This article discusses certain ‘charitable’ gifting schemes which threaten to undermine the public and regulators confidence in the charitable sector. This article also discusses a plan to deal with this problem.
Abusive Canadian Charity Tax Shelter Schemes
July 08, 2007
Recently the Toronto Star wrote an article entitled “Charity tax dodge entangles parish: Thousands of donors audited after firm issues $273M in bogus receipts in church’s name”. The article recounted the story of a small Greek Orthodox Church located at Bayview and Finch in Toronto, Canada. This small church only a few years ago was issuing approximately $15,000 annually in charitable tax receipts. Over the last few years, however, the church has issued approximately $273 million in tax receipts ostensibly given to people for donations. The Toronto Star noted that “It’s part of a dubious tax shelter scheme cooked up by a Concord, Ont., company that promised to spread relief to the world. Some medical supplies, comics and crayons were distributed, but nothing on the scale that $273 million would buy.”
This is perhaps the most extreme example of an abusive tax shelter arrangement, however, there are many others schemes floating around.
The Canadian Council of Christian Charities sent out a warning to its members on June 18, 2007 stating in part:
“The Canadian Council of Christian Charities (CCCC) advises registered charities not to get involved in tax shelter gifting arrangements. The CCCC has serious concerns about these arrangements. Registered charities should be aware that participating in such arrangements can jeopardize their charitable status or expose them to monetary penalties. A tax shelter gifting arrangement typically promises participants tax savings greater than the cost of participation in the scheme, thus allowing donors to “profit” from donating to a charity. Prominent examples of such schemes include gifting trust arrangements, leveraged cash donations, and buy-low, donate-high schemes. Many of these arrangements provide little or no benefit to the charities involved or to their intended beneficiaries. Instead, many of these arrangements take advantage of a registered charity’s receipting privileges for the private gain of promoters and participants. … Charities that knowingly participate in schemes that are abusive or fraudulent or that fail to devote their resources to legitimate charitable activity, can be subject to revocation and/or significant monetary penalties. In addition to penalizing charities involved in these arrangements, the CRA may also apply penalties against those persons who promote such arrangements or who participate in the making of false statements to the CRA.”
The Canadian government has attempted on numerous occasions to curtail various types of charity related tax avoidance schemes. There appears, however, to be no end in sight to the number of greedy Canadians who seem to have little interest in charity and are prepared to take these risks. The system that we have of tax incentives and tax receipts costs the Canadian governments billions of dollars per year. In theory the Canadian government is in a sense matching the donation of a Canadian – of the one dollar donated 54 cents in Ontario comes from the donor and 46 cents from the Canadian and Ontario government.
The estimated cost in foregone taxes of the one scheme highlighted by the Toronto Star could be, if the tax payers are at the highest marginal tax rates, approximately $126 million. This one scheme dwarfs the losses of the government in the HRDC scandal and the Sponsorship Scandal – which unlike this scandal has received lots of attention and publicity. Not only has the Canadian government lost out on this money but schemes such as this are damaging the credibility of the charitable sector and the burden will shift to other taxpayers.
Many of the “charities” operating in this or similar manner are using international development themes such as donation of books, and materials in developing nations or the donation of pharmaceuticals to people with AIDS. These operations are undercutting the efforts of legitimate charities to raise funds and are reducing the level of trust that Canadians have in charities in the international development area. As I have noted in a previous article, (http://www.blumbergs.ca/articles_more.php?id=110_0_2_0) Canadians already have the lowest level of trust in charities that are involved with international development and schemes such as these are only bound to increase that level of distrust.
The Canada Revenue Agency has quite correctly taken a hard-line on these abusive schemes. On numerous occasions CRA has provided notices cautioning Canadians to avoid such schemes and in their latest notice on October 31, 2006 they reiterated “We will audit the tax returns of investors who participate in these tax shelters.” They also noted “The CRA generally has three years from the date of assessment to reassess taxpayers and these audits can take over a year to complete.”
In conclusion charities should avoid any involvement with these illegal schemes. First these schemes are undercutting the charitable sector. Second, they are shifting the tax burden onto other law abiding citizens. Third, the charity in the end will get very little out of the scheme except possibly revocation of status, financial penalties and a multi-year headache.
In a very well written 2003 article “The Tax Expenditure Program for Charitable Giving: Kicking a Gift Horse in the Teeth” in the Canadian Tax Journal Daniel Sandler and Tim Edgar argue that abuse in mass marketed charity tax shelters are ripping off the tax expenditure program that the government has by allowing tax credits for donations to registered charities.
This subject is a cause for concern but there is still hope that this menace can be eradicated.
I would suggest a five point plan:
Charities need to take greater responsibility for their actions – boards, fundraisers and planned giving officers need to be more careful about the sort of fundraising ideas they are involved with and the harm caused by these abusive schemes.
2) PROFESSIONAL ADVISORS.
Professional advisors such as tax lawyers, accountants, tax preparers, investment advisors and other financial advisors need to avoid involvement with these schemes and warn their clients about the risks involved. Some of these schemes in the past have come with long opinion letters written by a small number of major law firms that seem to endorse the scheme, with of course thirty pages of caveats. The opinion letters were used to market these schemes. Although these opinion letters and the subsequent litigation with CRA may be lucrative for the law firm in the short term expect that one day there will be a backlash. Charities should ask law firms they deal with whether they have provided legal opinions on schemes such as these. Just as the Canadian Cancer Society would probably not hire a lawyer who represents a tobacco company – charities should not hire law firms that profit from these schemes. Lawyers who care about the charitable sector also need to tell their clients not only about the technicalities of these schemes but the harm they are causing the country and its charitable sector. Investors should flee any financial advisor pushing such a scheme.
The CRA needs to continue its aggressive assault on these schemes. They should continue to audit taxpayers who make a claim under one of these schemes. CRA needs to move more quickly to cancel the registration of any charity knowingly involved with such a scheme. CRA should consider some major initiatives to advertise their concerns with these schemes. Such advertising would cost little compared to the losses caused by these schemes.
Organizations such as AFP, CAGP, and Imagine Canada need to continue to educate their members and the general public about their concerns with these abusive schemes.
Individual taxpayers must open their eyes to the folly of these schemes and the CRA and charitable organizations must continue to educate the public about them.
If these schemes are allowed to proliferate it is not too difficult to imagine that one day when there is a recession and we are running budget deficits again that there could be a significant scaling back of tax incentives for donations to charities – needless to say this would be happening at the worst possible time for Canadian charities.
Although frequently asked about these schemes by taxpayers – I honestly cannot understand the attraction. Generally the tax savings may be in the thousands of dollars but not only will the full amount probably be disallowed but taxpayers who “invest” in these schemes will almost certainly be audited for many years to come and may have to pay interest and penalties as well.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.