Robert says that the Court, in its oral reasons, found as follows (my comments are in square brackets):

• Benefits from third parties other than the donee-charity can vitiate a gift and no decided case says otherwise. [In fact, in Rickerd v. M.N.R., [1980] D.T.C. 1838, the Tax Review Board seemed to hold that a benefit need not flow from anyone for it to vitiate a gift.]
• The interest-free loan was a benefit, and it was provided in return for the purported gift.
• Providing the put option was also a benefit because the put allowed the donors to avoid liability under the loan by transferring the deposit and insurance policy to the lender.
• The cash transferred to the charity was not a gift because it was part of a connected series of transactions. The donation of cash was made only because of the grant of the interest-free loan. [That is, the Federal Court of Appeal affirmed Justice Woods' finding, at ¶49 of her decision, that the scheme represented "just one interconnected arrangement." This reasoning also seems to be of a piece with the approach taken by the Tax Court to certain other charity schemes where the cash is treated as the price to be paid for entry into the scheme.]
• The verdict: 100% of the donation (cash and loan) was denied.

What I find interesting about the case is the light it casts on the art-flip schemes. Mr. Donato tried to claim that the cartoons were personal use property because, if they were, he would not be required to realize any gains on donations of individual cartoons that were valued at less than $1,000. Mr. Donato would win the tax game if he could make a donation, claim the credit and not have to realize any taxable gains as a result of making the gift. The art-flip shelters depended on this same aspect of the personal use property rules: a taxpayer could win the game only if he paid an amount for the art, he donated it at a higher amount for tax purposes and he was not required to recognize any of the gain for tax purposes. The latter was possible only if the property was personal use property with a value under $1,000.

Mr. Donato went to some lengths to attempt to ensure that the property donated would be regarded as personal use property (see ¶¶17–30). Nevertheless, the Court found that the cartoons could not be characterized as such.

[41] In determining whether the cartoons are personal-use property, the relevant inquiry is whether the cartoons were used primarily for the personal use or enjoyment of the appellant or his spouse.

[42] The conclusion that I have reached is that the property donated to Brock University in 2001 was not personal-use property of the appellant.

[43] The creation of the cartoons by the appellant was for the purpose of fulfilling his contractual commitment to Sun Media to provide a daily cartoon for use in its newspaper. This purpose is commercial rather than personal.

[44] Over the years, a few of the cartoons were subsequently used for personal purposes. These uses included: gifts to relatives or friends, the display of a few cartoons in the home, a single use by the Donatos in a trivia type game with friends in their home, and trading cartoons with other cartoonists for their work. There was very little, if any, evidence linking these uses to cartoons that were donated in 2001, and in any event the personal use was quite minor. …

[50] Based on the evidence, the tangible works of art were used in connection with the Sun Media contract, and this was the primary use of this property. Whether the appellant also used intellectual property rights is not the appropriate question.

The Court found in favour of the Crown on this point, then, but the taxpayer did not go away empty-handed. The CRA had tried to reassess the taxpayer’s 1999 taxation year beyond the normal reassessment period on the ground that he had made a misrepresentation by treating the cartoons as personal use property.

The Court had little difficulty disposing of this argument. It is trite law that taking a filing position for which a reasonable argument can be made will not obviate the protection of the statute bar. The CRA cannot reassess beyond the normal reassessment period merely because it disagrees with a filing position taken by a taxpayer. While the Court disagreed with Donato about the characterization of his cartoons as personal-use property, it did not think his “error” attributable to neglect or carelessness, and so the reassessment for the barred year was vacated.

Mr. Maréchaux participated in a leveraged donation program in 2001. Under the program, Mr. Maréchaux agreed to make a $100,000 donation to a charity but only if a third-party lender connected to the promoter would loan him $80,000 interest-free and repayable in 20 years. The taxpayer paid $30,000 cash and directed $70,000 of the loan proceeds to the charity. The taxpayer directed the remaining $10,000 to the lender as a security deposit that was supposed to be invested to repay the loan. The charity issued a receipt for $100,000 to the taxpayer. At the same time, the taxpayer purchased an insurance policy that would pay out if the security deposit did not yield the returns necessary to repay the loan. Early in 2002 the appellant, pursuant to a “Put Option” granted by the lender, assigned the security deposit and the insurance policy to the lender in complete satisfaction of the $80,000 loan.

Justice Woods, after adopting the definition of “gift” set out by Linden J.A. in The Queen v. Friedberg (1991), [1992] DTC 6031 (FCA), had little trouble concluding that Mr. Maréchaux did not make a gift and that he was not entitled to any kind of tax credit for it “because a significant benefit flowed to the appellant in return for the Donation” (¶32). Justice Woods wrote:

[33] The benefit is the financing arrangement. The $80,000 interest-free loan that was received by the appellant, coupled with the expectation of the Put Option, was a significant benefit that was given in return for the Donation. The financing was not provided in isolation to the Donation. The two were inextricably tied together by the relevant agreements.

[34] It is not necessary for purposes of this appeal to place a value on the benefit. However, it does appear to be somewhere in the neighbourhood of $70,000 ($80,000 received less outlays of $10,000), less a slight discount for the risk that the Put Option would not be effective. The benefit is certainly significant.

[35] I would also comment that, even without the Put Option, the financing provided a significant benefit. It is self-evident that an interest-free loan for 20 years provides a considerable economic benefit to the debtor. I would also note that the $8,000 security deposit could not reasonably be expected to accrete to anywhere near $80,000 in 20 years. The evidence of Mr. Johnson clearly showed this, even taking into account differences of opinion regarding some of his assumptions.

The Income Tax Act was amended with effect in 2003 to allow charities to issue “split receipts”, which are receipts issued for the eligible amount of a gift (the value of a ‘gift’ less any benefit received by the donor in respect of the gift). Justice Woods did not need to consider these provisions, of course, because the taxpayer made his “gift” in 2001, and she appears to have decided the case on the basis that, under the Act before it was amended, any benefit to a donor&emdash;regardless of the amount&emdash;would vitiate his gift.

Some cases decided before the 2003 amendments did appear to allow split receipts perhaps on the theory that the gift and the associated benefits were inherent in separate transactions. Justice Woods disposed of that possibility for Mr. Maréchaux by noting at ¶49 that “on the particular facts of this appeal, it is not appropriate to separate the transaction in this manner. There is just one interconnected arrangement here, and no part of it can be considered a gift that the appellant gave in expectation of no return.”

Justice Woods’ decision was rendered on November 12, and so it is unclear yet whether the taxpayer will appeal.

After the decision in Alberta Institute on Mental Retardation v. The Queen, [1987] 2 C.T.C. 70, (F.C.A.), it could be argued that any business would be related to the objects of a charity if all profits of the business were devoted to the charity’s objects. The Federal Court of Appeal, however, has since gone out of its way to reject this proposition in two cases, the most recent being The House of Holy God v. Canada (Attorney General), 2009 FCA 148 at ¶6.