Not only is Dec. 31 the deadline for making charitable donations, it’s also the deadline for determined Canadians looking to buy a tax shelter to reduce their 2009 personal income tax.

But a chill has been cast on some tax shelters, especially if they involve donation schemes, as a result of a tax case decided last month.

The case involved a “leveraged” donation tax shelter known as the Donation Program for Medical Science and Technology. It was marketed by Trinity Capital Corporation, which in 2001 took in over $18-million from 118 participants. Max Maréchaux, a real estate lawyer with Miller Thomson LLP, was among them.

Trinity offered similar programs in 2002 and 2003, resulting in total “gifts” in those years of $106-million and $94-million respectively.

The shelter was promoted as producing a “return on donation of up to 62.4%, depending on the donor’s province of residence.” It was supported by a tax opinion “from a firm of respected tax lawyers.”

Mr. Maréchaux was informed of the program by his accountant who advised him that by participating, based on a $30,000 cash outlay producing a $100,000 donation, he could come out ahead by more than $14,000, “subject only to a risk of challenge by the Canada Revenue Agency.” The risk of such a challenge was described to him as “slim.”

Here’s how the program worked: Under the deal, to make a $100,000 donation, Mr. Maréchaux contributed $30,000 of his own cash and received a 20-year interest-free loan for $80,000, $70,000 of which was to go to charity with the remaining $10,000 going to the lender to cover fees, insurance and a security deposit.

The Tax Court had two issues to decide: whether the donation was in fact a “gift,” and whether the general anti-avoidance rule (GAAR) applied.

Under the Income Tax Act, you can get a donation credit only for “gifts” made to registered charities. The term “gift” is not defined in the Act. Quoting an earlier case, “a gift is a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor.”

The judge concluded that there was no gift because a significant benefit flowed to Mr. Maréchaux in return for the donation -- the $80,000 interest-free loan that was given in return for the donation. In other words: no donation, no loan.

David Chodikoff, a tax litigator with Miller Thomson, who represented his fellow partner Mr. Maréchaux in tax court, advised tax shelter donors in a recent firm newsletter to “keep all options open” by objecting to their Notice of Assessment, while at the same time paying any amounts owing. This will stop the interest clock from ticking, allowing donors to “sleep better at night.” If they ultimately prevail, any monies refunded will be a “bonus.”

Asked whether Mr. Maréchaux’s case will be appealed, Mr. Chodikoff replied: “Stay tuned.”

Financial Post

Jamie.Golombek@cibc.com

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the managing director, tax and estate planning, with CIBC Private Wealth Management in Toronto