CRA goes after dodgy donors

Time is fast running out for the patrons of “gifting tax shelters” making questionable charitable donations in the hope of making a fast buck.

The Canada Revenue Agency (CRA) is tightening the noose around those who are using questionable tax shelter programmes to claim phoney charitable donations. Such schemes typically give the donor a tax receipt far in excess of the cash value of their donation, which allows them to claim a tax refund larger than the actual donation.

In the crosshairs of the CRA are some 170,000 Canadians who have allegedly claimed $5-billion in tax refund since 2003, the year the CRA launched its special audit project.

Jamie Golombek, managing director, tax and estate planning with CIBC in Toronto, is not surprised that the numbers are so high.

“The CRA has been looking at these donation tax shelters for quite a number of years and there have been a number of precedents in Tax Court and the Federal Court of Appeal in which many of these donations deals have been shut down and have been denied benefits,” says Golombek, adding that there are ongoing lawsuits in various courts dealing with many of these deals.

In the end, the donors didn’t get what they were expecting, says Golombek.

Laura M. White, partner, tax, Borden Ladner Gervais LLP, couldn’t agree more. “The CRA has publicly stated that it is systematically going through its files and reassessing every taxpayer who participated,” says White. “The CRA is also systematically reviewing the charities that participated and is revoking charitable registrations.”

Some taxpayers and charities have taken the reassessments/revocations to court, with little success, she says.

There was a proliferation of charitable giving scams over the past decade that were aggressively marketed. “There were seminars done in hotel conference rooms in small towns right across Canada over the last five years,” says Golombek.

The appeal of ‘easy-money’ drew many middle-income Canadians who got involved hoping to get a free ride. The CRA is now coming down hard on them. This will hurt scheming taxpayers where it hurts most. Not only will the CRA audit disallow any tax refund on the donations, chances are the ‘donor’ will never see the money ‘donated’ to the promoter ever again.

The crackdown, however, could potentially impact law-abiding taxpayers who want to take advantage of an otherwise legitimate avenue to earn tax credit.

“Anyone buying a tax shelter should be aware that there is risk, and especially if you seem to be making money on a donation such that when you make a donation, you get back more than you actually gave,” says Golombek. “That should trigger a red flag.”

His suggestion to taxpayers is that they should seek independent legal and tax advice on it. “Don’t just rely on the tax advice and opinion of a promoter,” says Golombek. “Make sure you take whatever they give you to your own accountant, lawyer, or tax adviser and get some independent advice to make sure that you understand the risks of it not being successful, and if you can afford to take that risk.”

Changes to tax laws in 2003 made it easier for the CRA to track those who embraced these shelters. The operation has already met with some success and is evidenced in some of the numbers that are starting to come out.

According to CRA figures, 10,500 taxpayers claimed $285-million in donations through shelters in 2009, a steep drop from 17,000 taxpayers who claimed $480-million in 2008.

“The CRA’s enforcement action is clearly having an impact and the message is starting to get out there to Canadians,” says Golombek.

(09/16/10)