Does a Failed Tax Receipt Constitute Unjust Enrichment?

In the recently released decision Neville v National Foundation for Christian Leadership, 2014 BCCA 38 [Neville], the British Columbia Court of Appeal considered whether a failed tax receipt constitutes unjust enrichment. The Nevilles participated in a program whereby they made a “donation” to the National Foundation for Christian Leadership (the “Foundation”) and received a receipt for tax deductions purposes. The Foundation warned donors that the receipt may not be accepted by Canada Revenue Agency (“CRA”) as a valid deduction. CRA subsequently assessed the Nevilles and others who had participated in the program and found the receipt was not a valid deduction. The Nevilles commenced legal action.

The Foundation ran a program for the purpose of facilitating Christian post-secondary education. Students would solicit donations for the Foundation. The Nevilles’ child participated in this program. The fundraising effort of the participating students was reciprocated with bursaries or scholarships from the Foundation to offset the cost of their education. The value of the bursary or the scholarship would not exceed the amount of the solicited donations.

Although the donation could not be specifically earmarked for a particular student, it was submitted along with a form detailing the names of the student and the donor. The Court found that donors knew or ought to have known based on the information provided by the Foundation that in return for a donation, their child would receive a bursary or scholarship.

The Tax Court and the Federal Court of Appeal, in disallowing the deduction, held that a gift was a “gratuitous transfer of property owned by the donor in return for which no benefit flows to the donor” (The Queen v Friedberg, 92 DTC 6031, 6032 (FCA)). The Courts found the bursary was a clear benefit to the donor’s family member and as a result the gift was not a taxable deduction within the meaning of the Income Tax Act.

The Supreme Court of British Columbia decided the donation was a gift at common law. The definition of a gift at common law is: one gives a gift, the gift is delivered and the person to whom the gift has been made accepts it. At issue was whether the failure of the gift to attract a tax benefit vitiates the gift or whether the gift was impressed with an implied trust justifying its repayment upon the failure of the tax receipt.

The Court considered whether a “trust can be grafted upon an absolute gift” and the short answer was “no.” The Supreme Court of British Columbia held that no constructive trust was created as the requisite three elements were not met. The three elements of a constructive trust include an enrichment of the defendant, a corresponding deprivation of the plaintiffs and the absence of any juristic reason for the enrichment (Pettkus v Becker, [1980] 2 SCR 845 at 835). The Court held that there was no enrichment of the Foundation and therefore no constructive trust.

The result is that a failed tax receipt does not vitiate a gift. No trust can be grafted onto an absolute gift. The participants of the Foundation’s program knew of the possibility the tax receipt may fail and had received what they bargained for.

All of the reasons of the Supreme Court of British Columbia were endorsed by the British Columbia Court of Appeal.

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