I was delighted to read a publication “Donor Beware: Investigation into the sufficiency of the Canada Revenue Agency's warnings about questionable tax shelter schemes”.  The special report was prepared in December 2013 by J. Paul Dubé, the Taxpayers' Ombudsman.  The 39 page report rips into charitable gifting tax shelters.  Although it is generally very positive about the work of CRA in trying to educate taxpayers and denying the tax credits it does make some recommendations for CRA to increase educational efforts to donors on the dangers of these schemes.  I was quite pleasantly surprised that there were a number of references to articles I have written or websites that I edit.

The report notes: 

The CRA has been warning Canadians for the last fifteen years of the consequences of participating in abusive tax shelters that it holds to be non-compliant with the Income Tax Act. There is a substantial amount of information on the CRA’s website and the CRA has published information, including warning about tax shelters and donating wisely, in a variety of 
newspapers, magazines and various other media sources. Yet people continue to be persuaded to participate in tax shelter donation schemes. 

Our investigation revealed that despite the changes in legislation to combat these schemes, abusive tax shelter donation schemes continue to taint the charitable sector, and despite efforts by the CRA to warn Canadians of the consequences of participating in such schemes, it is still seeing abusive schemes operating to which donors contribute, either knowingly or unknowingly. As one donor stated, “We thought that sending medication to Africa to help the people who can’t help themselves is a great donation program…also, we were told that the programs are 100% compliant with tax laws.” 

On Page 22 there is a long list of red flags that a potential “donor” should be aware of:

Red flags 
Taxpayers considering investing in a tax shelter donation scheme would be well advised to watch for “red flags” such as the following: 
 You are promised a tax receipt for much more than your contribution. 
 There is little information about how the scheme works on the tax shelter’s website. 
 The promoters refuse to answer questions until you hear their sales pitch. 
 The promoters refuse to answer questions from the press. 
 The promoters keep reassuring you that there is nothing to worry about in their scheme, which is purportedly different from similar schemes which were shut down by the CRA. 
 You have never heard of the beneficiary party or the beneficiary party has a name similar to that of a legitimate, reputable organization. 
 The promoters claim to have a tax opinion from lawyers. (In fact, an opinion is just that- an opinion – and it doesn’t guarantee anything.) 
 You are pressured to sign right now without being granted the time to think about it or consult an independent financial advisor or tax 
lawyer. 
 You are pressured to consult only the lawyer the promoter is suggesting. 
 The promoters use the expression “…and it’s all perfectly legal.” 
 The arrangement involves incredulous claims such as an unnamed individual has established a trust to distribute highly valued property to participants. 
 The promoter knows very little about the beneficiary charity, its purposes, where it operates and so forth or provides very limited details about the beneficiary charity and how it will use the copious amounts of cash and property to be received from the taxpayer. 
 It is difficult to find public recognition or announcements of the charity’s good works as a result of its tax shelter participation. Given that billions of medicine units have been purportedly distributed in Africa, why is it that no one in Canada or the charity’s donors are aware of its purported good deeds internationally? 
 The promoter advises that the CRA will audit you and deny your donation claim but the promoter will take care of the CRA and will defend the scheme in court. 
 The promoters tell you that if you lose when challenging the CRA, you can consider your tax refund a low- interest loan from the CRA. In reality, with compounding daily interest as well as penalties on a debt payable to the CRA over several years, the money owed grows exponentially. 

The report discusses the size of the problem:

It is estimated that as of December 31, 2012, there had been approximately 204,000 participants in tax shelter donation schemes, with $6.4 billion in donations reported. As of July 2013, the CRA had completed over 182,000 reassessments of taxpayers who had participated in tax shelter gifting arrangements, denying approximately $5.9 billion in charitable donations.

Here is the Conclusion of the “Donor Beware” report:

Conclusion 

The CRA has been warning taxpayers of the consequences of participating in tax shelter donation schemes for more than ten years. There is a substantial amount of information on the CRA’s website and the CRA has published information in a variety of newspapers, magazines, and various other media 
sources, information that includes warnings about tax shelters and donating wisely. Yet people continue to be persuaded to participate in tax shelter donation schemes. 

Individuals should always use caution and not fall prey to pressure-selling tactics by personable promoters. The media and other sources have abundantly commented on tax schemes. “You cannot make a ‘donation’ or investment of $2,500 and get a tax receipt for $10,000…The phrase ‘If it 
sounds too good to be true it probably is’ should be ‘if it sounds too good to be true in the charity donation tax shelter area then it definitely is.’”41

Furthermore, taxpayers should not expect to profit from a charitable donation. They should not expect to receive receipts and an income tax refunds for more than their actual donation.  The line between what is acceptable tax planning and what is abusive often 
lies in grey areas. 

Before issuing a tax shelter identification number, the CRA reviews the information provided by a tax shelter to ensure that all prescribed information is submitted. However, the CRA must issue an identification number once all required information has been provided. The CRA cannot take action until the program is promoted and sold to participants. The Auditor General of Canada reviewed this issue and confirmed that the CRA was acting according to the legislation.42 

The CRA’s website states clearly that a tax shelter identification number does not automatically entitle the participants to tax benefits. In addition, all tax shelters are required to include in their material a disclaimer that refers to the identification number as follows: 

The CRA has been warning taxpayers of the consequences of participating in tax shelter donation schemes for more than ten years. There is a substantial amount of information on the CRA’s website and the CRA has published  information in a variety of newspapers, magazines, and various other media sources, information that includes warnings about tax shelters and donating wisely. Yet people continue to be persuaded to participate in tax shelter donation schemes. 

