In Berg v. The Queen, 2014 FCA 25, the Federal Court of Appeal denied Allen Berg every dollar of the charitable donation tax credits he had claimed after buying timeshare units and donating them to a registered charity in exchange for receipts inflated to ten times their real value. The court held that the transaction failed on two independent grounds: the supporting documents were shams, and Berg had no genuine intent to make a gift. The decision reversed a partial win Berg had secured at the Tax Court and became one of the most-cited Canadian authorities on inflated-value donation shelters.1Tax Interpretations. Canada v. Berg, 2014 DTC 5028, 2014 FCA 25
The Transaction Behind the Case
Berg participated in a pre-packaged donation program in 2002 and 2003. In 2002 he bought 68 timeshare units from Young Island Timeshare Inc. for $242,000, their actual fair market value, and transferred them to Cheder Chabad, a registered charity. The receipt he received was for $2,420,000. The gap was covered by a promissory note for $2,178,000 that made it appear Berg had paid the higher figure.1Tax Interpretations. Canada v. Berg, 2014 DTC 5028, 2014 FCA 25
He ran the same play in 2003. He paid $133,950 for another batch of units and received a receipt for $1,786,000, again backed by a promissory note ($1,652,050) covering the shortfall. On top of the purchase prices, Berg paid guarantee fees to the promoters: $508,200 in 2002 and $366,130 in 2003.1Tax Interpretations. Canada v. Berg, 2014 DTC 5028, 2014 FCA 25
The detail that changed everything came out only during examinations for discovery. Berg had received written discharges from the promissory notes on the same day the notes were signed. He never owed the note amounts. He never intended to pay them. The promoters never expected collection. The notes existed for one reason: to make the inflated receipts look supportable.
Why the Federal Court of Appeal Denied Every Credit
The FCA heard the Crown’s appeal in September 2013 and released judgment on January 31, 2014. It allowed the appeal in full, set aside the Tax Court’s decision, and dismissed Berg’s claims for 2002, 2003, and 2004. The court offered two separate reasons, either of which was sufficient on its own.1Tax Interpretations. Canada v. Berg, 2014 DTC 5028, 2014 FCA 25
The Sham Documents Were Part of the Deal
A sham, in Canadian tax law, is a transaction where the paperwork shown to outsiders misrepresents what the parties actually agreed to. The Tax Court had treated Berg’s promissory notes, pledge agreements, and guarantee agreements as worthless paperwork that could be stripped away, leaving behind a legitimate cash donation equal to what Berg had actually paid.
The FCA rejected that approach. The pretense documents were not incidental. Berg had paid guarantee fees of $508,200 and $366,130 to the promoters for the entire package, and those fees themselves exceeded the fair market value of the timeshare units. He would not have paid that kind of money for documents that had no purpose. He used them as though they were genuine throughout the CRA audit, the objection process, and even discovery, disclosing the discharge letters only when his position collapsed. The court found the case indistinguishable from its earlier decision in Maréchaux.1Tax Interpretations. Canada v. Berg, 2014 DTC 5028, 2014 FCA 25
No Donative Intent
Canadian courts require that a donor genuinely intend to give, historically expressed as animus donandi: the donor willingly accepts becoming poorer so the recipient becomes richer. The FCA found Berg had the opposite intention. He entered the arrangement to enrich himself by claiming tax credits far exceeding his actual cost, and he acted from beginning to end with that objective. Without genuine donative intent, there was no valid gift under section 118.1 of the Income Tax Act, regardless of what property actually changed hands.2Department of Justice Canada. Income Tax Act – Section 118.1
The distinction matters for legitimate donors. Receiving a tax credit is not, by itself, fatal to donative intent. Every genuine donor benefits from the credit. The line is crossed when the anticipated tax benefit exceeds what the donor actually gives up, and the donor structures the arrangement specifically to produce that profit.
What the Tax Court Had Done
The case had first gone to trial before Justice Bocock at the Tax Court of Canada, with reasons released in November 2012. Justice Bocock accepted that Berg had paid $242,000 and $133,950 in cash for the units and had voluntarily transferred them to the charity. On that basis, the Tax Court allowed credits equal to the cash amounts Berg had actually spent, treating the sham documents as severable from a genuine underlying gift.1Tax Interpretations. Canada v. Berg, 2014 DTC 5028, 2014 FCA 25
Even that partial win came with a rebuke. The Tax Court described Berg’s charitable motivation as marginal at best and declined to award him costs, citing his conduct in preparing his returns, his dealings with the CRA, and his reliance on the pretense documents throughout the proceedings. The Crown appealed the credits that had been allowed, and the FCA erased them.
What Berg Means for Donation Shelter Participants
The financial consequences of a ruling like this go well beyond losing the credits. When the CRA reassesses a shelter donation, it typically reduces the claimed amount to whatever the taxpayer actually paid in cash, and in many cases to zero. Interest runs from the original filing date. And under section 163(2) of the Income Tax Act, a taxpayer who knowingly or through gross negligence makes a false statement in a return is liable for a penalty equal to the greater of $100 or 50% of the understated tax attributable to the false claim.3Department of Justice Canada. Income Tax Act – Section 163
In donation shelter cases, that penalty can be crushing because the inflated receipts generate credits many times larger than any legitimate amount. A taxpayer who claimed $2.42 million in donations when the true value was $242,000 faces a penalty calculated on the full difference in tax payable. Denied credits, accrued interest, and a 50% penalty stacked on top can far exceed whatever the taxpayer originally spent chasing the deduction.
Berg is not an isolated result. The CRA has audited hundreds of similar arrangements, and Canadian courts have consistently shut them down. The common thread is a taxpayer contributing a modest amount and receiving a receipt for a dramatically higher figure, supported by paperwork that will not survive scrutiny once the real agreement comes to light. After Berg, two questions decide these cases: whether the supporting documents describe what actually happened, and whether the taxpayer truly meant to give something away. If the math only works because of an inflated receipt, both answers tend to come back the same way.