Looking the Gift Horse in the Mouth: An Examination of
Charitable Gifts Which Benefit the Donor
Ellen B. Zweibel*
The author deals with the problem of gifts
which benefit the donor in the light of the
charitable donation deduction sections of the
Income Tax Act. The tax policy consideration
underlying the sections, namely the promo-
tion of charitable giving, may come into con-
flict with the Act’s prohibition on deductions
for purely personal expenditures and the desire
to avoid giving charitable organizations an
unwarranted competitive advantage. Recent
decisions of the Federal Court of Canada have
revealed the confusion in this area and the
need for a clear definition of “gift”. Using
American, Australian and Canadian case law
as background, the author formulates a three-
tiered test to distinguish a charitable gift from
an ordinary business transaction which may
have been entered into by a charitable
organization.
Cet article porte sur la deduction pour con-
tributions aux oeuvres de charit6 et en par-
ticulier sur la definition d’un << don >> pour les
fins de la Loi de t’impOt sur le revenu. Apr~s
avoir fait 6tat de l’incertitude et de l’insatis-
faction qui r~gnent en droit canadien suite A
des decisions rcentes en provenance de la
Cour fed~rale sur cette question, ‘auteur met
‘en 6vidence les aspects politiques fiscales sous-
jacentes i cette deduction. Notamment, la
prohibition par la Loi des deductions pour
d~penses purement personnelles et l’inten-
tion d’viter de donner aux organisations
charitables un avantage indu font obstacle A
la politique fiscale d’encourager les donations
charitables. En s’inspirant de la jurispru-
dence am~ricaine, australienne et cana-
dienne, rauteur 6labore trois tests susceptibles
de promouvoir ces politiques fiscales. L’au-
teur en arrive A la conclusion qu’une combi-
naison des trois tests serait la solution optimale.
‘Of the Faculty of Law, Common Law Section, University of Ottawa.
McGill Law Journal 1986
Revue de droit de McGill
REVUE DE DROIT DE McGILL
[Vol. 31
Synopsis
The Canadian Compromise
Introduction
I.
II. The Compromise Unravelling
III. Problem Stated and Solution Proposed
A. Test One: Subjective Intent
B. Test Two: Economic Benefit
1.
2.
3.
4.
Services
Increase in Value of Taxpayer’s Property
Receipt of Property or a Property Right
Miscellaneous, Indirect, Intangible Benefits
C. Test Three: Compulsory Payments
Conclusion
Introduction
We all know that it is better to give than to receive. When the gift is
to a qualified charity, this old adage has an additional meaning because the
donor is entitled to an income tax deduction under the Income Tax Act
paragraph 110(l)(a). l The question then becomes: If the reward to the donor
goes beyond the general feeling of personal satisfaction to which the adage
refers, and includes some economic benefit, should the gift still qualify for
the tax deduction?
‘Citations are to the Income TaxAct, S.C. 1970-71-72,c. 63, as am., unless otherwise indicated
[hereinafter ITA ].
1986]
EXAMINATION OF CHARITABLE GIFTS
In return for my annual donation to public television, I receive personal
satisfaction in sponsoring non-violent children’s programming, personal
entertainment in watching movies without commercial interruption, and
educational benefits for my three-year-old every weekday night when the
“Polka Dot Door” both instructs and babysits her from 6:00 to 6:30. I also
receive a charitable donation receipt for income tax purposes. I could obtain
similar personal, educational and entertainment benefits by purchasing a
VCR along with programs of my own selection. However, no one would
suggest that these personal expenditures should be tax deductible.
Charitable gifts are personal expenditures in the fullest sense. They are
inspired by a mixture of personal motives, even the most altruistic of which
reflect and promote the donor’s personal viewpoints. To escape ITA para-
graph 18(1)(h)’s prohibition on the deduction of personal expenditures, char-
itable donations require a specific deduction provision. This legislative
concession probably reflects a general perception that charitable giving should
be encouraged, rather than an empirical finding that charitable activity is
effectively promoted by a system of tax deductions. This paper will leave
aside the debate on the appropriateness of our present system.2 Rather, it
will examine what, if any, limits there should be on deductibility when the
donor receives tangible benefits because of his or her charitable gift.
The issue is not a new one. It has previously arisen in Canadian tax
cases, primarily in two contexts: the purchase of tickets to a charity-spon-
sored event, and payments to parochial schools by parents of children attending
the school. A compromise approach has evolved whereby Revenue Canada
now accepts the dual character of these payments and apportions them into
a non-deductible personal amount and a deductible charitable gift.
The compromise has recently started breaking down. This is in part
because it has been limited to a few situations, and has not been applied
to the many other miscellaneous benefits that donors receive. Hence recently,
in Burns v. Minister of National Revenue, 3 Revenue Canada challenged the
deductibility of a donation to the Canadian Ski Association because the
organization was training the donor’s daughter as a world class ski competitor
More importantly, the compromise is failing because it lacks, as a basis,
a comprehensive definition of charitable gift that incorporates tax policy
considerations. Thus, in McBurney v. R.,4 the Federal Court Trial Division
2See R.W. Boadway & H.M. Kitchen, Canadian Tax Policy, 2d ed. (Toronto: Canadian Tax
Foundation, 1984) at 71-74; R.M. Bird & M.W. Bucovetsky, Canadian Tax Reform and Private
Philanthropy (Toronto: Canadian Tax Foundation, 1976) at 4-10; G. McGregor, “Charitable
Contributions” (1961) 9 Can. Tax J. 441.
3(1983), [1983] C.T.C. 2629, 83 D.T.C. 557 (Tax Ct) [hereinafter Burns].
4(1984), [1984] C.T.C. 466, 84 D.T.C. 6494 [hereinafter McBurney (T.D.)].
McGILL LAW JOURNAL
[Vol. 31
allowed a deduction for the entire amount paid by a parent to the private,
religious elementary school attended by his children. The decision was based
essentially on a definition of gift rooted in contract law. It was recently
appropriately overturned by the Federal Court of Appeal. 5 However, the
appellate decision still falls short of providing a complete definition of char-
itable gift for income tax purposes.
I. The Canadian Compromise
With respect to charity-sponsored events, the Minister of National Rev-
enue’s original stance was to disallow any deduction, viewing the entire
admission payment as falling outside the legal meaning of a gift. This was
first successfully challenged in Aspinall v. Minister of National Revenue.6
The taxpayer, an executive member of the National Ballet Guild of Canada,
paid a $150 admission fee to attend a Guild-sponsored fund-raising per-
formance and reception. The regular price of admission to the event was
$65. The taxpayer deducted the $85 premium as a charitable donation. The
Guild had only issued a donation receipt for $42, because unforeseen expenses
had reduced the event’s net profit and hence the actual amount available
for the organization’s charitable activities. The Minister disallowed the entire
deduction.
The taxpayer’s first hurdle was to show that the extra $85 was intended
to be a gift, as opposed to a purely commercial payment. This was analyzed
from both the taxpayer’s and the charity’s perspective. The Tax Appeal Board
quoted at length from Mr Aspinall’s direct testimony to the effect that he,
and other subscribers, were aware that they were paying a premium and
that they intended thereby to make a gift. Likewise, the Board noted that
the Guild, in its solicitations and in the reception program, acknowledged
the financial support of those in attendance.
Having accepted the divisibility of the admission fee into entertainment
and charitable components, the Tax Appeal Board was left with a valuation
question. It applied a bargain sale analogy, using the regular admission price
as the fair market value and treating the excess amount as a gift. The use
of some of the excess to defray unexpected expenses was not considered
relevant, because all charitable donations go in part to defray administrative
expenses.
Interpretation Bulletin IT-11 OR now accepts the basic principle estab-
lished in Aspinall that part of the price of admission to a charity event can
5R. v. McBurney (1985), [1985] 2 C.T.C. 214, 85 D.T.C. 5433 [hereinafterMcBurney (A.D.)].
6(1970), [1970] Tax A.B.C. 1073, 70 D.T.C. 1669 [hereinafter Aspinall cited to Tax A.B.C.].
1986]
EXAMINATION OF CHARITABLE GIFTS
be a gift. The fair market value of the admission price is used to measure
the entertainment component. 7
Information Circular 75-23 presents the compromise position on reli-
gious school tuition.8 Payments to religious schools are divisible into a
personal non-deductible expenditure for secular education, and a deductible
charitable donation for religious instruction.9 Two methods are provided
for evaluating the deductible and non-deductible components. The appro-
priate method depends on whether the school itself has segregated its costs
for providing secular and religious training. Both methods arrive at a per
pupil cost and allow a deduction for payments in excess of that cost.’ 0 Under
both methods, contributions to the school by non-parents will result in an
increase in the deductible component.
The Information Circular’s basic approach was employed in R. v. Zand-
stra. I The Federal Court Trial Division disallowed a charitable deduction
to the extent that the amount reflected the per pupil cost of religious ele-
mentary school education for the taxpayers’ children.12
II. The Compromise Unravelling
The common law definition of charity tends to expand to reflect soci-
ety’s changing views and needs. 13 As “charity” widens to include sports, arts
and cultural activities, the likelihood increases that donors may be directly
71nterpretation Bulletin IT-1 10R, “Charitable Donation and Like Receipts: Tickets and Spe-
cial Fund-raising Events”, 20 February 1984, paras 2 and 3.
8Information Circular 75-23, “Tuition Fees and Charitable Donations Paid to Privately Sup-
ported Secular and Religious Schools”, 29 September 1975.
9Underlying this compromise is a basic premise that any payment for exclusively religious
instruction is per se for the advancement of religion, and hence charitable. However, to be
charitable, the religious activity must still provide a public benefit.
The classic statement on charitable religious activity, in Cocks v. Manners (1871), L.R. 12
Eq. 574 at 585, makes a distinction between providing religious instruction to one’s self and
family and making religious instruction available to the public.
The Information Circular disregards this possible distinction. For a case indicating a similar
shift away from Cocks v. Manners see, generally, Neville Estates Ltd v. Madden (1961), [1962]
Ch. 832, [1961] 3 All E.R. 769.
101f the school can divide its costs between secular and religious training, then the parents
can deduct the full amount paid for religious training. If the school does not separately account
for its costs, then only the amount paid in excess of the total per pupil cost for both secular
and religious training is deductible. See Information Circular 75-23, paras 7 and 9.
1(1974), [1974] C.T.C. 503, 74 D.T.C. 6416 [hereinafter Zandstra].
‘ 2An earlier case, No. 688 v. Minister of National Revenue (1960), 23 Tax A.B.C. 400, 60
D.T.C. 130 [hereinafter No. 688 cited to Tax A.B.C.], disallowed a parent’s full contribution to
a private Hebrew school. If Information Circular 75-23 had been in effect, a partial deduction
would have been allowed. See also Homa v. Minister of National Revenue (1969), [1969] Tax
A.B.C. 961, 69 D.T.C. 673; Koetsier v. Minister ofNationalRevenue(1973), [1974] C.T.C. 2011,
74 D.T.C. 1001 (Tax Rev. Bd).
‘3See, generally, ReLaidlaw Foundation (1984), 48 O.R. (2d) 549, 13 D.L.R. (4th) 491 (H.C.).
REVUE DE DROIT DE McGILL
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involved in a charity’s activities, and thereby receive some type of benefit.
