For most of the early 2000s, thousands of Canadians were sold “leveraged donation” arrangements that promised a charitable tax credit several times larger than the cash actually paid out of pocket. The Canada Revenue Agency denied those credits on a mass scale, and a series of Tax Court of Canada and Federal Court of Appeal decisions has since confirmed that the arrangements do not work. One of the clearest of these is Kossow v. The Queen, 2012 TCC 325, affirmed by the Federal Court of Appeal in 2013 FCA 283. The taxpayer lost, and the reason she lost goes to the single most important concept in this entire area of law: what actually counts as a gift.
This article looks at how the leveraged structure in Kossow worked, why the Court held there was no gift, and what the decision means for anyone whose donation tax credit has been reassessed.
The facts
Ms. Kossow participated in a charitable donation program connected to the Ideas Canada Foundation over the 2000, 2001 and 2002 taxation years. The structure was typical of leveraged shelters of that era. For each year, she contributed a relatively small amount of her own cash and topped it up with a much larger, long-term interest-free loan from a third-party lender. The combined figure was then routed to the foundation, and she received a charitable receipt for the full amount.
The numbers tell the story. Across the three years she paid roughly $10,000 to $12,000 of her own money each year, but the loan brought the total “donation” up to $50,000, $60,000 and $50,000 respectively, and her receipts were issued for those larger figures. The loans were interest-free and not repayable for decades. In other words, a modest cash outlay was converted into a charitable receipt many times its size, generating a tax credit that, in cash terms, could exceed what she had actually spent.
The CRA reassessed to deny the credits entirely. Ms. Kossow appealed to the Tax Court of Canada.
The issue
The central question was deceptively simple: did Ms. Kossow make a gift within the meaning of the charitable donation provisions of the Income Tax Act? The charitable donation tax credit in section 118.1 is available only for a gift. If the payment to the foundation was not a gift in the legal sense, no credit is available, regardless of how the receipt was worded or whether the foundation was a registered charity.
Canadian tax law has a settled definition of what a gift is. It comes from the Federal Court of Appeal in The Queen v. Friedberg: a gift is a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor. The presence of donative intent, the intention to impoverish oneself for the benefit of another without receiving anything back, is essential. If the “donor” receives a significant benefit in return for making the transfer, the donative intent is missing and the transfer is not a gift at all.
So the real issue in Kossow narrowed to this: was the long-term interest-free loan a benefit that Ms. Kossow received in return for her contribution? And if so, did that benefit destroy — or, in the language the courts use, vitiate — the gift?
What the Court decided (and why)
The Tax Court dismissed the appeal and upheld the denial of the credits. Justice Miller concluded that Ms. Kossow had not made a gift, because the interest-free loan was a significant benefit she received as part of the same interconnected arrangement, and that benefit vitiated any gift.
The reasoning rested heavily on an almost identical case decided shortly before: Maréchaux v. The Queen, 2009 TCC 587, which the Federal Court of Appeal had affirmed in 2010 FCA 287. In Maréchaux, a taxpayer paid $30,000 of his own cash, received a receipt for $100,000, and financed the $70,000 difference with a twenty-year interest-free loan. The courts held there was no gift: the taxpayer had made the payment expecting to receive, and in fact receiving, a significant benefit in the form of the interest-free financing. The economic reality was that the financing was an integral, pre-arranged part of the transaction, not an independent loan that happened to coincide with a donation.
The Court in Kossow found the two structures materially the same and applied the same conclusion. Several points from the analysis are worth drawing out:
- A benefit defeats the gift even if it comes from a third party. Ms. Kossow argued that the loan came from a separate lender, not from the foundation, so it should not be treated as consideration for her donation. The Court rejected that. Where the financing is part of a single, interconnected set of transactions, a benefit will vitiate the gift whether it flows from the donee or from another person. On appeal, the Federal Court of Appeal confirmed that a long-term interest-free loan is itself a significant benefit and that the source of the benefit is not the deciding factor.
- The interest-free loan was the benefit. The right to use a large sum of money for decades without paying interest has real economic value. That value was exactly what made the arrangement attractive, and it was inseparable from the decision to “donate.”
- Donative intent was absent. Because Ms. Kossow expected and received that benefit, she lacked the intention to give without return. The whole structure was engineered to produce a tax credit larger than her real economic cost. That is the opposite of the impoverishment the law requires for a gift.
The Federal Court of Appeal dismissed the further appeal, holding that the Tax Court judge had made no error and that, as in Maréchaux, there was no gift for the purposes of the Income Tax Act.
Why this decision matters / practical takeaways
Kossow is not a surprising decision, and that is precisely its value. It sits in a consistent line of authority — Friedberg, Maréchaux, and the many cases that followed — that has effectively closed the door on leveraged and other “buy-low, receipt-high” charitable shelters. For taxpayers, the practical lessons are concrete:
- A receipt is not a gift. A charitable receipt, even one issued by a registered charity, does not establish that a valid gift was made. The CRA and the courts look at the substance of the transaction, not the paperwork. If a benefit flowed back to the “donor,” the credit can be denied no matter what the receipt says.
