Lessons on Donative Intent from Ayre v the King

In Ayre v. The King, 2025 TCC 41, the Tax Court of Canada dismissed six lead cases, along with ninety-nine bound appeals, challenging the Minister of National Revenue’s denial of charitable donation tax credits.[1] The Court found that the appellants participated in tax shelter gifting arrangements involving cash and pharmaceutical donations without the requisite donative intent. As such, they were deemed not to be entitled to tax credits under section 118.1 of the Income Tax Act.[2] The case is currently under appeal to the Federal Court of Appeal.

Background

The lead appellants participated in registered tax shelter and gifting arrangements created, promoted, marketed and administered by Relief Lending Group Inc (“RLG”) and MissionLife Financial Inc (“MLF”).[3] These programs claimed to allow participants to make large charitable donations of pharmaceuticals by paying a small upfront cost and contributing the remainder by way of a large “loan”.[4] In exchange, the participants gained tax receipts for the full amount of the donation, including the “loan” and claimed tax credits that exceeded their cash outlays.[5]

The Minister reassessed the appellants under section 118.1 of the Income Tax Act and denied the donation credits because there was no valid gift, the financing arrangements were unsupported by any real economic substance and were assumed by the Minister to be a sham, and the fair market value of the property donated was inflated.

Key Issues

The Court considered several issues, including:

1. Whether the appellants made valid gifts of cash and pharmaceuticals;
2. Whether the financing arrangements for the purchase of pharmaceuticals were a sham;
3. The fair market value of the donated pharmaceuticals; and
4. The eligible amount of the gifts under the Income Tax Act.

The Court determined that the first issue was dispositive and did not engage in a detailed analysis of the remaining issues.[6]

Findings

The Court made two central findings of fact. First, the Court held that the “loans” from RLG and MLF to the appellants did not exist. The appellants' cash outlays, described as "prepaid interest," were in fact the only funds used to purchase the pharmaceuticals. The evidence did not support the existence of bona fide lending arrangements.[7]

Second, the Court found that the fair market value of the donated pharmaceuticals could not have exceeded the amounts actually paid by the appellants. In reaching this decision, the Court rejected expert evidence that relied on retail or manufacturer pricing. Instead, the Court held that the appropriate market to determine the fair market value of the pharmaceuticals was the market in which the appellants actually purchased the pharmaceuticals.[8]

Requirements for a Valid Charitable Gift: Donative Intent and Economic Reality

The Court concluded that the appellants lacked the donative intent required for a valid gift under section 118.1 of the Income Tax Act.[9] Under section 118.1 of the Income Tax Act, individuals are entitled to receive a tax credit for a gift made to a registered charity or qualified donee. Relying on its earlier decision in Mariano v the Queen, 2015 TCC 244, the Court emphasized that a valid charitable gift under section 118.1 requires an intent to impoverish oneself.[10] In ascertaining intent, courts will rely on both subjective and objective indicators of intent.

Given the Court’s view of the inconsistent testimony with the reality of the transaction, the Court gave greater weight to the objective circumstances, including the promotional materials, the structure of the programs, and the appellants' prior patterns of charitable giving.[11] The Court held that the appellants either knew or were wilfully blind to the fact that no real loan existed.[12] The purported loans functioned only to inflate the value of the donation for tax credit purposes.[13] Here, the participants paid only a fraction of the amount for which they received a tax receipt, and the evidence demonstrated that their primary motivation was to enrich themselves by receiving tax credits far greater than their cash outlays.[14]

The Court further found that the participants had no intention of repaying the “loans,” which were not advanced in any meaningful economic sense.[15] The prepaid interest was the only real cash outlay. The remainder of the financing was unsupported by any real capital or expectation of repayment.

Friedberg Distinguished

The appellants argued that they satisfied the requirements under section 118.1, relying on the Federal Court of Appeal's decision in The Queen v Friedberg, 1991 CanLII 14017 (FCA) and its interpretation in Jensen v The Queen, 2018 TCC 60.[16] They argued that donative intent could only be vitiated by non-tax benefits and that the statutory scheme permitted "profitable gifts" in certain circumstances.[17]

The Court rejected these arguments, distinguishing the facts from those in Friedberg, which involved the donation of certified cultural property.[18] The Court reaffirmed the Federal Court of Appeal’s decision in Markou v. Canada, 2019 FCA 299 which held that outside the context of cultural property, a taxpayer who anticipates receiving tax benefits exceeding the value of their donation lacks donative intent.[19]

The Court also found that the rules in section 248(30) of the Income Tax Act did not apply. Section 248(30)(a) allows for a tax credit for a gift given in the absence of donative intent as long as the gift does not exceed 80% of the fair market value of the transferred property. In this case, since the tax credits claimed by the appellants exceeded 80% of the fair market value of the property donated, the Court found that this provision did not apply.

Implications

Ayre offers several important lessons:

1. Donative intent is critical for taxpayers seeking to claim a charitable tax credit under section 118.1 of the Income Tax Act. For a valid charitable gift under this provision, taxpayers must provide a real transfer of property without expectation of return. Taxpayers who participate in gifting arrangements designed to generate profits through tax benefits are unlikely to satisfy the requirement of donative intent, regardless of the formal structure of the transactions.
2. Sham loans and inflated donations, even if supported by formal documentation, will not withstand judicial scrutiny if they lack economic substance. Ayre demonstrates the Tax Court's willingness to look beyond self-serving testimony to the economic realities of the arrangements
3. Ayre is a reminder that aggressive donation schemes may expose clients to reassessment, penalties, and reputational risk.

Looking Ahead

Ayre is currently under appeal to the Federal Court of Appeal. Whether the appellate court reaffirms or refines the Tax Court’s findings, Ayre remains a timely example of how courts evaluate charitable donation shelters, and the evidence required to support a tax credit claimed under section 118.1 of the Income Tax Act.

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