Although an apportionment approach may still be a viable solution to the
donor benefit problem, its application is not always as apparent and straight-
forward as in the admission fee situations set out in Interpretation Bulletin
IT-1 1OR.
This was the problem presented to the Tax Court in Burns, where the
taxpayer’s daughter received ski training concurrently with his donations to
the Canadian Ski Association. Taylor J.’s opinion gropes for a standard for
determining when a gift has been made, ultimately settling on the taxpayer’s
primary motivation as the test. Some important points are raised in the
process.
First, the Minister could have justified the denial of a charitable deduc-
tion by proving the existence of a contract for services, regardless of what
the parties called the payments. To this end the Minister introduced evidence
showing the extreme pressure placed on parents to make contributions.
Some letters from the Canadian Ski Association even contained an implicit
threat that training would be discontinued unless donations were forthcom-
ing. Judge Taylor considered this evidence insufficient to establish a contract.
However, he made a significant point –
that while the existence of a contract
would destroy the gift, the absence of a contract did not in itself prove there
was a gift.14
Although Judge Taylor reiterated a debate between counsel on whether
“consideration” is synonymous with “benefit”, he avoided approving any
particular definition of consideration by focusing instead on the taxpayer’s
motive. However, using motive as the main test raised a further problem.
The taxpayer, by his own admission, had mixed charitable and personal
motives for making the donations. Judge Taylor implicitly rejected any
requirement that the taxpayer’s motive be exclusively charitable by finding
that Dr Bums’ primary motive was to support the public objectives of the
Canadian Ski Association and that his secondary or ancillary family con-
siderations did not undercut the primary motive sufficiently to vitiate the
gift. 15
Several factors were used to rank the relative importance of the tax-
payer’s charitable and personal motives. First, his long-standing support of
the Canadian Ski Association was seen as evidence of his commitment to
the charity’s general objective of producing world-class Canadian skiers.
14Burns, supra, note 3 at 2631 (C.T.C.), 559 (D.T.C.):
But that does not relieve this appellant from convincing the Court that the amounts
at issue qualify as “gifts” and it is not sufficient that counsel for the appellant
highlight the distinctions which might be seen from a “contract”.
15Ibid. at 2633 (C.T.C), 560 (D.T.C.).
1986]
EXAMINATION OF CHARITABLE GIFTS
Second, even his specific interest in his daughter’s ski training was inter-
preted as an interest in fulfilling the charity’s mandate. The rationale for
this interpretation was that Dr Bums’ narrow personal objective could have
been accomplished through private lessons, whereas producing a Canadian
world champion could only be done under the Association’s auspices.
Finally, Dr Bums’ daughter’s achievement could not ultimately be tied to
his donations. Her progress as a trainee depended solely on her physical
skills and ability. If she was capable she would be chosen whether or not
Dr Bums made any donations.
Thus the Burns decision contributes some important ideas to the Canadian
case law. It puts the relevance of contract into perspective in determining
whether or not there has been a gift. It promotes charitable motive as the
main test. It rejects the proposition that the taxpayer’s motive must be
exclusively charitable, thus allowing for the co-existence of a primary char-
itable objective and a secondary personal objective. Finally, there was no
suggestion in this case that the donation could be apportioned into personal
and charitable components.
The donor benefit problem next arose in the McBurney case. The Fed-
eral Court Trial Division could have treated it as another religious school
tuition case and, following Zandstra, apportioned the payments between a
non-deductible fee for secular education and a deductible charitable gift.
Instead, Mr Justice Muldoon distinguished Zandstra on factual grounds
and allowed the full amount of the donation as a charitable deduction. 16
Although the Federal Court of Appeal recently overruled the Trial Division,
it left unanswered some troublesome points raised in Muldoon J.’s decision. 17
As the Federal Court of Appeal makes clear, Zandstra and McBurney
are factually indistinguishable. The schools in both cases stressed Christian
religious instruction over secular instruction. Parents contributed to each
school according to their ability to pay. Those who could not pay were not
pressured, and their children were neither denied admission nor expelled.
In both cases the parents felt obligated by their sense of Christian duty to
educate their children from a strictly religious perspective and this obligation
formed the basis of a “clear understanding with the charities that while
[their] children were attending these schools [the parents] would contribute
within [their] means.” 18
An important part of the Federal Court of Appeal’s decision is the
affirmation of the test applied in Zandstra. In that case, Heald J., when he
was sitting in the Federal Court Trial Division, adopted a definition of gift
16McBurney (T.D.), supra, note 4.
17McBurney (A.D.), supra, note 5.
18McBurney (A.D.), ibid. at 219 (C.T.C.), 5436 (D.T.C.).
McGILL .LAW JOURNAL
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from an Australian High Court case, Commissioner of Taxation ofAustralia
v. McPhail.19 Under the McPhail approach, a gift has two distinct require-
ments which must be separately tested. First, it cannot be a payment made
pursuant to a contract. Second, the payment cannot result in the receipt of
a material advantage.
The gifts in McBurney and Zandstra both run afoul of the second limb
of the McPhail test. As was pointed out by the Federal Court of Appeal,
Muldoon J. erred because he narrowed his inquiry to the first limb in McPhail.20
He focused solely on “whether he [McBurney] paid tuition and received as
contractual consideration the benefit of having his children receive a Chris-
tian education”.21 Relying on the evidence that the school neither attempted
to collect unpaid pledges through legal measures, nor expelled children whose
parents did not pay, Muldoon J. found there was no contractual obligation
between the parents and the school and hence the full amount was a gift.
The Federal Court of Appeal puts the school tuition payment cases
back on track. The importance of this cannot be overrated. There was already
at least one lower court decision choosing to follow McBurney over Zandstra.22
The Federal Court of Appeal, however, does not deal directly with
Muldoon J.’s challenge to the appropriateness of the second limb of the
McPhail approach, the material benefit test. A major portion of Muldoon
J.’s decision is a rejection of Revenue Canada’s apportionment compromise.
Intertwined with this rejection is his rejection of the material benefit test.
It is useful to follow the logic of the Federal Court Trial Division, to uncover
both its weaknesses as well as the legitimate questions it may raise.
19(1968), 117 C.L.R. 111 at 116,41 A.L.J.R. 346 [hereinafterMcPhailcited to C.L.R.], quoted
in Zandstra, supra, note 11 at 508 (C.T.C.), 6419 (D.T.C.):
But it is, I think, clear that to constitute a “gift”, it must appear that the property
transferred was transferred voluntarily and not as the result of a contractual obli-
gation to transfer it and that no advantage of a material character was received by
the transferor by way of a return.
20McBurney (A.D.), supra, note 5 at 218 (C.T.C.), 5435 (D.T.C.).
21McBurney (T.D.), supra, note 4 at 474 (C.T.C.), 6501 (D.T.C.) [emphasis added]. Even with
this narrow question, the McBurney facts should have presented real difficulties. Although the
taxpayer alleged that no tuition fee was levied, the record is replete with references to tuition
fees: in the information handbook, the corporation constitutions and by-laws, and even the
school’s first year statement of receipts and expenditures. The amounts originally designated
tuition fees in the operating statements were, in later years, redesignated “donations from
parents and students”. Muldoon J., supra at 476 (C.T.C.), 6502-3 (D.T.C.), dismissed the ref-
erences to tuition fees as “stressful semantics” finding that the school officials had simply
changed the terminology to conform with its ideals, its practices and the reality of the matter.
In contrast, the Federal Court of Appeal re-emphasizes the references to tuition in the record.
22Bleeker Stereo and Television Ltd v. Minister of National Revenue (1984), [1984] C.T.C.
2885, 84 D.T.C. 1761 (Tax Ct).
1986]
EXAMINATION OF CHARITABLE GIFTS
Although the Minister of National Revenue had not challenged the
charitable status of the religious schools involved, Muldoon J. begins his
decision with a lengthy, general discussion of the definition of charity and
the importance of the advancement of religion in Canadian culture.23
He emphasizes that although churches provide their members with a
variety of religious, educational and social benefits, donations to the church
are fully tax deductible.
It is worth emphasizing that according to the state of the law today, contributors
to parish churches are rightly entitled to full income tax deductions, up to the
prescribed limits, for their contributions even though they received the man-
ifest and multifold benefits of their parish worship, instruction, pastoral ser-
vices and counselling, year in and year out, for themselves and their children …
There can be no doubt that the sermons and homilies, the Bible study groups
and the Sunday schools, the adult counselling and marriage preparation courses
can be characterized as both educational and religious, but nothing about that
characterization entitles the Department of National Revenue to vivisect the
parishioners’ contributions for income tax purposes. Parliament has not authorized
the Minister of National Revenue to do that.24
With this background, Muldoon J. begins to unravel Information Cir-
cular 75-23’s compromise position with respect to payments to religious
schools. Looking at the religious schools in the McBurney case, Muldoon
J. concludes that, “[e]ach corporation, with the school it operates, is in law
a religious charity and an educational charity. ’25 He then draws an analogy
between the religious schools in the case before him, and the parish church.
The analogy is supported in two ways. First, he underscores the educational
component in many church-based activities. Second, he quotes from the
trial record to show that in these particular Christian schools, the religious
perspective is so pervasive that, “[it was and is blended with [secular sub-
jects] such that, if the secular and religious teachings were (to make an
analogy) chemical elements, they would be combined in solution of varying
proportions from hour to hour throughout the school year. ’26
Once the analogy between these religious schools and the parish church
is accepted, it is a short logical leap to the proposition that Revenue Canada
cannot “vivisect” payments to these religious schools without being
discriminating.
Thus it is not whether the plaintiff received any benefit at all, big or small,
real or imaginary, physical or metaphysical, material or immaterial from, and
as a result of, his monetary contributions to the three charities. So to pose the
23McBurney (T.D.), supra, note 4 at 468-69 (C.T.C.), 6496-97 (D.T.C.).
24Ibid. at 470 (C.T.C.), 6497-98 (D.T.C.).
251bid. at 472 (C.T.C.), 6500 (D.T.C.).
26Ibid. at 472 (C.T.C.), 6499 (D.T.C.).
426.
REVUE DE DROIT DE McGILL
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question would demonstrate an intent to treat the religious charities carried
on by the three corporations differently from the treatment habitually and
correctly accorded to those religious charities carried on by parishes and other
religious congregations. 27
Muldoon J.’s rejection of Revenue Canada’s apportionment compro-
mise is, in effect, a rejection of the material benefit test. If there is no
authority to vivisect contributions to a parish church into non-deductible
material benefits and deductible spiritual benefits, likewise there is no authority
to vivisect contributions to religious schools. The judge therefore confined
himself to ascertaining whether there was a contractual obligation to pay
tuition.
If Muldoon J.’s reasoning had been allowed to stand, it would have
been disastrous from a tax policy perspective. 28 In effect, by defining “gift”
as merely the absence of a legal contract to pay tuition, it would have
potentially enlarged the types of payments to charities which would be
deductible, without requiring any examination of whether the payment was
in reality a non-deductible personal expense. Muldoon J. emphasized the
tax policy of promoting one particular charitable activity, namely the
advancement of religion, without ever considering the countervailing tax
policy that personal expenditures such as elementary school tuition are non-
deductible.29 Also, as an earlier case, No. 688, pointed out, a decision allow-
ing a full deduction would promote schemes to camouflage tuition fees as
donations. 30
27Ibid. at 473 (C.T.C.), 6500 (D.T.C.).
