December 2015 Newsletter

Inflated receipts for charitable donations — No donation allowed at all

Canada’s charitable donation credits for individuals are generous. In many provinces the total of federal and provincial credits approaches or equals 50% of the amount of the donation. While this promotes philanthropy, it has also led to abuse.

The recent Castro decision of the Federal Court of Appeal is an appeal of several Tax Court of Canada decisions on such fraudulent donations. In a typical case, the taxpayer would donate $1,000 and received a tax receipt showing he had donated $10,000. The Tax Court disallowed the $10,000 as a donation, but did allow a credit on $1,000, the actual cash donated to the charity.

The Federal Court of Appeal overruled the Tax Court and disallowed the donation entirely. The Court of Appeal agreed with the Tax Court that receiving an inflated receipt was not a “benefit” that reduced the amount of the donation. However, the $10,000 receipt did not show the correct amount of the donation. The Income Tax Regulations (section 3501) are very clear that detailed information must be provided on a receipt and that, if the amount of the donation is not correctly shown, the receipt is deemed to be “spoiled” and unusable. (We discussed the requirements for donation receipts in our September 2015 letter.)

Taxpayers be warned: the CRA has gotten more and more sophisticated in its ability to track false donations. If you make a fraudulent claim for a donation credit — or one made with carelessness or negligence as to its validity — there is no limit as to when the CRA may reassess you to recover the tax you should not have saved. Assessments to reverse donation credits, plus interest and penalty, are often issued many years after the fact, after the CRA has completed a detailed audit of the charity.

This letter summarizes recent tax developments and tax planning opportunities; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this letter, which are appropriate to your own specific requirements.

Last modified on December 14, 2015 12:00 am
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