- Any meaningful benefit can poison the entire claim. In these shelter cases the courts did not split the donation into a “real” cash portion and a financed portion and allow a credit for the cash. The presence of the benefit vitiated the gift as a whole. Taxpayers who assume they will at least keep a credit for the cash they actually paid are frequently mistaken.
- The source of the benefit does not save the arrangement. Structuring the financing through an arm of the program, a separate lender, or a chain of entities does not change the result where the pieces are pre-arranged and interconnected. Courts assess the economic reality of the whole.
- Gross negligence penalties and interest can follow. Beyond losing the credit, participants in denied shelters have faced reassessments going back years, accumulated arrears interest, and in some cases penalties. The financial exposure is often far larger than the original tax credit appeared to be worth.
- Genuine charitable giving is unaffected. None of this restricts ordinary donors. A straightforward cash or in-kind gift to a registered charity, made without expecting anything in return, remains fully creditable. The problem in Kossow was never charity; it was the benefit attached to it.
For taxpayers caught in one of these reassessments, the procedural path matters as much as the legal principle. Our guides on the Tax Court of Canada appeal process and on evidence and the burden of proof explain how these disputes are actually run, including the taxpayer's onus to displace the Minister's assumptions.
How Barrett Tax Law approaches donation tax shelter files
Denied-donation files usually arrive in one of two forms: a participant in a known shelter who has just been reassessed, or a taxpayer worried that a past donation arrangement will be challenged. In both situations the starting point is the same — understanding the precise structure of the arrangement and whether, on the law set out in cases like Kossow and Maréchaux, any benefit flowed back to the taxpayer.
From there, the work is about realistic options. Some files turn on the facts of an individual taxpayer's participation and are most appropriately resolved through careful audit representation at the audit or objection stage. Others proceed to an appeal at the Tax Court of Canada, where the analysis focuses on the genuine donative intent and whether the transactions were truly interconnected. Because denied shelters frequently arrive with gross negligence penalties attached, we treat the penalty as a distinct issue carrying its own burden on the Crown. And for taxpayers who want to come forward about a past arrangement before the CRA contacts them, the Voluntary Disclosures Program is sometimes a route worth assessing. If you have been reassessed over a charitable donation claim, a free consultation is a sensible first step to understand where you stand.
This article is commentary on a public court decision and is provided for general information only. It is not legal advice, does not create a lawyer-client relationship, and outcomes always depend on the specific facts of each case. For the full reasons, see Kossow v. The Queen, 2012 TCC 325 (CanLII), affirmed 2013 FCA 283.
Frequently asked questions
What is the legal definition of a "gift" for the charitable donation tax credit?
Canadian courts use the definition from The Queen v. Friedberg: a gift is a voluntary transfer of property from a donor to a donee, in return for which no benefit or consideration flows back to the donor. The donor must have donative intent, the intention to give without receiving anything in return. The charitable donation tax credit in section 118.1 of the Income Tax Act is only available for a transfer that meets this definition.
Why were the donation tax credits denied in Kossow v. The Queen?
Ms. Kossow funded her donations partly with her own cash and partly with long-term, interest-free loans, and received charitable receipts for the full combined amount. The Tax Court held that the interest-free loan was a significant benefit she received as part of the same interconnected arrangement. Because she received that benefit, she lacked donative intent and made no gift, so the credits were denied. The Federal Court of Appeal upheld this in 2013 FCA 283.
Does it matter that the loan came from a third party rather than the charity?
No. The taxpayer argued the loan came from a separate lender, not the charity, so it should not count as consideration. The courts rejected that. Where the financing is a pre-arranged, integral part of a single set of transactions, a benefit will vitiate the gift whether it flows from the charity or from another person. The economic reality of the whole arrangement is what governs.
If part of my donation was real cash, can I at least keep a credit for that portion?
Often not. In leveraged shelter cases like Kossow and Maréchaux, the courts did not divide the donation into a cash portion and a financed portion and allow a credit for the cash. The benefit attached to the arrangement vitiated the gift as a whole, so the entire credit was denied. Taxpayers who assume they will keep a credit for the cash they actually paid are frequently mistaken.
Does this decision affect ordinary charitable donations?
No. A straightforward cash or in-kind donation to a registered charity, made without expecting anything in return, remains fully creditable. The problem in Kossow was not charitable giving itself; it was that the taxpayer received a significant benefit, an interest-free loan, in connection with the transfer. Genuine gifts with no benefit flowing back to the donor are unaffected.
What should I do if the CRA has reassessed me over a donation tax shelter?
Start by understanding the precise structure of the arrangement and whether any benefit flowed back to you, since that is the question the courts focus on. Depending on the file, the matter may be addressed through audit representation at the objection stage or through an appeal to the Tax Court of Canada. Because these reassessments often include gross negligence penalties and years of arrears interest, it is important to treat the penalty as a separate issue and to get advice early about your options.