28For an excellent critique of the trial decision, see G. Bale, “Construing a Taxing Statute or
Tilting at Windmills: Charitable Donation Deduction and the Charter of Rights and Freedoms”
(1985-86) 19 E.T.R. 37.
291TA paras 60(e), (f) and (g) allow students attending certain secondary and post-secondary
institutions to deduct tuition fees. Elementary school tuition is non-deductible under the general
provisions of ITA para. 18(l)(h).
301n that case the Tax Appeal Board denied the taxpayer’s deduction of contributions to the
Associated Hebrew Schools of Toronto attended by his children. There was no tuition fee.
Parents were encouraged to contribute according to their financial ability, although some con-
tributed nothing. Only nominal amounts of $10 or $15 annually were contributed on behalf
of 10 per cent of the 2,000 pupils enrolled. Undoubtedly, if the reasoning in McBurney (T.D.)
were applied to the facts in No. 688, the parents in the latter case would have been allowed a
full deduction.
The Board in No. 688, supra, note 12 at 406, accepted the argument proposed by the Minister
of National Revenue, who had submitted that:
shocking results might flow from the allowance of this appeal. It would mean that
in order to obtain a deduction under Section 27(l)(a) of the Income Tax Act all that
would have to be done would be for the various educational institutions to agree
with the parents not to charge a fixed amount … but to make a donation which
could be deducted.
1986]
EXAMINATION OF CHARITABLE GIFTS
Muldoon J. cites two cases, Antoine Guertin Lte v. R. and Burns, in
support of his position that the receipt of a material benefit is not relevant
for determining whether a gift has been made. Antoine Guertin Lte v. R.3 1
is cited as an instance where a charitable deduction was allowed despite the
receipt by the donor of direct and quantifiable benefits. However, the case
deals solely with ITA subsection 245(1). The Minister was challenging a
series of interconnected employee bonuses, charitable deductions and loans
as artificial transactions. 32 Because the Minister’s assessment did not raise
ITA paragraph 11 0(l)(a), the court never considered whether the charitable
donations were truly gifts. Neither the ultimate holding nor the court’s rea-
soning had any real bearing on the questions presented in McBurney.
The Burns case also provides weak support for the analysis applied in
McBurney. First, the case specifically rejects using the absence of a con-
tractual obligation as proof that a gift has been made. Although the judge
quotes from counsel’s arguments on whether “consideration” and “benefit”
are synonymous, he does not give an opinion on the matter. Instead the
case is resolved by finding that the taxpayer’s motivation was primarily
charitable, a point not even considered in McBurney.33
The Federal Court of Appeal decision in McBurney reaffirms the mate-
rial benefit test of McPhail as applied in Zandstra. Unfortunately, the deci-
sion does not adequately discuss the critical question of how to identify a
material benefit. It therefore does not answer Muldoon J.’s challenge that,
since we do not vivisect donations to churches where the parishioners receive
“benefits” such as Sunday school instruction or marriage counselling, we
cannot vivisect donations to a church school where religion and education
are inseparable. Furthermore, the decision does not provide a standard for
analyzing more difficult benefit situations such as the one presented in Burns.
The Court of Appeal finds a material benefit on two independent grounds.
First, the taxpayer made the donation out of a sense of personal obligation
3′(1981), [1981] C.T.C. 351, 81 D.T.C. 5045 (EC.T.D.) [hereinafter Antoine Guertin Lte].
32The taxpayer’s employees were paid large year-end bonuses on the pre-arranged under-
standing that they would donate approximately one third to a specific charity. The charity then
lent the donated amount back to the taxpayer at an interest rate significantly lower than the
prevailing rate. In effect, the taxpayer reduced its taxable income by paying large employee
bonuses, and avoided ITA para. I 10(1)(a)’s limitation on charitable deduction to 20 per cent
of income. It also maintained its level of working capital through the loan back at a favourable
interest rate.
331n dicta, Taylor J. noted the lack of specific case law on the effect of a donor’s personal
involvement on the tax deductibility of a charitable gift. However, he did not purport to answer
the difficult questions posed. Burns, supra, note 3 at 2634 (C.T.C.), 561 (D.T.C.).
McGILL LAW JOURNAL
[Vol. 31
or “Christian duty”. 34 Second, the donation allowed the taxpayer to dis-
charge his legal obligation to educate his children.35
The latter reason, although quite clear and specific, is a very narrow
ground without much general application. On the other hand, the former
ground is so broad that it provides no standard at all. It could literally apply
to any donation to any charity where the taxpayer feels he has a personal
or moral obligation to support the charity’s objectives. It does not focus on
the real crux of the matter. Mr McBurney’s donations directly resulted in
the private school education of his children. This is something we ordinarily
expect to pay for and which is easily valued.
Perhaps the failure of the Federal Court of Appeal to articulate the
meaning of “material benefits” stems from the patent nature of the benefit
in McBurney. Unfortunately, the language used does not provide a basis for
analyzing more borderline situations. The subsequent discussion in this
paper on the application of a material benefit test will attempt to go much
further in dealing with this question.
III. Problem Stated and Solution Proposed
Since the charitable deduction is an exception to the general prohibition
on the deductibility of personal expenses, it is not surprising that different
tax policies collide at this point. There is no simple solution. On the one
hand, we want to encourage contributions to further charitable activities.
On the other hand, ordinary business transactions which happen to occur
between a taxpayer and a charity should not change their tax status simply
because one of the parties is a charity. Equity among taxpayers will not be
preserved unless the deductibility of goods and services purchased from
charities depends only on the general principles contained in the Income
Tax Act. Payments which are actually non-deductible personal expenditures
should be treated as such, and there should also be consistency in the treat-
ment of business expenses. Furthermore, if a deduction results simply because
the payee is a charity, it would give charities an unintended and unearned
competitive edge in those areas where there are profit-making organizations
providing similar services.
This paper attempts to formulate an analysis of charitable gifts which
harmonizes the foregoing tax policies. The objective is to distinguish gifts
from ordinary business or personal transactions, without inhibiting chari-
table giving. A three-pronged analysis using a combination of subjective
and objective tests is proposed. The second test is the most effective one
34McBurney (A.D.), supra, note 5 at 219 (C.T.C.), 5436 (D.T.C.).
35Ibid. at 220 (C.T.C.), 5437 (D.T.C.).
1986]
EXAMINATION OF CHARITABLE GIFTS
for reconciling the inherent confficts in tax policies. The first and third tests,
however, supplement the second and prevent some otherwise inequitable
results.
The first test evaluates the taxpayer’s subjective intent. To qualify for
the deduction, the taypayer must demonstrate that one of his or her sig-
nificant reasons for the donation was to further the charity’s public objective.
The proposed test would disqualify the donation for a deduction only if the
taxpayer’s charitable objectives were insignificant or non-existent, or if his
or her commercial expectations were overwhelmingly paramount.
While a subjective intent test has already been applied in some cases,
they require the taxpayer to prove that his or her dominant motive was the
furtherance of a charitable purpose. As will be discussed, the dominant
motive requirement is not relevant to the tax policy behind encouraging
charitable giving. Also, because taxpayers often have several motives for
charitable giving, a dominant motive analysis easily leads to an artificial
and unconvincing quantification and ranking of the taxpayer’s subjective
motives. For these reasons, the proposed subjective intent test is intended
only as a relaxed threshold used to weed out purely commercial transactions
which might pass the other two proposed tests.
The second test is objective: Did the contribution result in the taxpayer’s
direct or indirect receipt of an economic benefit? The test has two elements.
There must be an economic benefit, as opposed to the general psychological
benefits associated with giving. There must also be a causal connection,
direct or indirect, between the benefit and the donation. As will be seen,
this second test provides an objective approach to the conflict in tax policies
inherent in disallowing deductions for personal expenditures while at the
same time trying to encourage charitable giving through deductions. Also,
in the context of this test it is possible to revive Revenue Canada’s com-
promise position of apportioning contributions between a deductible char-
itable and a non-deductible personal or business element.
The third test is also objective. Regardless of the taxpayer’s charitable
motive, if for some reason the payment or transfer was compelled by statute,
regulation, court order or commercial contract, or to fulfill a precondition,
then there has been no gift. This test has a limited scope. It is intended to
catch non-voluntary transactions which slip through tests one and two.
The proposed tests have been suggested and shaped by Australian and
American decisions in this area. Like Canada, the tax statutes of both these
countries create an obvious point of tension by encouraging charitable giving
through deductions and credits, while disallowing deductions for personal
expenditures. Not suprisingly, the taxing authorities in both countries have
had experience with taxpayer schemes to convert personal expenses into
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charitable deductions. The Australian and American cases expose both the
potential parameters of the problem and the shortcomings of different solu-
tions which have been used.
One would expect that the natural backdrop to working on a solution
to these donor benefit problems would be the common law definition of
gift, such as that given in Black’s Law Dictionary.
A voluntary transfer of property to another made gratuitously and without
consideration. 36
However, both the Australian and American cases are clear that the
word gift, as used in the taxing statutes, is not completely synonymous with
the common law definition of gift. 37 In DeJong v. Commissioner of Internal
Revenue,38 the United States Court of Appeals, Ninth Circuit, adopted a
“colloquial” definition of gift from an earlier United States Supreme Court
decision. The Court refers to several situations which fit the common law
definition of gift, but which do not mesh with the ordinary sense of the
word as it is used in the taxing statute.
The course of decision here makes it plain that the statute does not use the
term “gift” in the common law sense, but in a more colloquial sense. This
Court has indicated that a voluntary transfer of his property by one to another,
without any consideration or compensation therefor, though a common-law
gift, is not necessarily a “gift” within the meaning of the statute. For the Court
has shown that the mere absence of a legal or moral obligation to make such
a payment does not establish that it is a gift. … And, importantly, if the payment
proceeds primarily from “the incentive of anticipated benefits” of an economic
nature, … it is not a gift. And, conversely, “[w]here the payment is in return
for services rendered, it is irrelevant that the donor derives no economic benefit
from it”.39
Several Canadian cases have implicitly acknowledged the imperfect fit
between the common law definition of gift and the meaning of the word in
the taxing statutes. In Olympia Floor & Wall Tile (Quebec) Ltd v. Minister
36Black’s Law Dictionary, 5th ed. (St Paul, Minn.: West, 1979) at 619.
371n McPhail, supra, note 19 at 115-16, Owen J., relying on English authority, comments on
the meaning of gift as used in the charitable deduction provisions of the Australian Income
Tax Assessment Act 1936-1966:
There is nothing in the Act which defines the word “gift” or which extends its
ordinary meaning to cover a disposition of property in circumstances in which the
disponor receives a benefit in return for the transfer of the property. … The word
as used in s. 78(1) is, I think, used in the sense in which it is understood in ordinary
parlance.
38309 E2d 373 (1962) [hereinafter DeJong].
39Ibid. at 377 citing from Comm’r of Internal Revenue v. Duberstein, 363 U.S. 278 (1960)
[hereinafter Duberstein].
1986]
EXAMINATION OF CHARITABLE GIFTS
of National Revenue,40 the taxpayer corporation deducted a portion of its
contributions to charity as a business expense, rather than as a charitable
donation. The charities involved were chosen by the taxpayer because they
were directed by persons the taxpayer was cultivating as business customers.
