company, Phoenix Learning Corporation (acquiring) software licences consisting of several courseware titles at nominal value from a Florida corporation, Infosource Inc.; Phoenix then gifted most of the licences to a Canadian trust, Global Learning Trust 2004,” Bocock said.

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After writing a cheque to an associated charity named Millenium, participants were “accepted as a capital beneficiary of the trust.”

After the cheque was cashed, “the trust, in turn, gave the taxpayer rights to education software licences to a number of licences proportional to the taxpayer’s cash donation,” said the judge.

The person with the taxpayer rights then donated those licences to one of several other participating charities, and was issued tax receipts for both the original cash donation and the “theoretically apprised market-value” of the software licences.

“As a result of the cash donation and the in-kind donation of licences, the taxpayer received donation receipts for several times the amount donated, leading to a charitable tax credit that was much higher than the initial cash donation,” the judge wrote.

In the case of the Malone family, they donated software licenses to Malvern Rouge Valley Youth Services, a Toronto-area organization. The Canada Revenue Agency revoked Malvern Rouge’s charitable status in November 2011 after an audit revealed “that the organization had devoted a significant portion of its resources to the promotion of the Global Learning Gifting Initiative tax shelter gifting arrangement.”

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For the period from May 1, 2008, to April 30, 2009, Malvern Rouge “received in excess of $17 million of cash. Of this amount, over $8.3 million was received as tax-receipted donations from the participants of a tax shelter,” the agency said at the time. “The organization received a further $8.7 million from another registered charity participating in the tax shelter. Our audit showed that of the approximately $17 million of cash received, the organization paid over $14 million to the promoters of the tax shelter.”

Barry Malone argued that he, his spouse, Barbara, and his son, Brandon, “had donative intent. They intended to enrich the lives of disadvantaged Canadians through charitable giving.”

But the judge wasn’t buying it.

“The Malones join the ranks of hundreds, even thousands of GLGI participants, stripped of their cash, denied their inflated ‘charitable donation amounts’ because the gifts were not charitable and, therefore, not eligible for the promised charitable deductions,” Bocock said. “They now face arrears of debt comprised of tax and interest arrears … This is most unfortunate.”

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In 2020, lawyers advancing a class action case against CLGI said that “as many as 50,000-60,000 Canadians participated in this charitable donation tax scheme, and paid in excess of $500,000,000 in what they thought were charitable donations.”

If something is “too good to be true … it invariably is,” Bocock said in his recent decision.

He cautioned that “if one gains something more than a charitable receipt equal to (and not greater than) the value of the cash and/or properly valued gift-in-kind, then the transferred property is not a charitable gift, at law, and does not qualify … as an eligible charitable deduction.”

If a donor is “asked to sign an Information Sheet, Deed of Gift, Deed of Gift of Property, Direction One, Direction Two, Application and Waiver, there are many legal results, one of which is likely not that of a qualified charitable gift warranting an eligible charitable tax receipt,” said the judge.

“Generally, a tax shelter number is less of a gold star and more of a red flag for the CRA.”

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