Beware of tax shelter donation arrangements
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.