Jackett J. noted that some payments, although gifts in the sense that they
were made without legal obligation, were still ordinary business transactions.
He gave as an example employee bonuses, which under most circumstances,
are ordinary business transactions and not gifts, despite the fact that there
is no consideration. He noted that “good business can dictate … disburse-
ments over and above the amounts legally owing for what the business man
has received or is to receive.”‘4 1 As previously discussed, the Burns decision
also made it clear that the absence of a contractual obligation is not sufficient
to prove that a gift has been made.
A. Test One: Subjective Intent
For the purposes of a taxing statute, we need a definition of gift which
accurately distinguishes it from other transactions. The courts have found
that the common law definition of gift places too much emphasis on the
absence of a legal contract and on the absence of compulsion. Strictly applied,
the common law definition may characterize some clearly commercial trans-
actions as gifts. An employee bonus payment has the voluntary, non-com-
pulsive, non-contractual elements of a common law gift and yet it is undeniably
an ordinary business payment.
What element makes the bonus payment a business expense rather than
a gift? Some courts have pinpointed the taxpayer’s motivation as the key
distinction. Even if the bonus payment is motivated by the employer’s good
feelings towards the employee, the primary motivation is the expectation
that it will promote employee morale and loyalty. Hence, a considerable
number of cases have focused on subjective intent or taxpayer motivation
to draw the line between a gift and other transactions. 42
40(1970), [1970] C.T.C. 99, 70 D.T.C. 6085 (Ex. Ct) [hereinafter Olympia Floor]. The main
issue in Olympia Floor was whether the charitable deduction sections of the Income Tax Act
precluded a deduction for such gifts under another statutory provision. That issue was resolved
in the taxpayer’s favour.
4101ympia Floor, ibid. at 106 (C.T.C.), 6089 (D.T.C.). Jackett J. is quoting from his own
judgment in Montreal Trust Co. v. Minister of National Revenue (1966), [1966] C.T.C. 648 at
655, 66 D.T.C. 5424 at 5428 (Ex. Ct) [hereinafter Crosbie Estate].
42In the Canadian context, we see this most clearly in Burns, supra, note 3, where the pivotal
consideration was the taxpayer’s motivation for making the donation to the Canadian Ski
Association.
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In the United States, subjective intent was first used in the taxing area
by the United States Supreme Court to distinguish gifts, 43 excluded from
income by Internal Revenue Code, section 102, from other income receipts.
Subsequently, the test was applied in DeJong by the Ninth Circuit Court of
Appeals in the charitable donation context. The criteria for a gift was expressed
as follows:
A gift in the statutory sense, on the other hand, proceeds from a “detached
and disinterested generosity,” … “out of affection, respect, admiration, charity
or like impulses.” … “What controls is the intention with which payment,
however voluntary, has been made.”44
Against this, the Court juxtaposed “the constraining forces of any moral
or legal duty” and “the incentive of anticipated benefit of an economic
nature” 45 as motives which would not support a charitable gift deduction.
Using this criteria, the taxpayer’s contributions to schools attended by his
children were held to be in the nature of tuition fees and not charitable gifts.
Delving into a taxpayer’s subjective intent is always an uncomfortable
proposition. Consequently, the appropriateness of the subjective intent test
has been hotly debated among the various circuits of the United States
Court of Appeals. The First Circuit rigorously rejected the DeJong test in
Crosby Valve & Gage Co. v. Commissioner of Internal Revenue:.
Were the deductibility of a contribution under section 170(c) of the Internal
Revenue Code of 1954 to depend on “detached and disinterested generosity”,
an important area of tax law would become a mare’s nest of uncertainty woven
of judicial value judgments irrelevant to eleemosynary reality. Community
good will, the desire to avoid community bad will, public pressures of other
kinds, tax avoidance, prestige, conscience-salving, a vindictive desire to prevent
relatives from inheriting family wealth –
these are only some of the motives
which may lie close to the heart, or so-called heart, of one who gives to a
charity. If the policy of the income tax laws favoring charitable contributions
is to be effectively carried out, there is good reason to avoid unnecessary intru-
sions of subjective judgments as to what prompts the financial support of the
organized but non-governmental good works of society.46
Because of this debate, as well as the greater variety of fact patterns
litigated, the American cases provide good examples of the weaknesses of
the subjective intent analysis. To begin with, the “detached generosity” lan-
guage is not appropriate for a corporate taxpayer. Hence, soon after DeJong,
43Duberstein, supra, note 39.
“DeJong, supra, note 38 at 378 quoting Duberstein, ibid.
45DeJong, ibid. at 379.
46380 E2d 146 at 146-47 (1967) [hereinafter Crosby Valve].
19861
EXAMINATION OF CHARITABLE GIFTS
the Ninth Circuit Court of Appeals acknowledged in United States v. Trans-
america Corp. that “[i]t does not seem appropriate, however, to demand of
a corporate entity such impulses as affection, respect or admiration. 47
At first blush, this attempt to restate the subjective intent test in order
to fit the corporate taxpayer more accurately does not seem to change the
fundamental inquiry, namely the dominant motive for the donation. In fact,
it highlights an existing ambiguity as to the kind of proof required. Does
the taxpayer have to prove a positive charitable state of mind or, as implied
in Transamerica, is it sufficient to negate commercial intention? It is not
surprising, therefore, that the subsequent American cases citing either DeJong
or Transamerica start to waffle as to what factors prove or disprove the
intent to make a charitable gift.
What motives destroy gift intention? If you require positive proof of a
generous motive, then any form of compulsion should obviously disprove
the gift element. This was the stance taken in Perlmutter v. Commissioner
of Internal Revenue.48 The taxpayer, a developer, in compliance with county
regulations, dedicated a percentage of land in a new subdivision to the
county for schools, parks and other facilities. The entire charitable deduction
was denied partially because the taxpayer acted under the compulsion of
legal requirements. 49
With this precedent, one would expect other land dedication cases which
involve donations of property in order to bring adjacent property into con-
formity with either local zoning requirements or under threat of condem-
nation, to likewise deny a charitable deduction because of a clear lack of
charitable intent. However, even within the Ninth Circuit there is a con-
siderable inconsistency. For instance, in Collman v. Commissioner ofInter-
nalRevenue,50 the taxpayei; an individual, testified that his motive for dedicating
a strip of land to the city was in part to avoid a future condemnation suit.
The Court specifically noted that this purpose did not prevent a charitable
47392 E2d 522 at 524 (1968) [hereinafter Transamerica]. The corporate taxpayer had claimed
a charitable deduction for its donation of a strip of land to the City of Oakland for use as a
street. The Court upheld the denial of a charitable deduction on the grounds that the sole
purpose of the transfer was to obtain a direct economic benefit for the taxpayer.
4845 T.C. 311 (Tax Ct 1965) [hereinafter Perlmutter].
49This aspect of Perlmutter was later noted with approval in Transamerica, supra, note 47
at 524 n. 1.
50511 E2d 1263 (9th Cir. 1975).
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deduction.51 Instead, the Court evaluated the Internal Revenue Service’s
evidence of business intention and found it to be insufficient. Thus, proof
positive of charitable intention was found by showing lack of economic
motivation, without regard to the taxpayer’s statements indicating a non-
charitable motive. This result seems at odds with Perlmutter.
Although the “disinterested generosity” language continues to be quoted,
many American cases have switched to an analysis of what economic advan-
tages were anticipated by the taxpayer. Thus, in Stubbs v. United States,
another land dedication case, a slightly different standard emerges:
The inquiry into motive and purpose here does more than probe the subjective
attitude of the donors and the extent to which public spirited and charitable
benevolence prompted their action. The inquiry serves to expose the true nature
of the transaction: that, as the jury found, the “gift” (as in DeJong) was in
expectation of the receipt of certain specific direct economic benefits within
the power of the recipient to bestow directly or indirectly, which otherwise
might not be forthcoming.52
This is still a subjective intent test. However, the emphasis has now
clearly shifted to whether the taxpayer had economic expectations. The
results are often inconsistent as different factors are considered relevant in
each case. Thus, in Sutton v. Commissioner of Internal Revenue53 the Court
disallowed a charitable deduction because the taxpayer, a member of the
City of Westminster Planning Commission, was presumed to be highly aware
that his dedication of an easement for street widening purposes would lead,
within a relatively short period of time, to increased saleability of his adja-
cent property. On the other hand, in Allen v. United States54 a charitable
deduction was granted to a developer who donated nine acres of redwoods
in order to secure city approval of a zoning variance for his adjacent property
Another problematic aspect of the subjective intent test is the una-
voidable reliance on self-serving testimony. In Dowell v. United States55 the
taxpayer sought admission to a retirement village owned by a religious
charity. Prior to applying, it was made clear to her that a monthly fee was
charged to cover only the village’s current operating expenses. The capital
cost of constructing the living units was met by “sponsorship gifts” which
51Ibid. at 1269 n. 3. It is interesting to contrast this with the Tax Court of Canada’s attempt,
in Burns, supra, note 3 at 2632-33 (C.T.C.), 560 (D.T.C.), to weigh the relative importance of
charitable versus personal motivation. Taylor J. looked for some positive evidence of the
taxpayer’s charitable interest. He found it in the taxpayer’s personal history of involvement
and support of the Canadian Ski Association’s activities prior to his daughter’s personal ski
training.
52428 E2d 885 at 887 (9th Cir. 1970).
5357 T.C. 239 (Tax Ct 1971) [hereinafter Sutton].
54541 E2d 786 (9th Cir. 1976) [hereinafter Allen].
55553 E2d 1233 (10th Cir. 1977) [hereinafter Dowell].
1986]
EXAMINATION OF CHARITABLE GIFTS
were “requested but not required” of all residents. 56 Two weeks after her
application for admission was accepted, Dowell made a sponsorship gift of
$22,500. She testified that “she made the ‘sponsorship gift’ because she
wished to do so; she felt no duress to do so … she made the gift out of
charity and generosity knowing that her gift would help others; and she did
not anticipate receiving any benefits from the gift nor did she expect that
any part of the gift would ever be returned to her.”57 Although the Court
agreed that a gift had been made, 58 with respect to the taxpayer’s testimony,
the Court made the following comments:
We are cognizant that such testimony, subjective in nature and inclined to be
self-serving in relation to the issue of intent, is suspect. …
We recognize that this argument “pinpoints” the obvious danger of placing
substantial weight upon the subjective intent elicited by testimony of the donor,
in light of the self-service urgence.59
Perhaps the most significant problem with a subjective intent test was
pointed out in the passage already quoted from Crosby Valve.60 A donor
may have several motives for making a gift, some community minded, some
family oriented, some business oriented. Some of the non-business motives
may not be particularly altruistic. Where the motives are truly mixed, in
addition to the difficulties encountered in the foregoing cases, the courts
become embroiled in a further level of subjective analysis in attempting to
discern the predominant motive. We see this most clearly in Burns where
the Tax Court of Canada came up with a rather unconvincing factual analysis
of the taxpayer’s primary and secondary motives. In all likelihood, Dr Burns
was equally motivated by his personal and non-personal considerations, but
a standard which focuses on primary motivation inhibits this conclusion.
This discussion began with the idea that detached generosity, or lack
of economic motive, is what distinguishes a gift from other transactions.
