CRA Revokes Choson Kallah Fund of Toronto as tax shelter donation arrangement
Published under: Canadian Charity Law
The problem of abusive charitable tax shelters using the developing world as a marketing tool continues. It just goes to show the importance of dealing with credible and legitimate charities if you want to make the world a better place.
The Globe and Mail had an article November 4, 2008 entitled “Ottawa alleges Toronto charity is running a tax-shelter scheme” by Josh Wingrove.
The Globe article states:
“The Choson Kallah Fund received donations of malaria and anti-parasitic drugs bought overseas at cut-rate prices, and issued at least $177-million in charitable receipts to the donors, who have not been identified, at the higher Canadian retail value, the CRA alleges in a letter to the charity. The charity kept about 1 per cent of the total as a fee, the document says. The donors, who were sought out by a company called World Health Initiatives Inc., profited because of the discrepancy between the international and Canadian drug prices, which Choson Kallah never verified, the CRA alleges. In the letter outlining the allegations, the CRA says that Choson Kallah “promoted” the tax shelter scheme. The CRA alleges that Choson Kallah immediately gave control of the drugs to another Ontario charity - Toronto’s Escarpment Biosphere Foundation (EBF) - which claims the drugs were distributed in 43 countries. But Choson Kallah didn’t independently appraise their value before issuing the receipts, the CRA alleges.”
Here is also a copy of the CRA news release:
The Canada Revenue Agency revokes the charitable status of the Choson Kallah Fund of Toronto
Ottawa, Ontario, November 3, 2008… The Canada Revenue Agency (CRA) has revoked the charitable status of the Choson Kallah Fund of Toronto effective November 1, 2008.
On December 21, 2007, the Minister of National Revenue issued a notice of intent to revoke the charitable registration of the Choson Kallah Fund of Toronto, in accordance with subsection 168(2) of the Income Tax Act. The letter stated, in part, that:
The audit conducted by . . . (the “CRA”), identified that Choson Kallah Fund of Toronto (the “Charity”), based on the activities of the Charity and the level of financial activity and resources devoted to this program, is operating primarily or collaterally for the purpose of furthering a tax shelter donation arrangement. In our view, the Charity’s original purpose, which is to provide funding for relief of poverty to impoverished individuals, has been sidetracked by its participation in this arrangement and has, in effect, become a secondary purpose. . . .
Accordingly, it remains our view that the Charity has willingly lent its name and tax receipting privileges to the tax shelter in exchange for monetary compensation. In our view, the Charity has participated in a program designed to abuse the charitable gift incentive provisions of the [Income Tax Act]. The Charity’s participation in this program is to issue receipts for property it neither uses nor sees for values established by the shelter promoters. The Charity is compensated for its participation for a set fee representing a scant 0.05% of all donation receipts issued (after deducting expenses). The Charity issued tax receipts for amounts in excess of $177 million during the years under review. In our view, the Charity’s participation in this program has become an end in and of itself. Accordingly, it is our view that the Charity has operated for the non-charitable purpose of promoting and participating in a tax shelter arrangement and, accordingly, cannot be considered to be a charitable organization all the resources of which are devoted to charitable activities.
The notice of intent to revoke and other letters relating to the grounds for revocation are available to the public on request by calling 1-800-267-2384.
A charity that has had its charitable status revoked can no longer issue donation receipts for income tax purposes and is no longer a qualified donee under the Income Tax Act. The charity is no longer exempt from income tax, unless it qualifies as a non-profit organization, and it may be subject to a tax equal to the full value of its remaining assets.
Registered charities in Canada perform valuable work in our communities, and Canadians support this work in many ways. The CRA regulates registered charities through the Income Tax Act and is committed to ensuring that charities operate in compliance with the law. Where a registered charity is found not to comply with its legal requirements, the CRA may apply monetary penalties or may suspend or revoke the charity’s status under the Act.
The CRA is reviewing all tax shelter-related donation arrangements (for example, schemes that typically promise donors tax receipts worth more than the actual amount of the donation), and it plans to audit every participating charity, promoter, and investor. For more information about tax shelters, go to the CRA’s Tax alert Web page at http://www.cra.gc.ca/alert.
For more information about the registration of Canadian charities, go to the CRA’s Charities and Giving Web page at http://www.cra.gc.ca/charities.
Comments
CRA has revoked another registered charity.
http://news.gc.ca/web/view/en/index.jsp?articleid=424069
The Canada Revenue Agency revokes the charitable status of the Pinnacle Foundation
Ottawa, Ontario, November 17, 2008… The Canada Revenue Agency (CRA) has revoked the charitable registration of the Pinnacle Foundation, a Vancouver-area charity. This revocation was effective November 15, 2008.
