If you are participating in or thinking about a tax shelter donation program, you may actually be asking Canada Revenue Agency (CRA) to audit you. CRA is warning taxpayers that everyone participating in a tax shelter donation program will be guaranteed to get the attention of their audit team.
In 2007, CRA audited 26,000 taxpayers and approximately $1.4 billion in claimed donations were denied. CRA has an audit team that is currently dedicated to reviewing all tax shelter donation claims.
Tax shelter donation programs that promise big tax savings have been around for a while. They are now getting CRA’s attention and there is a series of court judgments that have backed their position. Some programs have promised donation receipts equal to 3 or 4 times the cash payment.
Buy a Painting, Get a Donation Receipt
The “art flip” is a case in point. This scheme offered investors an opportunity to buy art at low cost and then donate the art at an inflated appraised value to a charity. The charity then provided a donation receipt in the amount of the higher appraised rate.
Much to the dismay of donors and charities, they did not get one cent more than the original purchase price of the art. Some charities even risked losing their tax exempt status. Because they could not redeem the art for the higher appraised value, they could not apply more than 80% of their income stream (determined by the tax receipts they issued) to their charitable purpose.
Drugs, Text Books and Comics
The “art flip” program has effectively been shut down with thousands of taxpayers owing back taxes and interest. However, several new schemes have appeared. These include investing in life-saving drugs for third world countries, text books and even comic books.
The drug program is particularly aggressive. The program’s promoter will acquire drugs to treat AIDS, HIV or malaria, frequently in offshore markets. By donating money to the promoter, which has a charitable organization registration number, the taxpayer receives a charitable donation receipt. The taxpayer may then request that the drugs purchased with his or her donation be given to another charitable organization. This generates a second charitable receipt to the donor for a gift in kind.
Depending on how the market value of the drugs is determined, the return to the taxpayer through tax deductions can be particularly lucrative.
The promoter of the program will frequently cite third-party tax and legal opinions that seem to endorse the gifting arrangement. For obvious reasons, CRA doesn’t appreciate this double dipping.
CRA advises that, before entering into an agreement with any tax shelter promoter, you should refer to a tax specialist that is not affiliated with the tax shelter program. CRA also cautions that if the returns seem too good to be true, they probably are. Either way, if you invest in a tax shelter program, expect to hear from CRA to book an audit.
Everyone's situation and circumstances are different. If you're not sure of the specific tax obligations and eligibility for deduction of any investment or opportunity, contact FBC to review your specific situation.