Redeemer: Are Charitable Donations a “Write Off”?

An interesting case dealing with tax and registered charities was granted leave to appeal on May 10, 2007. Redeemer Foundation v. Canada (Minister of National Revenue), 2008 SCC 46, looks at the extent to which the procedure in s. 231.2(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp) applies to the Minister, or Canada Revenue Agency (“CRA”) who acts on his behalf, when searching for information about unnamed persons during an audit.

The applicant, Redeemer Foundation (the “Foundation”), is a registered charity affiliated with Redeemer University College that runs a program to finance students’ tuition and costs through charitable donations, known as the Forgivable Loan Program (“FLP”). Following an audit of the Foundation in October of 1998, the CRA raised several issues with the practices of the Foundation, one of which was the issuance of donation receipts to parents whose donations benefited their own children. The Foundation was also unable to provide the CRA with transmittal forms that displayed the names of the donor and student who received the donation. At this point, the CRA threatened to reject the charitable deductions of parents if the Foundation did not abandon these practices.

Following another audit conducted in 2001, where the CRA learned that transmittal forms had not been saved despite the previous warning issued to the Foundation, the CRA ordered that the Foundation maintain proper records under s. 230(3) of the Income Tax Act, which would allow the CRA to conduct a proper investigation between the relationships between donors and students. A representative of the CRA orally asked the Executive Director of the Foundation for information, including a list of donors, after another audit in 2003. The information was provided shortly after, which lead the CRA to conclude that most donors used the FLP to fund their child’s education, while receiving a donation receipt for 100% of the gift amount for income tax purposes. The child recipients of these donations then received 90% of their parents’ gifts to pay for their tuition and other school-related expenses. According to the CRA, “for the reasons listed above, there may be grounds to revoke the organization’s status as a registered charity”.

In 2004, after the Foundation refused to provide the CRA with additional donor lists without a court order, the CRA issued notices of taxation reassessment to donors of the FLP with the intention of denying their tax deduction for their donation. The following year, the Foundation brought an application in the Federal Court for judicial review of the auditor’s request for donor lists on the grounds that the auditor was required to follow the process in s. 231.2(2) of the Income Tax Act, which required prior judicial authorization. The application was allowed and the judge concluded that the CRA could not use information from the audit of one taxpayer for the purpose of reassessing other taxpayers. He ordered the Minister to either destroy or return all information and documents he received from the unlawful request and required that he abandon all reassessments or planned reassessments concerning donors whose identity was revealed as a result of the unlawful request.

At the Federal Court of Appeal, the judge allowed the appeal of the CRA, setting aside the decision of the application judge and dismissing the Foundation’s application for judicial review. In coming to this conclusion, he explained that recourse under s. 231.2 was unnecessary as the Foundation was required by law to maintain the information and records under s. 230(2) that the CRA requested it produce. According to s. 231.1, in the exercise of the audit power, the CRA auditor was entitled to obtain information, including the lists of names and addresses of donors and duplicate receipts, through his own examination of the Foundation’s books and records. After examining this section, the judge could

“think of no principle which would require him (the auditor) to obtain a court order before asking for the Foundation’s assistance in obtaining the very same information”.

Further, the judge explained that, like buyer and seller, reciprocity between charity and donor is an important aspect in the tax return verification process. The Minister must be able to review the returns of donors who were issued a receipt if he determines that donations are not eligible for a deduction.

By allowing for leave to appeal by the Foundation, one wonders if the Supreme Court of Canada (“SCC”) were to reverse the Federal Court of Appeal’s decision and restore the initial decision of the Federal Court, would this type of judgment stand to curb the broad auditing powers provided to the Minister under the Income Tax Act. Indeed, considering that the Foundation claims that the CRA fails to follow their own rules under s. 231.2(2) by requesting for information relating to unnamed persons (donors) during an audit without judicial authorization, the SCC may seek to discipline the CRA for avoiding this provision of the Income Tax Act in their audit of Redeemer Foundation. On the other hand, a successful appeal might result in a system where courts are clogged with numerous requests by tax collectors for information pertaining to unnamed parties. Not only would this prove to be taxing (no pun intended) on the system, but also on tax collectors who would be additionally burdened by the requirement for a judge’s order for information relating to unnamed parties. While at this point in time it is impossible to determine how the SCC will rule, Redeemer Foundation v. Canada (Minister of National Revenue) is certainly worth watching considering its potential impact on the application of tax law.