April 10, 2018 (courtesy of Globalnews.ca) – Who doesn’t like a scenario in which doing good is also good for your wallet? But sometimes the personal gain from doing good is too good to be true.
That’s the case in a popular scam that has caused the Canada Revenue Agency (CRA) to deny over $7 billion worth of tax credits and deductions. So-called charity tax shelter schemes have caused the agency to review the returns of over 200,000 Canadians so far.
Often, victims of the scam not only lose the tax break they thought they were entitled to, but also face interest and penalties on taxes owed that can be “very substantial,” according to Smartgiving.ca, an online guide to charitable donations for Canadians.
Though the specifics of the scheme vary, the idea behind the scam is that people can make a charitable donation and receive a tax break equal to or larger than their charitable gift.
Canadians can get tax receipts for their donations to registered charitable organizations and can use those receipts to claim a tax credit equal to a percentage of the amount gifted.
Tax shelter scams, however, typically promise they will boost the original amount of your donation through complicated financial schemes. That, in turn, supposedly allows you to receive a tax receipt that can be several times bigger than your gift.
The trouble is, though, that the CRA will disallow any tax credit based on such a receipt. Very little — if any — of the money Canadians have donated through such schemes made it to an actual charity, according to Smartgiving, which is maintained by Toronto law firm Blumberg Segal.
Understandably, authorities take a dim view of “gifts” made for the purpose of reducing your own tax burden. Canadians who’ve legally challenged the CRA’s decision to deny these claims have had little luck so far, with the courts striking down these attempts in three prominent cases.
Indeed, taking the CRA to court over this can sink taxpayers even deeper into the hole. These cases typically drag on for eight to 12 years, with interest and penalties piling on as the clock keeps ticking, not to mention legal fees, Mark Blumberg, partner at Blumberg Segal, told Global News.
Fortunately, charity tax shelter scams aren’t as common as they used to be, he added.
“In 2006 it was the worst, it was $1.3 billion in receipts issued [by charity tax shelters],” Blumberg said.
The number of taxpayers caught in these schemes plunged to 400 in 2014 from 48,000 in 2006 as a result of a “multi-year, multi-pronged effort,” the CRA told Global News via email.
The agency has also levied over $190 million in penalties against promoters and tax preparers who advised their clients to donate to a tax shelter. As a result of these and other actions, charitable tax shelters that use mass marketing tactics have effectively been eliminated, the CRA said.
The early cases often involved Canadians who’d donated large amounts of money to charity tax shelters after receiving advice from tax professionals, who thought they’d spotted a legal loophole, Blumberg said.
Now the scam seems to attract much smaller donations coming from “even less sophisticated” taxpayers, he added.