Taxpayers expecting credits from donations could end up getting hit with interest and penalties
If your clients are hoping to claim tax credits from charitable donations they’ve made over the past year, they might want to exert extra vigilance in vetting the entities they contributed to. Otherwise, they might find themselves at the wrong end of a denial by the Canada Revenue Agency (CRA).
The CRA has denied over $7 billion worth of tax credits and deductions because of “charity tax shelter” schemes. The scams, which typically promise to boost the amount of the donation through complicated financial schemes, have led the agency to review returns from more than 200,000 Canadians, reported Global News.
Those duped by tax-shelter schemes are attracted to a supposed win-win: they expect their contributions to make a bigger financial impact, which in turn would entitle them to a bigger tax break. But according to Smartgiving.ca, an online guide to charitable donations maintained by Toronto law firm Blumberg Segal, victims often lose their tax breaks and stand to face “very substantial” interest and penalties on taxes owed.
“Very little — if any — of the money Canadians have donated through such schemes made it to an actual charity,” Global News said, citing Smartgiving.
Some have tried to challenge the CRA’s rejections of tax-credit claims related to the schemes, but the fights have tended to be long-drawn and futile. The typical battle lasts eight to 12 years, according to Mark Blumberg, partner at Blumberg Segal. Over that time, the clock on the interest and penalties keeps ticking, and legal fees pile up.
“In 2006 it was the worst,” Blumberg told Global News. “It was $1.3 billion in receipts issued [by charity tax shelters].”
According to the CRA, the incidence of taxpayers being tricked has plummeted from 48,000 in 2006 to 400 in 2014 because of a “multi-year, multi-pronged” effort. The scams, which used to involve large donations from Canadians who got bad advice from tax professionals, now attract much smaller donations from “even less sophisticated” taxpayers, according to Blumberg.
Still, he cautioned, taxpayers have to watch out for other scams involving charitable donations. Fake charities may ask for contributions that would supposedly go toward causes like the environment or cancer research; for this reason, Canadian taxpayers should check whether an organization is registered with the CRA. They should also be vigilant against fraudsters who make illegitimate collections in the name of a well-known organization by calling the charity directly and confirming their affiliation.
Another danger comes from confidentiality rules in the Income Tax Act that prohibit the CRA from alerting taxpayers to tax fraud by a particular charity until after its registered status has been revoked.
“What this practically means is that if CRA is aware of a $500-million scheme that is not legally permissible, they are not allowed to say anything about it until after the charity has been revoked,” according to Smartgiving.