On October 6, 2008, the Minister of National Revenue issued a notice of intent to revoke the charitable registration of the Pinnacle Foundation, in accordance with subsection 168(2) of the Income Tax Act. The letter stated, in part, that:
The primary activity of the Charity to date appears to have been issuing tax receipts in support of the donation arrangement and in amounts supplied by the donation arrangement promoters. The Charity’s sole activity during the audit period was its participation in the donation arrangement; no charitable activities have been conducted by the Charity prior to or after its participation aside from the gifting of approximately $18,000 to qualified donees. The Charity’s directors have advised CRA that no further activities are planned for the Charity. . . .
As a result of the Charity’s participation in the donation arrangement, the Charity has received minimal rental income from the timeshare units. The Charity received $20,253 in rental income in 2004 and gifted approximately $18,000 to qualified donees in 2005 despite issuing official donation receipts for cash and property in excess of $6.7 million. . . .
Given the manner in which the Charity structures and conducts its activities to accommodate these tax shelters, and the proportional levels of involvement in these arrangements, it is our position that the primary purpose of the Charity is to support and promote the donation arrangement.
The notice of intent to revoke and other letters relating to the grounds for revocation are available to the public on request by calling 1-800-267-2384.
A charity that has had its charitable status revoked can no longer issue donation receipts for income tax purposes and is no longer a qualified donee under the Income Tax Act. The charity is no longer exempt from income tax, unless it qualifies as a non-profit organization, and it may be subject to a tax equal to the full value of its remaining assets.
Registered charities in Canada perform valuable work in our communities, and Canadians support this work in many ways. The CRA regulates registered charities through the Income Tax Act and is committed to ensuring that charities operate in compliance with the law. Where a registered charity is found not to comply with its legal requirements, the CRA may apply monetary penalties or may suspend or revoke the charity’s status under the Income Tax Act.
The CRA is reviewing all tax shelter-related donation arrangements (for example, schemes that typically promise donors tax receipts worth more than the actual amount of the donation), and it plans to audit every participating charity, promoter, and investor. For more information about tax shelters, go to the CRA’s Tax alert Web page at http://www.cra.gc.ca/alert.
For more information about the registration of Canadian charities, go to the CRA’s Charities and Giving Web page at http://www.cra.gc.ca/charities.
For media information
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Here is an excerpt from the website of Pinnacle Foundation describing their scheme[I would love to read the opinion letter from Fraser Milner Casgrain but no one has sent it to me. FMC is being sued for $55 million in another tax charity matter - The Banyan Tree Foundation. All allegations have yet to be proven in court.]:
Pinnacle Foundation has been identified as the intended beneficial owner of Properties that have been transferred to the Regattas Trust by a Settlor who is resident in the Bahamas Islands. The Properties are unit weeks, including the right to use one condominium unit at The Regattas of Abaco resort each year as well as an indirect pro-rata interest in the Resort’s real estate. Pinnacle will realize financial benefits from its ownership through the rental and/or sale of these Properties.
The Regattas of Abaco is a private world-class resort community located in Marsh Harbour, the capital city of Great Abaco Island, Bahamas Islands. The Regattas is a member of the RCI exchange program, allowing owners of property at The Regattas to exchange the use of their property for time at other resorts around the world.
The Regattas Trust was established to benefit Registered Canadian Charitable Organizations by identifying suitable beneficiaries who may choose to donate Property received from the Trust to Pinnacle. Pinnacle will accept donations of Property, receive net proceeds from the rental and/or sale of the Property and make distributions from these receipts to other Canadian Charitable Organizations. As a condition of accepting the donation of property from the beneficiary, Pinnacle will require that the repayment of debt associated with the Property, in the amount of $ 8,000 CDN, be funded by the donor. The donor will receive donation receipts in the year of making the donations in an amount equal to the cash donation made to fund the repayment of the debt plus the fair market value of the Property donated (established by independent appraisal to be $19,925 USD, or approximately $26,560 CDN, less the associated debt.)
Interested individuals can make application to Apex Financial Corporation, the Trustee of the Regattas Trust, to become a beneficiary. Apex Financial Corporation is an independent special purpose corporation established to select eligible beneficiaries for the Trust. Selection criteria will focus on the past, present and intended future support of the applicant for non-profit entities in the role of either a volunteer or financial contributor. Upon acceptance, a beneficiary will be entitled to receive a distribution of Property from the Trust. While not required to do so, it is anticipated that beneficiaries, by virtue of their stated support for charity, would donate the Property to Pinnacle Foundation. The financial implications to a prospective beneficiary of the Trust are approximated as follows using an exchange rate of $1.33 CDN to $1.00 US :
Donation receipts
$26,560
Estimated income tax savings @ 46.41% (Ontario)
$12,326
Associated debt repayment funded by donor
$8,000
Net cash position of donor
$ 4,326
Associated Charitable and Non-Profit Organizations
Associated Charitable and Non-Profit Organizations Rental income from Properties donated to Pinnacle under this project are expected to generate in excess of two million dollars in net cash distributions to Canadian Charities over the next decade. Proceeds from the sale of Properties will increase this estimate of overall benefits. Beneficiaries of the Regattas Trust who choose to donate their property to Pinnacle Foundation will be able to designate which charity supported by Pinnacle is to receive the future financial benefits associated with their property.
