Beware of “Donate Low/Deduct High” Charitable Donation Schemes

Charitable organizations depend on donations to fund their activities and efforts, and often, the most generous donors are influenced by tax benefits. They would rather their dollars be donated to registered charities as opposed to being payable as taxes. The result is a win-win all around, except perhaps for the tax department.

As with too many legitimate tax strategies, greed and dishonesty motivate individuals and organizations to alter the original intent, create illegitimate schemes, and lure unwitting taxpayers to participate.

In recent years, Canada Revenue Agency (CRA) has issued strong warnings to Canadians about participating in tax-shelter-related arrangements in which donors receive tax receipts in excess of the amount of cash or value of a gift actually donated. CRA has been auditing not only these “donate low/deduct high” charities, but also the individual donors to these organizations. More than 65,000 individuals have had or will have their tax returns reviewed. In many cases, not one dollar of the donation is being allowed, resulting in taxes owing and significant penalties.

Examples of Fraudulent Charitable Donation Schemes

  • International Charity Association Network (ICAN) — in August 2008, CRA revoked
    the charitable status of ICAN for issuing $464 million in charitable donation tax receipts
    that exceeded the fair market value of the property that was gifted. ICAN appealed the suspension through the Tax Court of Canada and the Federal Court of Appeal and lost both times
  • Henvey Inlet First Nation Community Support Organization and Orion Foundation — in May 2010, CRA revoked the charitable status of both these charities for their involvement in donation tax shelters
  • Tax preparer who sold donation receipts containing inflated face-value amounts — CRA won three Tax Court decisions dismissing the donors’ claims and charged the tax preparer with fraud
  • Innovative Gifting Inc., a charitable donation tax shelter promoter that turned one-dollar donations into five-dollar tax receipts — an Ontario Superior Court voided agreements between Innovative and its charities

Be Cautious

Many fraudulent charitable donation schemes advertise that they operate in accordance with the Income Tax Act and further, that they have a large legal defense fund to fight challenges by CRA. Some claim their scheme is supported by a tax opinion “from a firm of respected tax lawyers”. Be cautious of any charity, even a registered one, that makes dubious claims or is willing to issue a receipt in excess of an actual donation. As with many
things, if it sounds too good to be true, it generally is bad news!

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