Recently a friend asked about a “tax scheme” that claims to buy medicines for AIDS patients (”Fight AIDS Save Taxes” is its slogan) in Africa and provides a tax receipt for four to five times the donation amount. While stiffing the government, helping AIDS patients and putting some money in the pocket may sound like a win-win situation all around, participating in a tax shelter scheme is asking for trouble. The Canada Revenue Agency has a clear position on these schemes and titled a recent alert, “Warning: Participating in tax shelter gifting arrangements is likely to result in a tax bill!” The text of the alert also provides no room for confusion:
New schemes are being marketed that claim to be different from those for which the CRA has previously issued warnings. Taxpayers should avoid all schemes that promise donation receipts for 3 to 4 times the cash payment. It is the CRA’s position that the proposed legislation, effective since 2003, will apply to reduce the donation credit to no more than the actual cash payment. Furthermore, as indicated above, completed audits have shown that there was effectively no gift being made in many cases, and as a result, the donation was reduced to zero.
The Toronto Star ran a series of investigative pieces on charity scams last year available here, here and here. An accompanying graphic to the story illustrates the risk involved in these schemes. A taxpayer made a donation of $10K and received a tax credit of $21K (probably adjusted for the original donation), got audited and the taxman wants $35K in back taxes, interest and penalties. Despite the CRA warnings and media coverage, it appears that many are falling for these schemes — the aforementioned “charity” claims to have raised $165 million so far.
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17 responses so far ↓
1 Scam hater // Aug 20, 2008 at 6:01 am
One of the promoters of ParkLane was Roy Beyer, who is now Director of Marketing with Foundation Capital Corporation / Harvest Capital. Harvest has also marketed some questionable investments, including ‘The Land Development Company” and “Payday Today USA”. Google to find out more.
2 Al // Aug 20, 2008 at 8:20 am
My wife and I investigated 4 charities that suit our tastes, and those are the only ones to which we donate. All the cold callers, no matter how good their causes may be get turned away politely.
3 Novice // Aug 20, 2008 at 10:17 am
Old adage “you can’t cheat an honest man (or woman)” comes to mind. This little saying has literally saved me thousands of dollars whenever someone comes up to me and tells me about the latest money saving endeavour that sounds too good to be true.
4 Canadian Capitalist // Aug 20, 2008 at 10:39 am
Scamhater: Like the Toronto Star says, it is astonishing that these “charities” simply shut down and start another when they are audited. I would think that they should be prosecuted because fraud is a crime and should be treated as such.
Al: We have a handful of charities we support and the only exception I make is for young children who knock on the door (they don’t give out gift receipts though).
Novice: I agree with you that “give $10 and get a $50 receipt” does not pass the BS test. And the CRA issues tax alerts every year and tax payers who participate in these schemes can’t say they weren’t warned.
5 Gail Bebee // Aug 20, 2008 at 11:09 am
Canada Revenue Agency has an informative and free speaker’s kit on charitable donations which covers donation scams. It includes a PowerPoint presentation, pamphlets etc. and is ideal for investment club discussion. Find out more here:
http://www.cra-arc.gc.ca/E/pub/xi/rc306-k/README.html
Gail Bebee
Author of No Hype-The Straight Goods on Investing Your Money
6 Brad // Aug 20, 2008 at 11:10 am
Hmmmm. CRA issues charitable status to a charity (which they presumably investigate before doing so), then decide that it’s not a charity after all, and those who have donated are screwed?
While I understand fully that these charities are used to structure the tax shelters, and that it’s very much ‘buyer beware’ when using such a shelter, it’s not as simple as those above make out.
CRA is an extra-legal organization which bullies people into paying taxes they may not owe, and will not provide clear guidance as to where the lines are. Just call CRA 3 times with a complex question, and usually you will get 3 different answers. Ask them to put it in writing, and they won’t.
Why can’t CRA investigate a tax shelter before issuing a tax shelter number?
And I hardly think that regurgitating vague, threatening ‘Alerts’ from CRA (why don’t they specify, name names?) and quoting the shoddy financial journalism of the Toronto Star passes as wise counsel from the Canadian Capitalist. Sad.
7 Canadian Capitalist // Aug 20, 2008 at 11:43 am
Gail: Thanks for the link.
Brad: The CRA simply registers a charity initially and assumes that they will collect donations and spend it for charitable purposes. They do audit and revoke registrations but how are they going to tell a good charity from bad at the time of registering?
It is a good question why the people running these charities are not prosecuted when they are found to be frauds. I don’t have an answer to this.
But, I don’t find anything vague about CRA’s alerts. They specifically mention that if the receipt is many times the donation, the taxpayer is taking a risk of the charitable contribution being denied and interest and penalties applied.
The Star’s series has named names, pointed out the abuses of the system and demanded action. How is that shoddy journalism?
8 NN // Aug 20, 2008 at 11:46 am
Whow CC, you sured failed Brad’s high standards this time. Didn’t I read somewhere on your site that you do not purport to be an ‘advisor’ and therefore nothing on this site can be construed as ‘advice’ (or ‘counsel’)?
