A cautionary charity tale

What constitutes a gift? That was the subject of a Tax Court of Canada decision released in November 2013 (Carson v The Queen, 2013 TCC 353).

The case involved Ward Carson, who found himself in court challenging the Canada Revenue Agency’s denial of his claim for a $3,120 charitable donation for the 2009 taxation year.

Peaceful Schools International Society, a registered charity of which his wife is the president, used two rooms in his home over a two-year period. The society used one room as an office, while it used the other for storing various supplies of Peaceful Schools. The $3,120 amount was his estimate of the fair market value of the use of those rooms.

In 2009, Carson was issued two donation receipts from Peaceful Schools, one for $1,950 and the other for $1,170, for in-kind rent. There was neither a lease nor a rental agreement. He testified that the monthly expenses for the two rooms exceeded the income he received, and presumably that’s why he didn’t report any net rental income from these rooms on his tax return. The issue before the Tax Court was whether the use by Peaceful Schools of two rooms in his home truly represents an eligible charitable gift for tax purposes from Carson to Peaceful Schools.

Can rent-free accommodation be a gift?

The term “gift” is not defined in the Income Tax Act. Prior jurisprudence, however, has defined a gift to be “a voluntary transfer of property.” This is confirmed in the CRA’s administrative materials, specifically with regards to rent-free accommodation.

The CRA, when asked whether a charity can issue a charitable receipt to a landlord who provides rent-free accommodations, specifically said that it cannot. That’s because “one of the criteria for a gift is that there be a voluntary transfer of property. In this situation, no property is being transferred — instead, use of the building is being provided. Since no property is transferred, no ‘gift’ is made. A tax receipt for the value of the loan of property cannot be issued.”

Alternatively, a charity could pay rent on a property to a person and then accept a gift equal to that rent, provided the gift is voluntary. In this case, the charity could issue a valid donation receipt. The donor would have to report the corresponding amount as rental income on his or her tax return, but would be able to claim the charitable donation tax credit with respect to that gift.

Carson tried to argue that the arrangement he had with Peaceful Schools “has the same effect as if he had entered a rental agreement, accepted rent and paid it back to Peaceful Schools, an arrangement the CRA acknowledges would be acceptable.”

The judge disagreed. There was no lease, and Carson was simply allowing Peaceful Schools to use the two rooms in the home. As the judge wrote, “This is not a question of being hung up on form over substance. [… T]he form had no semblance of a required payment … of rental monies. But neither did the substance.”

Carson maintained that he didn’t take steps to “formalize such an arrangement” since he, his wife and Peaceful Schools were all non-arm’s-length parties, and therefore, “Why would he contemplate anything so formal?”

Quite the contrary, said the judge, who suggested that for this reason alone it would have been appropriate to formalize the arrangement. As the judge wrote, “The arrangement is far too loose to conclude there has been a gift of money by Carson.”

The judge determined that since there was no transfer of property, there could be no charitable gift — and denied Carson the donation tax credit.