The test is very seductive, as it strikes a chord of common sense. However,
assuming that there are other ways to make the distinction, and given the
problems illustrated, it is questionable whether it should be used in the
context of a taxing statute.
Perhaps the question to be posed is as follows: How relevant is the
taxpayer’s motive to the tax policies behind the charitable deduction? The
561bid. at 1237.
57Ibid. at 1236-37.
58The evidence showed that more than 75 per cent of all residents made the sponsorship
gift. Further, a majority of the residents who left were refunded a portion of their sponsorship
gift. It is hard to imagine on what basis a charitable gift would be refunded, unless, of course,
the gift had been made with the expectation of certain economic benefits which was not fulfilled.
59Dowell, supra, note 55 at 1238-39.
6See supra, note 46 and accompanying text.
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purpose of the deduction is to facilitate the private funding of charitable
activities. This purpose is restricted by principles of equity which dictate
first, that a taxpayer’s expenditures for goods and services should not be
deductible merely because they are obtained from a charity. Second, charities
providing goods and services should not be put in a competitively advan-
tageous position vis-A-vis commercial providers of the same items. Since
the taxing statutes are not concerned with elevating the moral character of
the giver, the taxpayer’s dominant state of mind becomes less relevant. These
considerations have led several circuits of the United States Court of Appeals
to reject subjective intent tests in favour of an objective, or quid pro quo
test, under which “the issue is whether the transfer was ‘to any substantial
extent, offset by the cost of the services rendered to [the] taxpayers.”” 61
This objective test strikes more directly at the heart of the problem. 62
From a tax policy perspective, what we want to ascertain is whether the
contribution promotes the charitable activities without converting a pay-
ment for goods and services into a deductible item or creating inequities
between charities and businesses.
Since the second proposed test isolates personal and business expend-
itures by analyzing the benefit received by the donor, is the subjective intent
of the taxpayer relevant at all? Are there any situations where the economic
benefit test will not exclude a clearly personal or business expenditure from
the gift category? One particular type of situation does come to mind. If an
expenditure were made with the expectation of an economic benefit, but
for unforeseen reasons the benefit did not materialize, without a subjective
intent analysis, the expenditure could be construed as a gift. For instance,
suppose the taxpayer dedicated a strip of land for highway construction
anticipating that this would increase the value of his or her adjacent property,
and the market did not rise to meet these expectations. An objective analysis
measuring the benefit received would not prevent the charitable deduction.
On the other hand, an intent test would characterize this gift as non-charitable. 63
Is there a way to frame a subjective intent test so as to avoid an analysis
of primary and secondary motives, reduce reliance on self-serving testimony,
reduce the inconsistencies in both the standards applied and the proof required,
and still prevent an obvious business transaction from slipping through as
infra, note 72 at 1002.
6tHaakv. United States, 451 E Supp. 1087 at 1090 (W.D. Mich. 1978), quoting from Oppewal,
62As will be discussed more fully later, the American objective test is slightly different than
the third test proposed by this article, i.e., does the contribution result in the taxpayer’s direct
or indirect receipt of an economic benefit? See infra, Part III.C.
63See R.D. Hobbet, “Charitable Contributions – How Charitable Must They Be?” (1980)
11 Seton Hall L. Rev. 1 at 15, where the author argues for a purely subjective intent test in
part because it would easily resolve situations such as the one discussed.
1986]
EXAMINATION OF CHARITABLE GIFTS
a charitable deduction? The subjective intent test as previously applied in
case law requires charity to be the taxpayer’s primary motive. The solution
proposed here is to lower the standard and require instead that one of the
taxpayer’s significant motives be charitable. Then in most situations where
there are mixed motives, the taxpayer will easily pass the subjective intent
test. Any non-gift element can then be further scrutinized under the second
objective test, and, as will be seen, the possibility of apportioning the con-
tribution then arises. The proposed subjective intent test will only deny a
charitable deduction where the taxpayer was motivated almost solely by
hopes of a business advantage. The test still requires some ranling of motives.
However, because the test allows for more than one significant motive, the
level of subjective analysis is reduced. The results of the test should thus
be less artificial and more convincing.
B. Test Two: Economic Benefit
This second test is derived from the Australian High Court case of
McPhail. A charitable deduction shall be disallowed to the extent that the
taxpayer received a direct or indirect economic benefit as a result of the
contribution. In this test, the actual outcome of the payment is objectively
evaluated rather than the intention or expectation of the taxpayer. Although
the test includes indirect benefits, there must still be a causal link between
the contribution and the benefit.
By measuring the benefit received, the personal or business element of
a transaction is factually isolated. The charitable deduction may then be
disallowed either entirely or partially, depending on the circumstances. Thus,
the test puts in concrete form the countervailing tax policies which should
properly restrict the scope of the charitable deduction to its charitable ele-
ment. The test prevents the otherwise inequitable conversion of a personal
or business expenditure into a charitable deduction.
At the same time, this test is potentially more generous to a taxpayer
with mixed motives than is the dominant motive test. As long as the tax-
payer can demonstrate a charitable motive sufficient to pass the lowered
threshold in the proposed subjective intent test, he or she can justify allo-
cating at least a portion of the payment to a charitable deduction. In contrast,
under a pure dominant motive test, if the court decides that the predominant
motive is non-charitable, no matter how significant the charitable element,
no deduction should theoretically be allowed.64
64Several of the American cases which applied a subjective intent test apportioned the con-
tribution without attempting to state any rationale. See, e.g., DeJong, supra, note 38.
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The proposed second test is consistent with the human reality that
charitable gifts stem from mixed motives and have mixed effects. It neither
penalizes the taxpayer because of the personal or business element, nor
provides an unfair advantage or incentive to camouflage personal or busi-
ness expenditures as charitable deductions. The test incorporates the essence
of the Revenue Canada compromise approach in Information Circular 75-
23 and Interpretation Bulletin IT-11OR discussed earlier.
As with any test, the proposed benefit test raises several important issues
and has certain weaknesses. Although the test accurately reflects important
tax policies, it still requires the court to analyze issues such as the types of
economic benefits which must be measured and the factors which are appro-
priate for determining whether the benefit is in fact sufficiently connected
to the contribution. These issues will inevitably fall within the realm of
judicial interpretation. As well, there are issues involving administrative
convenience, such as the valuation of benefits and the effect of the test on
the burden of proof. Before discussing these aspects directly, it is useful to
examine the American and Australian cases which have evolved “objective”
tests.
Disenchantment with the subjective intent test has led some American
courts and the Internal Revenue Service through its Revenue Rulings to
attempt to define an objective test. Two, or possibly three, objective tests
have emerged, each based in part on an analysis of the benefit received by
the taxpayer. However, for the most part, either in their formulation or
application, these objective tests ultimately end up as subjective intent tests.
The earliest form of an objective test was proposed by the United States
Court of Claims in Singer Co. v. United States.65 Singer sewing machines
were routinely sold at substantial discounts to two types of charities, schools
for use in sewing classes and other charities such as churches and Red Cross
groups. At issue was whether the discount to either category of charity
qualified as a charitable deduction. Because of the controversy in the circuits
on the appropriateness of the “disinterested generosity test”, the Court in
Singer derives its own test:
It is our opinion that if the benefits received, or expected to be received, are
substantial, and meaning by that, benefits greater than those that inure to the
general public from transfers for charitable purposes, (which benefits are merely
incidentalto the transfer), then in such cases we feel the transferor has received,
or expects to receive, a quid pro quo sufficient to remove the transfer from the
realm of deductibility under section 170.66
65449 E2d 413 (1971) [hereinafter Singer].
66Ibid. at 423.
1986]
EXAMINATION OF CHARITABLE GIFTS
Ostensibly, the Singer test is objective since it requires an analysis of
benefits. However, because the test evaluates not only the benefits actually
received, but also benefits “expected to be received”, the inquiry inevitably
shifted back to an examination of the taxpayer’s intent.
The Court of Claims considered the discount sales to schools separately
from those to other charities. As a preliminary point, it appropriately rejected
Singer’s argument that only a direct benefit should disqualify a charitable
gift. However, there was no concrete evidence that Singer had received any
particular indirect benefit.67 In fact, Singer had attempted to negate any such
inference by introducing a survey showing that only 1.735 per cent of pur-
chasers had been influenced in their choice of machine by training on Singer
machines. The survey, along with some other objective evidence, was given
little, if any, weight. Instead, focusing on the “benefit expected” aspect of
its test, the Court of Claims naturally resorted to a determination of the
predominant purpose of the discounted sales. With respect to the discount
sales to schools, the Court found the predominant purpose to be the enlarge-
ment of its future potential market by developing an interest in the Singer
brand among young women trained on Singer machines. 68
In contrast, with respect to the sales to other charities the Court found
the primary purpose to be assistance to the charities in the performance of
the charitable, religious or public services that they were currently providing.
Creating a favourable public image was only an incidental effect.69
Thus, in the end, the objective aspect of the test becomes incorporated
into a predominant purpose or subjective intent test. For this reason, it has
been described as a hybrid objective/subjective test. 70
Another difficulty with the Singer test is that it requires a comparison
between the benefit to the donor and the benefit to the general public. The
difficulty of measuring the benefit to the donor exists in any benefit test,
and will be discussed subsequently. Suffice it to say that most of these prob-
lems can be dealt with by using standard valuation methods with which
courts are familiar. The more difficult and interesting question in applying
the Singer test is the measure of the benefit to the general public. Is it
sufficient to equate that benefit with the fair market value of the gift, or
67If the receipt of an indirect benefit had been proven, using the Court of Claims’ own test,
the Court would then have had to compare the benefit accruing to Singer with the benefit
accruing to the general public. For a critique of this aspect of the Singer test, see Hobbet, supra,
note 63 at 6-8.
68Supra, note 65 at 423.
69Ibid. at 424.
70 Hobbet, supra, note 63 at 6.
McGILL LAW JOURNAL
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should other intangible factors be relevant, such as the value of relief pro-
vided to a disadvantaged group or the value of allowing a program to con-
tinue? These questions have not been dealt with by any court applying
Singer.7′
A more distinct benefit test was stated by the First Circuit Court of
Appeals in Oppewal v. Commissioner of Internal Revenue,72 another school
tuition case. As in DeJong and McBurney, the religious schools involved
in Oppewal relied on voluntary contributions rather than specific tuition
fees, and students whose parents failed to make the suggested contributions
were not denied admission or re-admission. Rejecting the subjective intent
test the Court stated its test as follows:
The more fundamental objective test is –
however the payment was desig-
nated, and whatever motives the taxpayers had in making it, was it, to any
substantial extent, offset by the cost of services rendered to the taxpayers in
the nature of tuition? If so, payment, to the extent of the offset, should be
regarded as tuition for, in substance, it served the same function as tuition.73
The test is straightforward. The offsetting benefit is measured, and to
that extent the amount of the charitable gift is reduced. The Oppewal test
differs from the proposed test in two ways. First, it does not expressly include
indirect benefits which could be substantial. Second, because of the clear
facts from which it emerges, the test assumes that there is a relationship
between the contribution and the offsetting benefit. The test does not empha-
size that the benefit to the taxpayer must be the result of the contribution
and not the result of some other factors.
