In the past, some charities have involved themselves with tax shelters and issued inflated receipts far in excess of the actual donation. Taxpayers who participated in these shelters were reassessed, their charitable donation claims were either denied or limited to their actual donation and hit with backtaxes, penalties and interest. But the principals involved in both the charity and the tax shelter simply move on and launch new charities and new tax shelters as CRA revokes the charitable status of the ones that issued inflated receipts.

Budget 2011 proposes to clamp down on these abuses in the charitable sector by allowing CRA the discretion to refuse or revoke the registration of a charity organization, or to prevent it from issuing official donation receipts if an individual who controls or manages the charity has been found guity of a criminal or civil offense or was a principal of a charity whose registration was revoked within the past five years or who at any time was a promoter in a gifting or any other tax shelter and the registration of the participating charity was revoked within the past five years.

It is all but certain that Budget 2011, which Finance Minister Jim Flaherty tabled yesterday will not survive a vote in Parliament and the measures contained in it are of academic interest now. Still, one hopes that a future Government will reintroduce the measure contained in Budget 2011 that cracks down on abusive charities.

This article has 15 comments

  1. A colleague of mine was involved with “donate AIDS drugs to Africa” scheme. The idea is to claim the amount for brand name drugs, while actually gifting generic brand drugs. Supposedly saved $10k of taxes. I’m all for tax avoidance, but this is just cheating.

  2. @Slacker: A colleague of mine was interested in a donate AIDS drugs to Africa too. I managed to talk him out of it. He is pretty glad I did because the shelter got into all sorts of trouble with the CRA. The promoters are now doing some new and improved tax shelter. I don’t why otherwise intelligent people fall for what are essentially scams.

    http://www.canadiancapitalist.com/beware-of-tax-shelter-donation-arrangements/

  3. In some cases small legitimate charities are taken in by promoters. These charities may be guilty of not doing their homework, but in one case I explained to the person running the charitable organization that individuals were getting tax receipts for more than they contribute and he seemed genuinely surprised. In the end the charity gets slammed, but the promoters of the bogus scheme just move on to another charity.

  4. CC, I assume you talked your friend out of the donation scheme because is did not pass the “smell test”. That is what befuddles me. Accountants, lawyers and friends told people these crazy donation schemes for comic books, art, aids drugs etc. really smelt bad; yet people have such tunnel vision on saving taxes, that they totally disregard common sense. Unfortunately, many are now paying for it and deservedly so in many cases.

    The CRA has to be careful though, there are many small charities that unfortunately are not staffed properly that with good intention issue donation slips in error, for example for services provided to the charity. Under the proposals, these charities would be subject to suspension of their receipting privileges. I hope if this sees the light of day, the CRA will at least attempt to distinguish between sleazy promoters and those charities just not up to speed and provide them warnings and education on the receipting process.

  5. Camp Board Memeber

    I totally agree with this clamp down, schemes like this cast a cloud over all charities. As a Board member of a small Christian camp we have been informed through our national organization and the camps currently being “attacked” by CCRA that the CCRA has set up new guidelines for what a camp must do to be considered advancing religion and therefore be eligible as a charitable organization. Based on their new guidelines there will not be a Christian Camp in Canada that will qualify. I for one would think that the efforts of the CCRA would serve Canadians better if they went after crooked schemes rather then organizations working to improve the lives in their community and surrounding areas.

  6. I’ve heard the schpiel from some of those guys running those schemes because they were making the financial trade show circuit. Basically, the tax loophole that they’re taking advantage of is the “donation in kind”. They are just abusing that one clause to bits.

    Personally, I hold a libertarian view, so I would prefer that we just eliminate the charitable contribution tax credit altogether – along with eliminating income taxes altogether. I think Canadians would freely give to charity if we weren’t so heavily taxed nearly to the point of poverty to begin with…

  7. I would be careful not to throw all charitable programs under the bus. Some are clearly off-side. Others are under appeal and may withstand legal challenge. Revoking charitable status of those that withstand scrutiny simply because they are lumped into “bad tax schemes” presumes guilt which is contrary to how our system of justice works. In other words, the measures are really a wrong approach to solve the essential issue that our taxes are perceived to be too high. This crackdown is partially a misdirection by the government lest they tackle the actual problem.

    A more enlightened approach would be to create and/or enforce current laws (if they exist) a provision which allows CRA to criminally prosecute anyone who promotes tax evasion. Then, you create enough of a chill to root out the source of the issue.

  8. @Michael James: Agreed. I’m also not sure if this clampdown will make huge difference to tax shelters. After all, the promoter can simply look for an existing charity that is already registered. There are thousands and thousands of them around.

    @The BBC: CRA has a big warning on its website that essentially says tax payers should stay away from tax shelters that issue inflated receipts. It is very surprising that so many continue to ignore this warning (though to be fair participation has been dropping sharply over the past few years).

    @Camp Board Member: I agree that CRA should go after shady charities and allow legitimate ones to carry out their work.

    @Phil: The donation tax shelters do involve a tortured interpretations of the term “donation”. The problem with legislating this is that a number of genuine donations fall under the “in kind” category. For example, someone may be donating their art collection to a museum.

    @Thicken My Wallet: It does make sense to either legislate or enforce existing legislation to root out promoters of egregious tax shelters.

  9. Being able to issue charity receipts is a big responsibility and any charity doing so needs to be careful and professional enough to handle that responsibility or their privilege should be revoked and these people can be charitable in other ways or through other organizations

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  12. Long-awaited measure, I wonder why it took so long. However, they can’t apply it retroactively.zss

  13. Samantha Stephens

    Putting safeguards in place is always a good idea. And helping Canadians avoid charity scams is excellent.

  14. Samantha Stephens

    Further to the above and keeping within this thread. I wonder why those lotteries which are associated with raising funds for hospitals etc. cannot be structured so that ticket purchases can qualify for the charitable donation income tax credit. These lotteries are trying to raise funds and it’s all the more difficult if they have to compete with charities who can issue income tax receipts, given that every person who didn’t win in that particular lottery has made a charitable donation. I would definately like to see the next budget address such issues as charitable donations are a truer way to fair taxation according to income level.

  15. Certainly some accountants and lawyers are wisely advising their clients to avoid “too good to be true” schemes. However, in the case of my friend (a financial advisor no less) who donated to such a cause, ( I believe the “donation” was computer software or art) there was supposedly a tax lawyer on retainer. If memory serves me correctly, this lawyer was retained by the charity to fight the expected CRA reassessment in tax court to allow the charitable credit for its many contributors. So they must be legit, right? (ok that was sarcasm folks) In addition, any accountant that I have known is in the habit of stretching tax law writeoffs like silly putty. With all this conflicting information among professionals, even the most intelligent and savvy individuals can get hooked.
    I must also comment on the naivety of charities about receipts as brought up by a previous post. I have worked in the nonprofit sector and understand the difficulty finding employees well trained in financial matters . However, it is imperative for any charity to demonstrate fiscal responsibility. This includes being aware of the policies and procedures around charitable tax receipts. Ignorance and assumptions are not an excuse. CRA is capable of explaining all the requirements in the simplest terms. I know because I had to place many of those explanatory phone calls. Charities should be held to as high, maybe even higher, standards than for-profit corporations. After all, they are asking us to give them our hard earned money and our tax dollars (in the form of gov’t grants).

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