CCRA warns on in-kind charity donations

(November 26, 2003) The federal government has issued a fact sheet, warning investors to scrutinize in-kind charitable donations made for tax purposes through promoters.

“As tax filing season approaches, you may see a growing number of advertisements for tax-shelter donation arrangements,” the release read. “While donating various items to a charity is a legitimate way of making a charitable donation, you should be aware of the risks associated with certain donation arrangements.”

Often these arrangements involve the donor giving money to an intermediary, which buys the in-kind donation at a steep discount. The items purchased range from art to software, which is then donated to a pre-selected charity. A tax receipt is issued for the full market value, or higher, to the original donor. This can result in a tax deduction greater than the actual gift.

CCRA says it may disallow deductions made under such arrangements if there is too large a discrepancy between the value of the donation and the amount claimed as a deduction.

CCRA says it has conducted audits on 5,000 taxpayers in relation to these arrangements, and is currently conducting another 5,000.

“The question is whether or not the tax benefits will stand up at the end of the day,” says Jamie Golombek, vice-president of taxation and estate planning with AIM Funds Management. “One of the rumours floating around is that one of [these arrangements] has accumulated a half million dollar litigation fund. I’m not sure if that’s encouraging or not.”

Golombek says that prior to February of this year it was easier for donations under these arrangements to be missed by CCRA. But in February, the tax laws changed, mandating that these arrangements must be registered as tax shelters. As such they are instantly identifiable by CCRA.

“You have to make sure you feel 100% comfortable with the legal opinions that are there,” says Golombek. “Review them, discuss them with your accountant and be prepared for the risk that if you lose out, there could be both interest and penalties.”

Debate about these arrangements has even made it onto Advisor.ca’s Talvest Town Hall discussion forum.

“All the ‘experts’ and ‘gurus’ and ‘sheisters’ in the world cannot make these things smell good. Do we have the ability to use common sense anymore?” asked a poster identified as Skeptical in Kelowna. “When it comes right down to it the client would be taking on a considerable amount of risk for relatively little return. Isn’t it our job to bring these realities to our clients’ attention and insulate them from making poor decisions?”

What do you think about these arrangements? Is CCRA being heavy handed, or are these just schemes to cheat on taxes? Join the discussion in progress on this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com