March 2020 Newsletter

In past years, various promoters marketed schemes to enable taxpayers to “profit” from the charitable donation credit. (The promoters would also earn huge profits.)

The early schemes were art donations: you would buy art that came with a professional valuation, but you would pay a steeply discounted price, and then donate the art to a charity, which would issue you a tax receipt based on the valuation price. So you might spend $20,000 to buy art supposedly worth $100,000, and claim a charitable donation credit for a donation of $100,000, which would be worth about $50,000 depending on your province of residence.

These shelters expanded to other products, such as software and pharmaceuticals. Some shelters were “leveraged donation” schemes where you donated cash, but most of the cash came in the form of an interest-free loan that you never actually had to pay back. The schemes became more and more complex. Some were outright shams, with no real donation to the charity at all. Most of them resulted in relatively little new charitable work being done.

The federal government reacted with numerous amendments to the Income Tax Act to prevent these schemes from working, and the rules were gradually tightened up. As well, the CRA reassessed all taxpayers it could find who were using these schemes, to deny the tax benefits (other than for simply buying and donating flow-through shares, which is acceptable, though an amendment to the Act made it less attractive).

The resulting appeals to the Tax Court of Canada (and beyond, to the Federal Court of Appeal) have virtually all failed, either on the question of valuation or because the Court concluded that there was no real “gift” to the charity. In many cases the CRA or the Tax Court allowed the actual amount of money paid into the scheme as a donation, but not always.

Some claims were also disallowed because they were not properly registered with the CRA as “tax shelters”, with a tax shelter registration number that would have to be shown on the return of each taxpayer claiming the donation credit.

Many charities were hurt by these shelters, because they issued what the CRA concluded were false donation receipts. Dozens of charities had their registrations revoked. Promoters have also been assessed millions of dollars in penalties. Thousands of taxpayers have been seriously impacted or financially ruined by the CRA reassessments, along with interest and sometimes penalties assessed (not to mention legal fees). Numerous class actions and other lawsuits are underway against promoters and law and accounting firms that advised on these shelters; some of them have settled with significant payments.

Marketing of these shelters has pretty much dried up, as the promoters and professional advisers realize that their scheme will not work, and taxpayers are better informed than in the past. The CRA has tried to ensure the public is aware of this on their website.

2019 saw several more Court decisions that continued on the same path of denying taxpayers the claimed credits.

If you took part in a donation scheme years ago and the CRA reassessed you, and the promoters have retained legal counsel to handle your appeal along with everyone else … don’t hold out great hope for your appeal to succeed. The appeals might settle without a Court hearing, but you aren’t likely to get the full donation you claimed. (Of course, this is a general comment; we aren’t privy to the specifics of every donation scheme or shelter that was used.)

Last modified on March 13, 2020 12:00 am
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