Moving right along, thanks for the heads-up, I will be investigating the ’shoddy financial journalism’ of The Star next. I fear investors will fail to recognize to-good-to-be-true schemes for what they are until the end of time.
9 dc // Aug 20, 2008 at 1:10 pm
If something seems to good to be true, it usually is.
I am suprised at the number of people I know that gave money to these types of scams for the sole reason that they could get a deduction in excess of what they paid.
I know one guy who “doesn’t believe in RRSP’s” but was keen to throw $5,000 at one of these scams. Ridiculous.
10 Steve Heath // Aug 20, 2008 at 10:02 pm
CC, not to discourage you from giving to kids (I do as well) but you mentioned:
“Al: We have a handful of charities we support and the only exception I make is for young children who knock on the door (they don’t give out gift receipts though).”
Down here it became a big scam for kids to go door to door “raising funds” for something and just pocketing the cash, so residents were advised that if it is a real charity, it should have a receipt, and if it is fundraising for something else (such as a school trip) then the student should show an official letter from the school indicating such.
11 Steve // Aug 20, 2008 at 11:13 pm
Unfortunately, the scams out there hurt many legitimate tax shelter programs which don’t involve the dreaded “inflated receipts”, etc.
Question: If a program existed which didn’t harm the charities & followed the letter & spirit of the law exactly ( i.e. - no GAAR), do you think the CRA could EVER afford to say it was “okay”?
Get real people - The CRA has an agenda, and even though the law allows for tax avoidance and defines “tax shelter” in the income tax act, the CRA can never afford NOT to challenge a program or everybody in Canada would participate & never pay tax again!
Focus on the LAW - not your feelings, newspapers, or the CRA and you will have your answer as to whether a tax shelter program “works”.
I guess none of you happened to read the retraction that very journalist did on the above mentioned article. Check it out at: http://www.canada.com/edmontonjournal/news/local/story.html?id=03a299c4-a493-4f11-acb7-5fdd381c88bb&k=60351
12 ThickenMyWallet // Aug 21, 2008 at 10:34 am
The Toronto Star article was overly simplistic and clearly written by someone not drilling down on the analysis and painting the entire industry in one broad-stroke. It would be equivalent of them writing that all finance blogs give improper information.
Like any other investment product, there are good ones and there are bad ones. The legitimate tax shelters have been challenged by CRA and, the majority of them, have survived court challenges (the tax lawyers who advise and give opinions on the legitimate ones are a who’s who of the corporate tax bar in Canada; you have lawyers charging $800 per hour against a government lawyer who wants to leave at 4:30 every day- hardly a fair fight). The reason why you never hear of CRA losing these challenges is because the original legitimate tax shelters had a minimum buy-in that precluded most middle class citizen (usually starting at cash contributions over $25,000) so why would a media outlet like the Star report on that?
As with all things, greed took over and the products went retail. This is when the scams began to happen and because of the number of people claiming credits CRA had to act to defend its bottom line.
There’s good tax shelters and bad ones. If the entire concept of tax shelter make your eyes glaze over. Avoid the entire industry.
Of course, I would like to point out, from the all the background noise, what the real problem is. If the tax rate was actually fair and low there would be no need for this entire industry- good or bad. Let’s remember why we all spend countless hours looking at shelters and figuring out ways to deduct interest off our mortgages etc. We all feel our taxes are too high and attempt to find ways to minimize them.
13 Steve // Aug 21, 2008 at 3:31 pm
Excellent points!
I agree entirely…
S.
14 No Fee Banking, Cheap Books and Roundup - Aug 22, 2008 | Million Dollar Journey // Aug 22, 2008 at 6:31 am
[...] Canadian Capitalist warns us to beware of tax shelter donation arrangements. [...]
15 Thankful For Fools // Aug 23, 2008 at 1:53 am
I worked for a fundraising company a few years back. They raised money for questionable and not so questionable groups. And regardless of their real merit, if you’re being propositioned with an offer for charity giving then just simply don’t do it.
The company I worked for never exceeded 22% for actual “charitable offerings.”
And that’s a high number for the “fundraising industry.”
Never give to solicitors of any kind, unless you truly believe it’s worth it simply to help your local (for canvassers) or international (for telemarkets) job markets.
Pick a charity. Research it as you would a stock, to ensure the money might accomplish *something* and then enjoy your minor tax benefit.
Charitable giving should be about doing something you believe in, not a minor tax deduction. It’s one place that I simply can’t find selfishness to be ironic.
16 Canadian Capitalist // Nov 4, 2008 at 9:20 am
Column in the Globe and Mail that CRA says a charity is running a tax-shelter scheme:
Link
17 Steve // Nov 5, 2008 at 12:06 am
Yes, this charity works with a “Trust structure” (warned against by the CRA) called CHT (Canadian Humanitarian Trust).
These type of programs are worse than the “buy low, donate high” programs of old as they are buy NOTHING and donate high.
If you are participating in a tax shelter, be sure that it only gives receipts for the price paid for items donated & that charities are achieving a 100% disbursement quota. They DO exist - do your homework!
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