Individuals should always use caution and not fall prey to pressure-selling tactics by personable promoters. The media and other sources have abundantly commented on tax schemes. “You cannot make a ‘donation’ or investment of $2,500 and get a tax receipt for $10,000…The phrase ‘If it sounds too good to be true it probably is’ should be ‘if it sounds too good to be true in the charity donation tax shelter area then it definitely is.’”41  Furthermore, taxpayers should not expect to profit from a charitable donation. They should not expect to receive receipts and an income tax refunds for more than their actual donation.  The line between what is acceptable tax planning and what is abusive often lies in grey areas. 

Before issuing a tax shelter identification number, the CRA reviews the information provided by a tax shelter to ensure that all prescribed information is submitted. However, the CRA must issue an identification number once all required information has been provided. The CRA cannot take action until the program is promoted and sold to participants. The Auditor General of Canada reviewed this issue and confirmed that the CRA was acting according to the legislation.42 

The CRA’s website states clearly that a tax shelter identification number does not automatically entitle the participants to tax benefits. In addition, all tax shelters are required to include in their material a disclaimer that refers to the identification number as follows: 

prepare complete and accurate tax returns. The CRA will review tax returns randomly, because of various risk factors, or as part of a project to supress tax avoidance. For example, if there is a claim for a credit on the tax return for charitable donations, it might get selected for review. Again, donors should note that to date, no gifting tax shelters have been found to be compliant with the legislation. Not one. Thousands of reassessments have been completed, removing these claims from donors’ income tax returns, resulting in millions of dollars being owed to the government. With the amounts owing plus penalties and interest, donors who were expecting to receive a large refund are left worse off than when they started. As for the money that participants gave to a promoter of the tax shelter donation scheme, there is very little hope that they will ever recuperate that money. 

In order to avoid issuing these inflated tax refunds which later need to be recovered, starting with tax year 2012, the CRA has nationally stopped issuing assessments of returns to individuals who claim a credit for a gifting tax shelter scheme. Donors will be able to receive their notice of assessment only if they remove their claim for the donation. Otherwise, their assessment will be delayed until the audit of the tax shelter is completed. Additionally, in an effort to discourage participation in donation tax shelters, the CRA will be permitted to collect up to 50% of the taxes in dispute, interest and any applicable penalties which result from the disallowance of a donation claimed with respect to a tax shelter, even before completion of the appeal process. During the course of this investigation, it became apparent that more needs to be done by the CRA to warn Canadians about tax shelter donation schemes and their promoters. While some people are no doubt motivated by greed and willingly take the risk of investing in dubious tax shelter donation schemes, we have heard from donors who claim to have been duped into participating in what they thought was a legitimate charity. 

The promoters can be very persuasive, using convincing evidence such as the CRA’s list of registered charities (since the tax shelter needs the participation of a registered charity for its receipting privileges in order to exists); Notices of Assessment and tax refund cheques issued by the CRA to participants in the scheme; and legal opinions from reputable law firms, to make the point that such contributions are within the law. In reality, this “evidence” is deliberately misleading and provided without context. For example, the CRA Notice of Assessment reflects the income tax declaration as filed before an audit, not the final assessment. 

We recognize that the CRA has made many efforts to educate and inform Canadians about the risks involved with investing in tax shelter donation schemes. We believe, however, that more could and should be done to alert the public to the specific types of schemes being promoted in Canada that are non-compliant with the Income Tax Act and how to recognize them. We also believe that much could be done to enhance the CRA's communication efforts on this subject, in ways that are cost effective, by having others help spread the message. 

For example, Members of Parliament could include warnings about tax schemes in the “householder” newsletters they distribute to their constituents, at no cost to the CRA. Since the complaints we have received suggest that many seniors are getting caught up in tax schemes, the CRA should enlist the help of associations representing seniors and retired people in distributing warnings to their membership. Likewise, print and electronic publications serving specific cultures, groups, and communities could be helpful in alerting their audiences to the risks and consequences of donating to tax schemes. These are just some of the ways in which the CRA could seek to alert more people to the perils of investing in schemes that will ultimately cost them money rather than save or make them money. 

The CRA is taking steps to reduce the impact on taxpayers as well as protect the tax base by holding the assessments in abeyance pending an audit of the tax shelter. In addition, the CRA has released information and warnings to taxpayers through various channels, such as media, Internet, and printed publications. Organizations nationally and internationally are warning taxpayers of the consequences of getting involved in tax shelter schemes. And based on the decrease in participants, it is fair to say that the majority of potential donors are getting the message.

Since 2006, the CRA has seen a decrease of 82% in the number of participants in tax shelter donation schemes, from 50,000 participants per year to 8,400 participants per year, and a decrease of 77% in the amount of disallowed donations. However, there are still people who continue to participate in tax shelter  donation schemes. While the CRA is working towards protecting the tax base and reducing the impact on taxpayers, the fact is Canadians are still giving money to these tax shelters and attempting to claim the donation on their return. Regardless of whether or not the return is assessed, the taxpayer has lost money that may have otherwise gone to support the charitable sector. The CRA needs to continue its efforts to inform taxpayers about the dangers of investing in a charity-related tax shelter, as well as analyze the trends in tax shelter contributions in order to develop and target appropriate communication products. 

You can read the full report at: http://www.oto-boc.gc.ca/rprts/spcl/dnrbwr-eng.pdf