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.
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.
Other charity tax scams
Charity tax shelters are just one type of tax scam involving charitable donations, warned Blumberg.
Another common type of fraud involves fake charities asking Canadians for gifts. You may hear about supporting local home shelters, protecting the environment, or fighting cancer, but if you’ve never heard of the organization before, take some time to do some research.
Charities must be registered with the CRA in order to issue official donation receipts that can be used to claim tax credits. And the agency regularly calls on Canadians to look up charities on the government’s online directory before giving.
But the fact that a charity is registered with the CRA isn’t always enough to avoid scams, Blumberg warned.
Because of confidentiality rules in the Income Tax Act, the CRA cannot alert taxpayers to tax fraud involving a particular charity until after its registered status has been revoked, according to Smartgiving.
“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,” reads the website.
In addition to checking the registration status, the CRA advises asking for written information about it, including its name, address and telephone numbers.
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Fake tax receipts
If you’ve written down the organization’s phone number, it’s a good idea to call it to see what happens.
Even if the charity is one you’ve heard about and the information you’ve been given is legitimate, your money may not be going where you think.
Sometimes, people who aren’t connected to the charity will ask for donations on its behalf. Other times, it’s individuals who are part of the organizations, such as a director or employee, who decide to do their own personal fundraising on the side, according to Smartgiving. And fraudsters typically issue fraudulent tax receipts.
When you call the charity, ask if it is actually behind the donation campaign you’ve heard about.
In general, though, the safest way to give is to research the charities devoted to issues that matter to you and donate directly to them.