These shortcomings in the Oppewal test could easily have been dealt
with as it became applied to subsequent fact patterns. However, a second
version of the test emerged in Revenue Rulings and case law, which has
overshadowed it. Haak v. United States, yet another school tuition case,
states the objective test as follows:
[I]f a transfer is made with the expectation of receiving a benefit, and such
benefit is received, the transfer is not a charitable contribution under 26 U.S.C.
170.74
7See, generally, ibid. at 6-8.
72468 E2d 1000 (1972) [hereinafter Oppewal]. See also Winters v. Comm’r of Internal Rev-
enue, 468 E2d 778 (2d Cir. 1972), a school tuition case where the court applied both the
subjective intent test of DeJong, supra, note 38 and the objective intent test of OppewaL
73 oppewal, ibid. at 1002.
74Supra, note 61 at 1092 [emphasis added].
1986]
EXAMINATION OF CHARITABLE GIFTS
In Revenue Rulings the test has become:
A contribution for purposes of section 170 of the Code is a voluntary transfer
of money or property that is made with no expectation ofprocuring a financial
benefit commensurate with the amount of the transfer.7 5
Although these tests require an objective analysis of benefits, they con-
tain the problematic phrases “expectation of receiving” and “expectation
of procuring”. Like Singer they are thus susceptible to becoming subjective
intent tests.
The impetus for including economic expectation in these tests is under-
standable. Because only the bald result is considered in a pure benefit-
received test, it would be possible for a business transaction which failed
to achieve its economic ends to qualify as a charitable deduction. The Court
of Claims in Singer was particularly concerned with this point.76 For this
reason the proposed three-tiered test includes a modified subjective intent
test in addition to a pure benefit test. The problem with the tests stated in
Singer, Haak and the Revenue Rulings is that they try to cover the entire
ground in a single statement. The clarity and impact of a benefit analysis
becomes muddled and perhaps lost altogether. By keeping the subjective
intent test and the benefit test separate and narrow, the domain and effect
of each remains clear.
The Australian “McPhail rule” is the basic model for the proposed
benefit test. It was first enunciated in the McPhail case by Owen J. sitting
as a single judge for the High Court of Australia. For purposes of the income
tax charitable deduction, a gift has to satisfy two distinct tests. First, it has
to be a voluntary transfer and not as a result of a contract obligation. This
aspect of the McPhail rule will be considered in a subsequent section. Sec-
ond, the transferor cannot receive an advantage of a material character by
way of return.77
In McPhail, a private boys school faced with having to increase tuition
fees, devised a plan to lessen the financial burden on parents by turning a
portion of the tuition fee into a tax deductible donation. Two fee schedules
were sent out. Schedule A gave the normal fee which incorporated a special
building fund charge. Schedule G listed a reduced tuition fee which, at the
School Council’s discretion, would be made available to applicants who
committed themselves to a specific contribution to the building fund. The
specific contribution was intended to be tax deductible. The difference between
the tuition fees in Schedule A and Schedule G was almost the precise amount
75Rev. Rul. 83-104, 1983-2 C.B. 46; Rev. Rul. 76-185, 1976-1 C.B. 60 [emphasis added].
76Supra, note 65 at 420-21.
77McPhail, supra, note 19 at 116.
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of the requested building fund contribution. On these facts it was easy for
Owen J. to find that the substantial concession in the fees charged under
Schedule G was a benefit directly resulting from the contribution. As will
be discussed subsequently, Owen J. also held that there was a contract.
The Australian cases generally analyze charitable gifts using both tests
of the McPhail rule. Many of the cases first construe the existence of a
contract and then fortify the denial of the charitable deduction with the
finding that a benefit was received. For instance, in Case E44,78 a Taxation
Board of Review case, the taxpayer, upon her acceptance as a resident in a
housing unit run by the War Widows’ Guild, made a $4,100 “donation”
requested by the Guild. In conformity with requirements of a government
subsidizing agency, there could be no written contract between the Guild
and an applicant for housing. The subsidizing agency was trying to prevent
a resident from claiming any implied or express property rights in the hous-
ing unit assigned. The Taxation Board of Review found first, that a contract
existed and second, that
[a]t the very least, even if no enforceable contract came into existence, the
taxpayer, in return for the payment of $4,100, received a right of real value –
the right to occupy a home unit for life on terms agreed to between the parties. 79
As in McPhail, it was easy for the Board to enunciate the economic benefit
received by the taxpayer, and the direct connection between the benefit and
the contribution.
Cyprus Mines Corp. v. Federal Commissioner of Taxation80 represents
a more interesting application of the benefit test. An agreement between
joint venturers in a mining operation and the State of Western Australia
gave the joint venturers the option of substituting a gift to any Western
Australian charitable fund, in lieu of certain royalty payments due under
the contract. The joint venturer paid the required amount to the Western
Australia Library Fund. Applying McPhail, the Supreme Court of Western
Australia denied the deduction under both the contract and benefit tests.
The benefit flowing to the taxpayer was the discharge of its liability to the
State. The taxpayer had argued that only a benefit coming directly from the
charity, in this case the Library Fund, should taint a gift under the benefit
test. This argument was rejected, thus expanding the McPhail rule to direct
and indirect benefits.
The issue of direct and indirect benefits was examined again in Leary
v. Federal Commissioner of Taxation8 by the Federal Court of Australia.
78(1973), 73 A.T.C. 371.
79Ibid. at 372.
80(1978), 22 A.L.R. 322 (S.C. W. Aust.) [hereinafter Cyprus Mines].
81(1980), 32 A.L.R. 221 [hereinafter Leary].
19861
EXAMINATION OF CHARITABLE GIFTS
The case is a fascinating example of a tax avoidance scheme involving
charitable deductions. In simplified form, the facts were as follows. The
Order of St John, a public benevolent institution under the Australian Income
Tax Assessment Act, was approached by Metropolitan Taxation Service (MTS)
with a fund-raising proposal. MTS would procure donations for the charity
for a fee of 98.8 per cent of all monies raised. Although the charity only
received 1.2 per cent of the donations, MTS guaranteed it a minimum of
$100,000 annually, net of the fees to MTS. To meet this guarantee, MTS
would have to raise in excess of $8,300,000.
MTS then sought potential donors by approaching various accountants
and tax advisors. Leary, the taxpayer whose donation was at issue, became
involved at the recommendation of his accountant. MTS, through a sub-
sidiary, Sadar Finances (Sadar), lent Leary $8,500 at 5 per cent for a 40 year
term. The loan agreement gave Leary several repayment options. Under
one of these, Leary could buy back his $8,500 obligation to Sadar for a
nominal $17, if he made a $10,000 donation to the Order of St John. The
day following the loan by Sadar to Leary, Leary donated the $10,000 to the
Order of St John and exercised his repurchase option.
The Order of St John retained $120 of the $10,000 donation. The remaining
$9,880 fee paid to MTS represented $1,300 in profit for one day’s use of its
subsidiary’s money, and $8,550 in return of capital to be redirected, one
way or another, to Sadar. Leary claimed a tax deduction of$ 10,000 although
his total outlay was only $1,500 plus the $17 paid to Sadar to discharge the
loan. If the scheme were fully operative, it was estimated that the total tax
relief provided to persons such as Leary would be $3,000,000.
The material advantage to Leary was the discharge of his $8,500 liability
to Sadar for the nominal $17 payment. The benefit did not come directly
from the Order of St John, so that the Court had to find a link between the
payment to the Order and Sadar’s willingness to extinguish the debt. Although
the mechanics were not clear, it was evident that the Order of St John “fed”
back to Sadar, via MTS, the funds required to economically justify the
collapse of the loan.82 Thus, the Court found the Order of St John was still
the ultimate source of the material advantage.
These American and Australian cases provide a background for the
discussion of the proposed benefit test which disallows a deduction to the
extent that the taxpayer receives a direct or indirect economic benefit as a
result of the contribution. This test is more straightforward and clearly
objective than the American tests which have subjective intent elements
incorporated into them. It has the advantage of harmonizing the conflict
82Ibid. at 231.
McGILL LAW JOURNAL
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between the specific tax policy of promoting private funding of charitable
activities and the general tax policies of disallowing deductions for personal
expenses and requiring similar business expenses to be treated in the same
way.
In applying this test, it is helpful to pose two distinct questions. First,
to what extent did the taxpayer receive an economic benefit concomitant
with the contribution? Second, was this economic benefit the result, directly
or indirectly, of the contribution?
The first question requires a simple identification and quantification of
the economic benefit to the taxpayer. To some extent it necessarily begs the
second question by initially analyzing any benefits to the taxpayer without
paying attention to the nexus between the benefit and the contribution.8 3
Leaving the nexus question aside, what is included in the scope of
“economic benefit”? In broad, simplistic terms we are distinguishing between
material benefit and the “psychic benefit” which “reflects only the general
feeling of satisfaction which could result from making a donation”.8 4 Most
benefits are straightforward and easy to categorize. There are, however, some
conceptual points which should be dealt with first.
Many of the cases use the term quidpro quo or consideration to describe
the quality of an offending economic benefit. Although these terms are used
in a non-technical, almost metaphorical sense, they have the disadvantage
of conjuring up contract requirements which are clearly not intended. For
instance, the word “consideration” is used in Zandstra to describe the ben-
efit of Christian education for the taxpayers’ children.8 5 Since Zandstra was
applying the McPhail rule which has both a benefit and a contract test, the
judge clearly did not intend the existence of a benefit to turn on whether a
formal contractual relationship existed.
Economic benefit should not be treated as synonymous with contractual
obligation. On the one hand, if the court looks at contract factors as opposed
to whether the taxpayer has gained something of value, the definition of
economic benefit becomes too narrow. On the other hand, just because the
contribution is made to fulfill a contract provision does not necessarily mean
83This separation of the issues is somewhat strained and artificial, but it proves useful for
discussion purposes. As will be seen, the nexus issue is really the more difficult of the two. It
is also the question most dependent on the exercise ofjudicial discretion.
84Burns, supra, note 3 at 2631 (C.T.C.), 558 (D.T.C.).
8 5Supra, note 11 at 508 (C.T.C.), 6419 (D.T.C.).
1986]
EXAMINATION OF CHARITABLE GIFTS
that an economic benefit has resulted. A simple example of this was pointed
out by Bowen C.J. in Leary.
Thus, where A and B agreed to make gifts to C … or A agreed with B to match
any gift made to him by C, there would seem to be no reason why either A
or B should be deprived of his deduction. 86
For purposes of the benefit test, the inquiry should be confined to whether
the taxpayer received something of economic value, apart from whether the
right to receive it arose under a contract.
Whether a benefit exists should also not be confused with the question
of whether it is easy or difficult to measure the benefit. These are problems
which have administrative solutions.
Closely related to the difficulty of measuring a benefit is the question
of benefits which are insubstantial. The tests in both Singer and Oppewal
refer to “substantial benefits”. Although the proposed test has not adopted
this language, considering the general judicial disdain for trivial matters, it
would certainly be expected that some de minimus threshold would emerge.87
The nexus issue is the most difficult and the weakest aspect of the benefit
test in that it will undoubtedly turn on specific facts and circumstances and
could thus lead to inconsistent results. The first difficulty comes from the
inclusion of indirect benefits within the tests ambit. Any time the economic
benefit comes not from the charity, but from a third party, or from sur-
rounding circumstances not directly controlled by the charity, the issue of
indirect benefits arises. We saw examples of these two types of indirect
benefits in both the American and Australian cases: in Leary, where the
charitable contribution led to the discharge of a debt to a third party, and
in Singer, where the economic benefit was an increase in potential future
sales, in other words, goodwill.
