Charitable Donations as Business Expenses

In two recent decisions (Emballages Starflex inc. c. Agence du revenu du Québec, 2015 QCCQ 7455, and Emballages Starflex inc. c. Agence du revenu du Québec, 2016 QCCA 1856), Quebec courts have clarified rules for the deductibility of donations as business expenses and ruled that Quebec taxpayers will not receive any provincial tax relief for amounts donated to US charities.

For its 2009 tax year, the taxpayer claimed a $1.4 million gift deduction under section 710 of the Taxation Act (QTA) (the Quebec equivalent of ITA paragraph 110.1(1)(a)) regarding charitable donations made to Jewish charities in both Canada and the United States. The gift deduction allowed the taxpayer to lower its taxable income to under $500,000.

Revenu Québec denied the portion of the gift deduction attributable to US charities because none were registered as "qualified donees" with the minister of national revenue. The taxpayer filed a notice of objection and subsequently appealed the reassessment to the QCCQ, claiming that article XXI(7) of the Canada-US tax treaty deems US charities to be registered for Quebec tax purposes.

Shortly before trial, the taxpayer filed a motion to amend its appeal proceedings in order to assert, on an alternative basis, that the donations ought to be considered publicity and promotion expenses, which are wholly deductible under the QTA equivalent of ITA section 9. The motion to amend was heard on the first day of trial. The taxpayer called the president of a corporation with similar activities to testify on the importance of charitable donations in order to develop and create business opportunities in the Jewish business community. None of the taxpayer's representatives or clients testified.

The trial judge dismissed the taxpayer's motion to amend on the grounds that Revenu Québec had issued the notice of reassessment precisely because the taxpayer had initially treated the donations as gifts. In the judge's opinion, allowing the amendments sought by the taxpayer would enable it to present a completely new position from a tax perspective, a position that Revenu Québec had not had the opportunity to analyze during audit. He also ruled that the very notion of publicity was "irreconcilable" with the concept of a gift.

After dismissing the taxpayer's motion to amend, the trial judge proceeded to analyze, on the merits, the taxpayer's initial argument based on the Canada-US tax treaty, and ultimately dismissed the appeal.

In November 2016, the QCCA upheld the dismissals of both the motion to amend and the appeal. Although the court acknowledged that federal courts have allowed donations to charities to be treated as deductible business expenses, it suggested that this is possible only when sufficient evidence is adduced at trial. Further, in a brief obiter dictum, the court quoted an excerpt from Iacobucci J's reasons in Symes v. Canada (1993 CanLII 55 (SCC)), apparently as authority for the proposition that when a specific set of ITA provisions limits the deductibility of an expenditure, the deduction will be denied regardless of a taxpayer's genuine motives with regard to the expenditure. However, another possible reading of Symes is that some expenditures serve dual purposes; if the actual purpose intended by a taxpayer is not limited by specific provisions, the general provisions of the ITA will apply.

Corporations and other businesses that want to treat charitable donations as business expenses should take every precaution to adequately document their business decisions and to adopt a consistent approach in their tax filings. Similarly, litigators should be careful to assert alternative positions as early as the objection stage, regardless of the fact that limiting provisions applicable to large corporations (such as ITA subsection 165(1.11)) may not apply.

Francis Hally
Morency, Société d'avocats LLP, Montreal

Canadian Tax Focus
Volume 7, Number 2, May 2017
©2017, Canadian Tax Foundation