February 28, 2006

A father’s intention to gift his children a substantial amount of money and benefit a favoured charity at the same time, albeit indirectly, was at the centre of a recent case decided by the Tax Court of Canada.  The case in question is Benquesus v. Canada [2006] T.C.J. No. 149.  Gift giving has never been so creative!

Mr. Jacques Benquesus lived in Israel.  In 1997, he transferred $1.5 million to the Canadian charity, Sephardic Education Foundation, indicating in writing that his family members (four children and son-in-law) were loaning the monies to the Foundation interest free.  Further, if the family members were to forgive the loan, the funds should be considered a donation.  His children and son-in-law were all residents of Canada.  Mr. Benquesus had made other substantial gifts to family members over the years.

The children and son-in-law forgave some, but not all, of the monies.  In 1999, the Foundation issued charitable receipts to them for such gifts.  The amount of the gifts was shown as donations in the financial statements of the Foundation for that year, and the amount of loans outstanding were reduced by the amount of the gifts.  The family members claimed the amounts as charitable donations in the 1999 taxation year.  The Minister of National Revenue disallowed such amounts as charitable donations.  The family members appealed the assessment on the basis that their father had gifted them the money, which they then donated to the Foundation.  Of course, any charitable tax receipts were useless to Mr. Benquesus as he was not a resident of Canada.

According to the court, the matter turned on whether Mr. Benquesus gifted the money to his family.  The court held that Mr. Benquesus had in fact made a valid gift to his children and son-in-law and thus the children were entitled to claim donation tax credits in the year in question.

No witnesses were called by either side.  Instead the parties presented an Agreed Statement of Facts at trial.

The Court considered the three requirements for a valid inter-vivos gift: (i) an intention to donate or give; (ii) acceptance by the donee; and (iii) a sufficient act of delivery.

According to the court, all three requirements were met in this case according to the Court.  However, while the court quickly determined that the first two requirements were met, the court struggled with whether there was sufficient delivery.  The court acknowledged that the family members effectively took over control of the money.  They instructed the Foundation how much was to be kept as a donation, and how much was to be paid back by them.  This was the only evidence before the court as set out in the Agreed Statement of Facts.  The court ultimately decided that there was a sufficient act of delivery to perfect the gift to the family members.  It was, therefore, the children and son-in-law who ultimately made the donations to the Foundation.

The court also considered whether an intention to gift money to children in the hopes that they use the money a certain way rendered the gift ineffective.  The court was not persuaded that it did.  The court recognized that in an ideal world, to perfect delivery of a gift there would be a physical transfer of possession of the property from donor to donee.  As a general rule, the donor must have done everything that can be done to perfect the gift.  However, courts have found that lesser forms of delivery may suffice.  Courts have strained to find sufficient delivery when the evidence of a desire to make a gift is irrefutable.  In the case before the court, the evidence set out in the Agreed Statement of Facts clearly signalled Mr. Benquesus’ desire to make a gift to his children.