The second difficulty stems from the inherent vagueness of any caus-
ation test. Different fact situations suggest different approaches to estab-
lishing whether a nexus exists. In some instances, deciding whether the
contribution was an integral part of a chain of events leading to a benefit
might be appropriate. Other situations might justify a “but for” test: But
for the contribution or contributions of a class of persons, would the benefit
have been received?
86Supra, note 81 at 223.
7There are two possible administrative approaches. A simple approach would disregard
benefits under a minimum dollar value. A more difficult approach would exempt benefits which
represent less than a certain percentage of the total gift. Ideally, again, this would best be dealt
with on an administrative level.
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By applying the proposed benefit test to specific examples from cases
and Revenue Rulings the specific problems relating to the scope of benefits,
nexus and measurement can be considered and solutions proposed. For
convenience of discusssion, economic benefits are broken down into four
categories: (1) benefits in the nature of services rendered to the taxpayer;
(2) benefits resulting in an increase in value of the donor’s property; (3)
receipt by the donor of property or a property right; and (4) miscellaneous,
indirect and intangible benefits.
1. Services
Benefits in this category are the easiest to identify and to measure. The
most typical example is the purchase of tickets to a charity-sponsored fund-
raising performance or other event. To the extent that the price paid exceeds
the ordinary price of a similar event, a charitable contribution could be
justified. It is the taxpayer’s burden to show the amount of the contribution
and consequently his or her burden to prove the ordinary price of admission.
For certain types of events, such as concerts, this should be easy. Other
events, such as dinner dances, would be more difficult. An American author
suggests that for these types of situations there should be a presumption
that the benefit conferred is equal to the price of admission.8 8 This is desir-
able from an administrative perspective and would probably also encourage
the charities themselves to clearly state the amount of the gift being solicited.
Another typical situation was presented in Revenue Ruling 76-232.89
The taxpayer attended marriage counselling seminars conducted by a char-
itable organization. Although there was no enrollment fee, at the conclusion
of the seminar the charity requested a voluntary suggested contribution to
cover the program’s costs. Unlike the charity event, the payment was not
a prerequisite to admission, so that the connection between the contribution
and receipt of services was less straightforward. Without discussing the nexus
issue, the Revenue Ruling merely applies a presumption that the taxpayer’s
payment was equal to the value received and denies the charitable deduc-
tion. The Revenue Ruling in essence assumes a connection between the
benefit and the payment. Under the proposed benefit test it would have
been easy to justify treating the payment as a reimbursement to the charity
for services provided. Factors which connect the benefit and payment are
88Hobbet, supra, note 63 at 20-21.
89Rev. Rul. 76-232, 1976-1 C.B. 62. This Revenue Ruling creates an interesting contrast to
Muldoon J.’s presumption in McBurney (T.D.), supra, note 4 at 470, that counselling services
offered by the church should not affect the deductibility of donations. See also Feistman v.
Comm’r of Internal Revenue, 1971 T.C.M. (P-H)
71, 137 (U.S. Tax Ct 1971) denying a
deduction for dues to a Jewish synagogue because the taxpayer did not allocate the contribution
between a charitable gift and payments entitling him to participate in social events.
19861
EXAMINATION OF CHARITABLE GIFTS
the proximity in time between the seminar and the donation, the relation-
ship between the requested amount and the cost of the services, and the
absence of any other charge.
The same nexus issue emerges in the school tuition cases which invar-
iably involve schools dedicated to educating the taxpayer’s children regard-
less of whether he or she has made the full suggested contribution. The
American cases which have used an objective approach have assumed an
obvious connection between the contribution and the educational services
provided. Recently, in Revenue Ruling 83-104,90 the Internal Revenue Ser-
vice attempted to formulate criteria for distinguishing disguised tuition pay-
ments from actual charitable contributions. The factors considered relevant
all probe the nexus issue.
Revenue Ruling 83-104 treats certain factors which show a direct, implicit
connection between the contribution and the educational services, as cre-
ating a presumption that the payment was not a charitable contribution.
These factors are as follows:
the existence of a contract under which a taxpayer agrees to make a “contri-
bution” and which contains provisions ensuring the admission of the taxpayer’s
child; a plan allowing taxpayers either to pay tuition or to make “contributions”
in exchange for schooling; the earmarking of a contribution for the direct benefit
of a particular individual; or the otherwise-unexplained denial of admission
or readmission to a school of children of taxpayers who are financially able,
but do not contribute.9′
If these factors are not present, the Revenue Ruling then looks to other
economic and non-economic facts and circumstances tending to show a
connection. Examples of factors which may themselves, or in combination,
negate a charitable contribution are given:
The factors that the service ordinarily will take into consideration, but will not
limit itself to, are the following: (1) the absence of a significant tuition charge;
(2) substantial or unusual pressure to contribute applied to parents of children
attending a school; (3) contribution appeals made as part of the admission or
enrollment process; (4) the absence of significant potential sources of revenue
for operating the school other than contributions by parents of children attend-
ing the school; (5) another factor suggesting that a contribution policy has been
created as a means of avoiding the characterization of payment as tuition.92
The Canadian cases, Aspinall, Zandstra, McBurney and Burns, fit within
the service category. Under the proposed benefit test, the results in Aspinall,
upholding a deduction for that portion of the ticket price for a charity-
sponsored event which exceeds the ordinary cost of a ticket, would remain
9Rev. Rul. 83-104, supra, note 75.
91Ibid.
92Ibid.
McGILL LAW JOURNAL
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the same. Likewise, Zandstra and McBurney epitomize the benefit test by
approving charitable deductions only for the amount of the donation to the
school in excess of the per pupil cost.
The most difficult case is Burns, which allowed the deduction for con-
tributions to the Canadian Ski Association, despite the concurrent training
of the taxpayer’s daughter. The benefit in Burns, ski training, is identifiable
and could be given a value based on the cost of private instruction. The
issue in Burns would be the nexus between the contribution and the services.
The type of analysis suggested by Revenue Ruling 83-104 provides an inter-
esting approach. 93 First, there are no factors implying a direct connection,
and hence no presumption would arise. As for indirect factors, no doubt
the significant pressure on parents to contribute would be considered. How-
ever, the combination of independent, non-financial criteria for accepting
a student in the training program, and the overwhelming public source of
funding for the program as opposed to funding coming from a small class
of persons with concurrent interests, would indicate a weak connection and
negate the nexus between the contribution and benefit. Hence, arguably,
Burns could withstand a benefit test.
2.
Increase in Value of Taxpayer’s Property
The primary example of this type of benefit is seen in the various
American land dedication cases. Two typical situations occur. Real property
is donated to local governments for highways, or as open space, to comply
with requirements for changes in zoning. The taxpayer benefits by the increase
in value of his or her property located in the vicinity. For example, in
Sutton,94 following the dedication of land for street widening purposes, the
taxpayer’s adjoining property became available for more lucrative com-
mercial use. This increase in value is a measurable benefit which would
offset the value of the donation in whole or in part. Courts and tax depart-
ments are familiar with this kind of valuation problem so that from an
administrative perspective this approach is sound.
Facts and circumstances may dictate another result. Citizens & Southern
National Bank of South Carolina v. United States95 is an example of a case
93The Revenue Ruling applies its suggested factors to several hypothetical situations. Example
no. 6 suggests an approach to Burns. The example proposes a church school funded directly
by the church out of its general funds. Parents make up a minority of the church membership,
and do not contribute more than non-parents to the general church funds. The example looks
behind the school’s financial structure to determine whether there is public or community
support. Because public support is great, the connection between the parents’ donation to the
church and the benefit of education is weak, so that a deduction is justified.
94Supra, note 53.
95243 E Supp. 900 (W.D. S.C. 1965).
1986]
EXAMINATION OF CHARITABLE GIFTS
where there may be several grounds for not finding an economic benefit.
The Bank had recently located in a blighted urban area. To facilitate reju-
venation of the area, the Bank donated property for a highway which would
bring the area within a business loop. Undoubtedly, the Bank benefitted by
the increased business resulting from the area’s revitalization. This is an
indirect benefit and, therefore, within the benefit tests ambit. However,
unlike an increase in fair market value of adjoining land from a change in
zoning, it would be too difficult to attribute to what extent the increase in
business resulted from the construction of the highway given the Bank’s
other promotional activities. Also the benefit might be characterized as de
minimus.
3. Receipt of Property or a Property Right
A simple example of this type of economic benefit is illustrated by
Revenue Ruling 76-185.96 The taxpayer undertook to restore a state-owned
historic mansion. Upon completion, the taxpayer was to have a non-assign-
able right to reside on the premises for 15 years, during which time he was
to maintain the premises and grounds according to state specifications. There
would be public access to the grounds on specified terms. The taxpayer
sought treatment of the restoration expenses as a charitable donation. Clearly,
the restoration was done in exchange for a valuable property right, the right
of occupancy, which is easily measured.
Another more common situation falling within this category of benefit
is where the taxpayer is admitted to a retirement or health care facility
concurrently with a donation to the facility. The property right received by
the taxpayer is the right to occupy a unit for life. The value of the benefit
would be reduced to some extent by any additional monthly or annual
charges paid. This was the approach taken by the Australian Board of Review
in Case E44. 97
These cases could, however, present nexus issues similar to those
encountered in the school tuition cases. For instance, if the taxpayer could
show that the institutions involved have broad-based public support or that
96Rev. Rul. 76-185, 1976-1 C.B. 60.
97Supra, note 78.
REVUE DE DROIT DE McGILL
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only a small percentage of persons admitted made any contribution, the
link between the contribution and the benefit would be considerably weakened. 98
4. Miscellaneous, Indirect, Intangible Benefits
The final category of benefits is a catch-all, and presents several difficult
problems. First, when the benefit comes from a third party, rather than from
the charity involved, the nexus between the contribution and the benefit
will often be at issue. An example of this is seen in Leary where, as a result
of a $10,000 charitable donation, the taxpayer acquired the right to discharge
a loan to a third party for a nominal amount. Although there was a clear
contractual connection between the contribution and the economic benefit,
the Australian Federal Court was not content with this as a basis for dis-
allowing the deduction. Instead, it focused on the fact that most of the funds
paid to the charity ultimately found their way back to the third party, or to
the third party’s parent company. In other words, but for the recycling of
the charitable donation, the third party could not have agreed to collapse
the loan. 99
To illustrate the importance of an economic nexus, as opposed to the
simple contractual nexus, consider the following hypothetical. Two friends,
A and B, agree that if A makes a $10,000 contribution to charity X, B will
purchase A’s house at a fair price. Although there is a cause and effect
relationship between the contribution and the benefit to A, there is no eco-
nomic connection. The benefit to A is not financially interrelated to the
charitable contribution. Under this circumstance, a court would be validly
reluctant to deny a charitable deduction under a benefit test.100
“An
interesting case to reconsider would be Dowell, supra, note 55. The decision allowing
the $22,500 charitable deduction emphasized the fact that the taxpayer had paid the suggested
contribution two weeks after her formal acceptance by the retirement village. This is an example
of confusing an analysis of benefit with formal contract requirements. However, the evidence
showed that more than 60 per cent of the persons leaving the retirement village were reimbursed
part of their contribution, a high percentage of persons admitted contributed the suggested
amount and the monthly fees covered only the facility’s daily operational as opposed to capital
costs. These factors provide clear evidence of a connection between the contribution and the
taxpayer’s admission to the facility. Contrast Dowell with Sedam v. United States, 518 E2d
242 (7th Cir. 1975), which disallowed a deduction for a “Founder’s Gift” to a retirement home.
