Be wary of “donate low” and “claim high” charities. That’s where you give money to a charity, and they give you a tax receipt for substantially more than you donated,and then you claim the amount shown on the tax receipt as a deduction on your Income Tax Return.
There are many variations on the scenario but the typical scheme works something like this: You get introduced to a charity through a friend or a “financial advisor”. You are usually provided with glossy promotional literature describing the charity and attesting to the legality of the scheme. Sometimes the promotional materials appear to have endorsements from high ranking politicians. One client showed me an endorsement letter from the Prime Minister of Canada. Another client showed me promotional materials that contained a legal opinion from a prominent Canadian law firm stating that the scheme was permissible under the Canadian Income Tax Act. Based on the representations in the promotional material, you donate $10,000.00 to some charity that you’ve never heard of, and that charity in turn gives you a tax receipt for $50,000.00, which you then claim as a deduction on your Income Tax Return. You get a Notice of Assessment from the Canada Revenue Agency (“CRA”) allowing the tax deduction for $50,000.00 and you receive a substantial tax refund. The refund is paid directly to the “financial advisor”. Your “financial advisor” keeps between 20% to 40% of the refund as his or her fee, and sends you the rest. Since this worked the first time, you do the same thing in the next tax year, and maybe the next. A few years later, CRA audits the “financial advisor” and disallows all of the deductions with respect to the charitable donations for all of his clients, and you get a Notice of Re-assessment from CRA demanding their refund payment back, plus taxes owing, plus interest, plus penalties, for each tax year that you claimed the tax deduction. You try calling your “financial advisor” but he has disappeared and his phone number is no longer in service. I put the term “financial advisor” in quotes because often the only qualification that the so-called “financial advisor” has, is that he or she took an online course on how to use some tax preparation software.
These charitable gifting schemes have been under scrutiny by the CRA for several years and they continue to be one of the areas that the CRA targets for auditing. In almost every case, the taxpayers who participated in the scheme have been re-assessed by the CRA and been required to return the tax refunds with interest. In addition, the CRA often adds what are called “gross negligence penalties” which amounts to 50% of the understated tax and/or the overstated credits.
The moral of the story, if it sounds to good to be true, then it probably is. If this or a similar scenario has happened to you, then you to need to speak with an experienced tax litigation lawyer immediately. You may be able to obtain financial financial relief by suing the promoters of the scheme, your “financial advisor”, or the law firm that gave the legal opinion, or by negotiating relief of interest and penalties with the CRA. Note: all lawyers practising law in Canada are required to have professional liability insurance to cover negligence claims. Whatever you do, DO NOT hire another “financial advisor”.