The Regattas Trust - Frequently Asked Questions
1. What is the Regattas Trust?
It is a Canadian Trust settled by a resident of the Bahamas Islands. The Settlor has transferred to the Trust Properties called Unit Weeks, which include the perpetual right to use one condominium unit at The Regattas of Abaco resort for one week each year as well as an indirect pro-rata interest in the Resort’s real estate. It’s Trustee, Apex Financial Corporation, is mandated to identify prospective supporters of Canadian charities who may receive Property from the Trust by virtue of becoming a beneficiary, funding the repayment of indebtedness associated with the Property and donating the Property to Pinnacle Foundation, a Canadian Charitable Foundation, for the benefit of designated Canadian Charities.
2. Who can apply to become a beneficiary of the Regattas Trust?
Any individual resident in Canada who is considered a supporter of social and cultural institutions in health and fitness, education and the arts is eligible to become a beneficiary.
3. How do I apply to become a beneficiary of the Regattas Trust?
Complete an application form setting forth the number of Properties you are applying for as well as your past, present and intended future association with non-profit organizations consistent with Pinnacle’s vision. Forward the form and required attachments to the Trustee, Apex Financial Corporation at the address indicated.
4. What happens if I am accepted as a beneficiary?
You will receive a distribution of Property at no cost in exchange for your beneficial interest in the Trust. You will be registered as an owner of the Property with the Resort’s Trustee. As the registered owner of the Property, you will be free to deal with the Property as you see fit.
5. How would my donation of the Property benefit charity?
Foundation will manage the Property through an independent sales and marketing company. Net receipts from the rental and sales of donated Properties will be used to fund distributions to the Charitable Organizations selected by beneficiaries on their application form.
6. Can I keep my Property for personal use instead of donating it to Pinnacle Foundation?
Yes. There are no requirements for beneficiaries to donate their Properties to charity. You would be free to use the Property personally or sell or otherwise dispose of it as you wish, including willing it to your grandchildren.
7. How much will it cost me if I keep the Property for personal use?
All Properties are subject to a lien not to exceed more than a specified percentage of fair market value of the property. Based on the current fair market value of the property, the lien could not exceed $8,000. This lien is payable on demand. If the lien is not paid when demanded, foreclosure on the Property will result. However, the lien is non-recourse and no claims can be made against you personally. In addition, Property owners are subject to annual maintenance fees. You can expect to receive an assessment from the Homeowners’ Association of the Regattas of Abaco in the amount of $1,200 USD in fees assessed for the two year period ending on December 31, 2004.
8. How do I donate the Property to Pinnacle Foundation?
You will need to complete a standard Deed of Gift form, including the designation of your preferred charity and forward it along with your cheque payable to Holmes Greenslade In Trust, to Apex Financial Corporation at the address indicated. You will receive a charitable donation receipt for your cash donation as well as a second receipt for the fair market value of the Property donated (established by two independent appraisers to be an average of $19,925 USD, or approximately $26,560 CDN, less the associated lien.)
9. Is the Donation Program a Tax Shelter?
The program has been registered with C.C.R.A. as a tax shelter and has been assigned a tax shelter number. As a condition of issuing a tax shelter number, C.C.R.A. requires that the following disclaimer appear in this material: “The identification number issued for this tax shelter shall be included in any income tax return filed by the investor. Issuance of the identification number is for administrative purposes only and does not in any way confirm the entitlement of an investor to claim any tax benefits associated with the tax shelter.”
10. How do I know whether Canada Customs and Revenue Agency will allow a credit for my donation receipt?
Material tax issues with respect to the acquisition and disposal of the Property as well as a beneficiary’s claim for a tax credit on the donation of Property to Pinnacle are summarized in the legal opinion of Fraser Milner Casgrain LLP. A copy of the legal opinion is available for review upon request. In the event that CCRA proposes to reassess your claim in the future, a fund has been established by the Settlor of the Regattas Trust to pay legal costs associated with appealing any proposed reassessment of your claim.
11. How much can I deduct this year?
Charitable donations included in calculating tax credits are limited to a maximum of 75% of net income for income tax purposes.
12. How can I learn more about the Regattas of Abaco?
You can visit the website at http://www.regattas-of-abaco.com
13. How can I learn more about Pinnacle Foundation?
You can visit the website at http://www.pinnaclefoundation.com
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