9 9Leary, supra, note 81 at 223.
‘0The Australian case, Cyprus Mines, supra, note 80, is similar to the hypothetical. The
taxpayer had the option of either paying a royalty to the State of Western Australia or paying
the same amount as a donation to a Western Australian charity. The benefit, the discharge of
an obligation, was the direct result under the contract of the payment to the charity. What may
be missing, however, is a clear economic connection, and hence this type of transaction may
succeed under an economic benefit test. There are, in fact, good policy reasons for disallowing
a deduction in the Cyprus Mines case. If the State of Western Australia were an individual
taxpaying entity and it wanted to see part of the proceeds of a particular sale dedicated to
1986]
EXAMINATION OF CHARITABLE GIFTS
The Singer case raises the thorny problem of economic goodwill which
might result from a charitable contribution. From the Court of Claims’
perspective, Singer’s discount sale of sewing machines to schools potentially
created a market for Singer products among the students trained on them.
At first blush, this type of economic goodwill seems like an obvious category
of economic benefit. There are, however, several justifications for disre-
garding it.
Expenditures which create goodwill are increasingly being viewed as
currently deductible business expenses.10′ In most instances, it would be to
the taxpayer’s advantage to characterize a payment as a business expense
rather than as a charitable donation in order to avoid the percentage lim-
itation on charitable donations. There is already authority in Olympia Floor
for deducting, as a business expense, contributions to charities where the
taxpayer was able to document a subsequent increase in sales. 102 Concep-
tually, if the charitable donation is reduced by an amount representing the
benefit of goodwill then, in most instances, an offsetting business expense
must be allowed.
Second, if the benefit is something less than goodwill, then the con-
nection between the contribution and any specific benefit may be too weak.
Although the community respect gained when an individual or corporation
acts philanthropically may in fact cause people to deal with them in a busi-
ness context, this type of benefit is too remote to be considered under the
benefit test.
The last example in this catch-all category raises a nexus problem sim-
ilar to the ones we have already looked at. In Blake v. Commissioner of
Internal Revenue, 0 3 a taxpayer, about to donate an old-fashioned sailing
vessel to a merchant marine academy, received some better tax advice. In
the eleventh hour, he arranged to donate corporate stock worth approxi-
mately $700,000 instead of the vessel. The taxpayer expected the charity to
sell the stock and use the proceeds to purchase the vessel for $675,000. The
charitable purposes, it would merely take the proceeds and donate them itself, thus obtaining
a charitable tax deduction. However, because the State of Western Australia pays no taxes, and
it does not, therefore, need a charitable tax deduction, it can sweeten the deal by shifting the
deduction to a taxpaying entity. This is not an appropriate use of tax exempt status, by either
a governmental unit or an ordinary charity. However, from the perspective of an economic
benefit test, the transaction may be sound. It would, however, fail under the compulsory pay-
ment test to be discussed later.
101See, generally, Minister ofNationalRevenue v. Kellogg Co. of Canada (1943), [1943] S.C.R.
58, [1943] C.T.C. 1, 2 D.T.C. 601; Canada Starch Co. v. Minister of National Revenue (1968),
[1969] 1 Ex. C.R. 96, [1968] C.T.C. 466, 68 D.T.C. 5320; Minister of National Revenue v.
Algoma Central Railway (1968), [1968] S.C.R. 447, [1968] C.T.C. 161, 68 D.T.C. 5096.
102Supra, note 40.
103697 E2d 473 (2d Cir. 1982) [hereinafter Blake].
McGILL LAW JOURNAL
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transaction proceeded as planned. In a subsequent transaction the charity
sold the vessel for $250,000. In essence, the taxpayer funded the purchase
of his vessel at a highly advantageous price. There is an economic benefit
in the purchase of the vessel, but the contribution funding the purchase is
a technically unrelated event. The nexus may nevertheless be found by using
a “but for” test: but for the donation of the stock, the charity would not
have proceeded with the purchase of the vessel.
C. Test Three: Compulsory Payments
With subjective intent relegated to a low threshold test, most gifts made
with mixed motives will easily qualify for the charitable deduction. The
primary test for distinguishing charitable gifts from personal and business
transactions thus becomes the economic benefit test. An examination of the
cases and the Internal Revenue Service’s Revenue Rulings reveal a narrow
category of business transactions which are not dealt with by the combined
effect of the first two proposed tests.
The Australian McPhail rule suggests a third test which can be effec-
tively applied. It requires that a charitable gift be property “transferred
voluntarily and not as the result of a contract obligation.”‘ 104 There are,
however, several problems with the test as formulated in McPhail. It is
unclear whether the requirement of voluntariness is a separate requirement
or merely synonymous with the contract element. Also, as pointed out by
Bowen C.J. in Leary, not all payments pursuant to contractual obligations
should be excluded from the ambit of charitable gift.105
For these reasons, the proposed third test incorporates a broad defi-
nition of voluntary transfer and narrows the contract requirement to com-
mercial contracts. Under this test, a charitable gift is not deductible if the
transfer was compelled by statute, regulation, court order, commercial con-
tract or to fulfill a pre-condition. The following examples will illustrate when
this test may be important.
In Revenue Ruling 79-148,106 the taxpayer, a manufacturer, was con-
victed of selling certain products to country X in violation of United States
104McPhail, supra, note 19 at 116. An interesting aspect of the McPhail contract test is the
different approaches of the various common law jurisdictions as to whether a contract exists.
The Australian cases – McPhail; Case E44, supra, note 78; and Case F40 (1974), 74 A.T.C.
223 (Tax’n Bd of Rev.) –
found the existence of a contract without much discussion. In
McBurney (T.D.), supra, note 4, the Canadian Federal Court took a narrower view of contract
formation. The most radical approach was in Blake, ibid., where the United States Court of
Appeals used equitable estoppel to construe a contract. It is unlikely that Canadian courts
would follow this route.
05Supra, note 81 at 230.
106Rev. Rul. 79-148, 1979-1 C.B. 93.
1986]
EXAMINATION OF CHARITABLE GIFTS
federal law. The taxpayer offered to contribute to a charity an amount equal
to the maximum fine imposed by statute for this crime. The taxpayer was
sentenced to two years’ imprisonment, but the sentence was suspended. The
payment to charity was incorporated by the judge as a condition of probation.
Although the taxpayer’s offer to make a contribution to charity clearly
influenced the court’s sentencing it would be difficult to pinpoint an eco-
nomic benefit, and thus the second test would not disqualify the deduction.
Presumably, the taxpayer could demonstrate a charitable motive for the gift,
such as a sincere desire to repent or reform through good works, and would
thus pass the low threshold of the subjective intent test. Only the third test
would provide a clear basis for denying the charitable deduction. 10 7
Allen, one of the land dedication cases, is an example of a clearly busi-
ness-motivated transaction which might, under some circumstances, pass
tests one and two. In order to get a zoning variance for half-acre lots in an
area zoned for one-acre lots, the taxpayer donated 9.2 acres of redwood trees
to the city for green space. The court accepted the taxpayer’s testimony that
his primary motive for donating the land was to preserve the redwoods,
which the court interpreted as a charitable act. Applying the subjective intent
test, a charitable contribution was upheld.’0 8
An economic benefit test would have focused on the increase in value
of the adjoining property following the dedication of the open space and
the zoning variance. As the dissenting opinion points out, the new devel-
opment would be more attractive to prospective purchasers because of its
proximity to the open space. However, arguably in the Allen case there was
no net increase in value. The majority opinion emphasized the taxpayer’s
evidence that it was more costly to develop the property under the new plan
than it would have been if he had built within the existing one-acre lot
requirement. From a net profit perspective these factors might have offset
each other. However, the business motive may have been to increase the
ease of sale, rather than to increase the total profit. Consequently, the eco-
nomic benefit is hard to pinpoint. Under the proposed third test, the con-
tribution of the property would be viewed as a pre-condition to a zoning
change and the charitable deduction denied. Similarly, in other land dedi-
cation cases, where the taxpayer is complying with regulations or statutes,
the issue would be dealt with summarily under the third test.
0 7There is, of course, another tax policy basis for disallowing the deduction. Arguably, the
payment is a type of penalty which should not be deductible as a business expense under ITA
para. 18(l)(a) and, therefore, should not be allowable under ITA s. 110 either. See, generally,
Day & Ross Ltd v. R. (1976), [1977] 1 EC. 780, [1976] C.T.C. 707, 76 D.T.C. 6433 (T.D.).
‘0 8Allen, supra, note 54.
REVUE DE DROIT DE McGILL
[Vol. 31
The final example comes from Bowen C.J.’s implicit criticism in Leary
of the Cyprus Mines reasoning. 0 9 In Cyprus Mines the taxpayer elected to
make a donation to the charity rather than pay the royalty to the State of
Western Australia. Arguably there was no real economic benefit since the
dollar amount paid out was the same. The economic benefit test is thus
insufficient to isolate the commercial element. However, payments made
pursuant to a commercial contract would be caught by the proposed third
test.
Conclusion
Deane J. in Leary commented on the word gift:
It is a monosyllabic old English noun of Norse derivation which designates a
descriptive category of transfer of property. Once it is accepted that it is to be
given the meaning which it bears as a matter of ordinary language, it is not to
be assumed that its ambit can properly be defined, with a lawyer’s or a logician’s
precision, by reference to a number of unqualified propositions or tests or by
identification with different polysyllabic words whose etymological origins pro-
vide greater scope for reasoning as to precise meaning. 0
It may be that this lengthy justification for the proposed three-tiered
test is such a fruitless logician’s pursuit. However, the lack of a consistent
approach evidenced by the Burns, Aspinall and McBurney cases, and the
challenge to Revenue Canada’s apportionment approach by the Federal Court
Trial Division in McBurney, certainly demand attention. The American
cases show the weakness of using one test alone. The two test approach of
the Australian McPhail rule has recently been criticized in Leary’ which,
surprisingly, introduced the subjective intent test articulated by the United
States Court of Appeals. Ninth Circuit, in DeJong without exploring its
criticisms.
Whatever the approach, there has been too little attention paid to the
tension between the tax policy of encouraging charitable contributions and
both the general prohibition against deducting personal expenses and the
tax equity considerations of treating charitable and business suppliers of
goods and services the same. In the proposed approach, tests one and three
eliminate transactions motivated almost exclusively by commercial and
non-charitable considerations. They form a wide mesh screen through which
most transactions will easily pass, and hence do not inhibit charitable giving.
109Leary, supra, note 81 at 230ff, criticizing Cyprus Mines, supra, note 80.
HoSupra, note 81 at 241.
1 “Ibid. at 242-43.
1986]
EXAMINATION OF CHARITABLE GIFTS
455
Test two is based on the premise that charitable gifts are motivated by a
complex mix of objectives. Thus it only seeks to reduce the quantum of te
gift by the actual economic benefit received. This, it is hoped, will preserve
the element of charity in the charitable deduction provisions.
