Much has been made in the press over the last year about the alleged fraudulent use of tax shelter plans by Canadian charities. If you’re at all interested in the charitable sector in this country, then you’ve likely read the stories – some more sensational than others – about how certain organizations with legal charity status, have been issuing tax receipts to donors for sums up to ten times the amount donated. A 2007 Toronto Star report estimated that Canada’s coffers had been robbed of approximately $1.4 billion via inflated charity receipts.

As CharityVillage reported back in February, the Canada Revenue Agency’s (CRA) Charities Directorate has been on an aggressive campaign to protect the integrity of charitable giving in Canada. Thus, the ongoing crackdown on charities issuing suspect tax receipts should be unsurprising and even welcome.

However, the concurrent move by the CRA to go after taxpayers who used these dodgy schemes has frustrated and angered many Canadians who are now being forced to pay back taxes (plus interest) on their initial donations, and who allege they were innocent dupes of sophisticated charity tax shelter schemes when all they were trying to do was help favourable causes.

But the situation isn’t that black and white, and the CRA may not be quite the “bad guy” one might assume.

It’s the law

Ottawa tax and charity lawyer Adam Aptowitzer cautions Canadians not to rush to judgment on a situation that is much more complex than it appears at first blush.

The tax shelters being promoted by many charities are “very complicated designs by experienced people,” he said. Furthermore, Aptowitzer said he’s reluctant to classify all of the tax shelter plans as “scams.”

“A lot of these plans are complicated endeavours. If, at the end of the day, no money was actually donated [by the charity to the cause it claims to support], then maybe it’s a scam. But there are many different [tax-shelter] plans out there,” he said. “It’s true that the CRA is going after everybody and people will say all tax shelters are fraudulent, but I’m not prepared to say that for all the shelters until I’ve seen them all.”

Aptowitzer relates one anecdote about how one charity had insured its plan with a world-renowned insurer so that it would cover the costs of the shelter should it not “pass muster” with the authorities. And when the shelter eventually failed, the insurer actually paid out.

Though any tax lawyer will advise his or her clients to be prudent before investing in any tax shelter, Aptowitzer notes that sometimes taxpayers need to understand how the system works.

“The CRA’s job is to apply the law and not to figure out who’s been duped. Don’t think the CRA will be the ‘nice guy’ if you get caught, innocently or not, in an illegal tax shelter.”

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According to the CRA, most of these schemes run contrary to the Income Tax Act and are considered conduct unbecoming of a registered charity in Canada.

Terry de March, director general of the Charities Directorate, reiterated to CharityVillage how important it is for his office to combat fraudulent tax shelter providers (and the charities they work through) and the need to preserve the image of Canada’s charitable sector.

Asked what the CRA is doing to forewarn taxpayers against these schemes, de March answered: “We are warning all taxpayers to be wary of any arrangement that promises a donation receipt in excess of the cash payment. We have made information available to the public on our website on donation schemes and how to avoid fraud and be better informed donors. For example, the section of our website called Giving to charity: Information for donors was designed specifically to assist donors in making informed choices about the charities they support. In addition, to assist donors we have included information on what to look for on an official tax receipt by providing a list of CRA requirements. We’ve also been speaking out in the media, issuing news releases, attending trade shows and other public events, and working through our partners in the charitable sector. When an opportunity arises to warn the public, we’re there.”

Until August 31, the directorate is consulting with the charitable sector on a proposed new set of policy guidelines for fundraising. The proposal is online and is also being promoted by organizations such as Imagine Canada. de March also recognizes that there are far more “good” charities out there than bad. Still, he says the Canadian taxpayer needs to understand what kind of toll the tax shelter schemes are having on the sector.

“Very little of the money invested in fake tax shelters found its way into the charitable sector, as most ended up in the pockets of the tax shelter promoters. So really, much of this money is ‘lost’ in the sense that it did not achieve any real purpose other than making a few individuals rich,” he says. “The latest statistics for 2007 indicate that tax shelter promoters reported 33,000 taxpayers participating in tax shelter arrangements with $944 million in donation receipts. The CRA is auditing all tax shelter gifting arrangements…every audit completed to date resulted in a reassessment of tax, plus interest. In many cases, the CRA disallowed the ‘gift’ completely.”

de March says that, as a result time, effort, trust and “confidence in our charitable giving system” are lost every time this happens. On the upside, he says that some of the charities with the largest involvement in tax shelters are “either now out of business or will be shortly. This leads us to be optimistic that we will see a decline in the number of both investors and total dollars in tax shelters this year.”

Bad for business

For Georgina Steinsky-Schwartz, outgoing president and CEO of Imagine Canada, the nation’s charitable sector wants these tax shelter promoters dealt with as badly as the CRA does.

“We’re supporting the CRA. What we’re hearing from the reputable charities is that all of us are very much in favour and feel it’s important that the CRA crack down on the abuses.” she says. “But we’re concerned with the simplified media coverage and we want to make sure that any [new laws and/or guidelines] the CRA proposes don’t take a ‘one-size-fits-all’ approach. It should take into account the many different sizes of charities. We believe the real issue is to get proper and consistent disclosure…and get to a point where donors can understand how the information is being disclosed from charity to charity.”

However, the terminology may be something the sector and the government need to clarify. Where the sector sometimes sees donors, the CRA sees investors.

“While it is true that individuals who run and promote tax shelters are generally not themselves members of the Canadian charitable community, they cannot operate without a willing registered charity, or a Registered Amateur Athletic Association to act as their accomplice,” de March says. “If we can stop these registered donation receipt issuing organizations from becoming involved, and if we can convince investors that no good will come of their participation, then tax shelters will decline. The charitable sector also has a role to play in helping achieve these goals.”

de March also praises many charitable sector organizations for taking a leadership role on the issue, citing groups such as Imagine Canada, Philanthropic Foundations Canada and the Association of Fundraising Professionals as remaining outspokenly “supportive” of the CRA’s mission.

Taking the fight forward

For now, charities, the tax shelter promoters who go through them, and taxpayers getting caught by the CRA as participants in the tax shelter schemes shouldn’t hold out hope for leniency from the government body. de March is serious when he claims the CRA “will be raising reassessments for any inappropriate tax credits claimed, plus interest, so this money is not lost. With respect to promoters of tax shelter arrangements, they are being advised that as a result of their involvement they may be subject to a third-party civil penalty. This penalty is intended to deter third parties from making false statements or omissions in relation to income tax.”

In the meantime, Aptowitzer says that taxpayers on the hook to the CRA who really feel they were duped after donating in good faith can always file a notice of objection to the CRA, though he doubts it would do much good. Another option is to file through the tax court, he says.

As for de March, he has one last bit of counsel for would-be donors (or investors, as he terms them) to fishy plans: “For those that invest in a tax shelter and get back a tax receipt from a charity worth four times what they invested, think twice. If it’s too good to be true, it probably is.”

And if the CRA has its way, it’ll cost you in the end.

Andy Levy-Ajzenkopf is president of WordLaunch professional writing services in Toronto. He can be reached at andy@wordlaunch.com.