Tag: Charity

Putting the charitable back into giving

For years, the Canada Revenue Agency (CRA) has pursued tax schemes it sees as abusing the charitable tax credit rules. Recent high-profile cases seem to indicate that the agency may be gaining some traction in its efforts. 

While this is heartening from the perspective of protecting the integrity of legitimate charitable fundraising, these developments may also foreshadow a dark cloud of privacy issues for potential charitable donors generally.

ICAN

On August 9, 2008, CRA revoked the charitable status of International Charity Association Network (ICAN), which had failed to provide adequate documentation for $464M of charitable receipts it issued in 2006.  In its press release announcing the revocation, CRA stated that it is “reviewing all tax shelter-related donation arrangements, and it plans to audit every participating charity, promoter and investor.”  

Interestingly, this press release followed closely on the heels of a win by CRA at the Supreme Court of Canada a week earlier in the Redeemer case.

Redeemer Foundation

Redeemer Foundation accepted donations from parents whose children then received forgivable loans to attend at an affiliated college.  During a 2003 audit of the charity, CRA requested and obtained a donor list, which it used to identify, audit and reassess donor-parents (denying the charitable deductions).  Redeemer resisted further CRA requests, but on July 31, 2008, the Supreme Court of Canada confirmed CRA’s audit power to compel disclosure and to use such information to conduct further audits.  

Clearly, those participating in and facilitating questionable donation structures have been put on notice by CRA.  

Legitimate charities and donors need not fear

Bearing in mind that both these cases involved aggressive donation schemes, one is nevertheless left to wonder what effect the combination of these two cases might have on potential charitable donors in general.  

In the face of an active CRA with a bolstered audit tool, potential donors may be inclined to keep the chequebook in pocket for fear that they may be exposed to unwanted scrutiny, remote though that possibility may be. Hopefully not, for charity’s sake.

Perhaps the best defence for both donors and charities is to be aware of the types of questionable schemes that may be targeted by CRA, and steer clear of them.  

More tax and estate info to come

Watch this space each month for the most current tax and estate planning information of use to you in your practice.  As well, I look forward to seeing you at our PD Network sessions this fall, where the tax and estate focus will be on the Tax-Free Savings Account (TFSA), and how you can use your client’s will to deliver value and build your practice.

Putting the charitable back into giving

For years CRA has pursued tax schemes it sees as abusing the charitable tax credit rules.  Two recent high-profile cases seem to indicate that the agency may be gaining some traction in its efforts. 

While this is heartening from the perspective of protecting the integrity of legitimate charitable fundraising, these developments may also foreshadow a dark cloud of privacy issues for potential charitable donors generally.

ICAN

International Charity Association Network (ICAN) was audited in 2007 with respect to its 2006 operating year.  CRA auditors were particularly interested in whether ICAN  may have been receiving property for which tax receipts were issued in amounts far in excess of the value of the property, sometimes called ‘buy low, donate high’ arrangements.

ICAN failed to provide adequate documentation for $464M of charitable receipts it issued in 2006.  According to CRA, this is almost five times the total charitable receipts issued by the United Way of Greater Toronto in the same year.  While the United Way had over 200 staff, ICAN managed its activity level with only 16 employees.

On August 9, 2008, CRA revoked the charitable status of ICAN.

In its press release announcing the revocation, CRA stated that it is “reviewing all tax shelter-related donation arrangements, and it plans to audit every participating charity, promoter and investor.”  Clearly, those participating in and facilitating questionable donation structures have been put on notice by CRA.  

Interestingly, this press release followed closely on the heels of a win by CRA at the Supreme Court of Canada a week earlier in the Redeemer case.

Redeemer Foundation

Redeemer Foundation operated as a charity offering forgivable loans to finance the education of students at an affiliated college. CRA became concerned that some donations to the program were not valid charitable donations because the donors’ contributions were made solely to finance the education of their own children.  The donation structure enabled donation credits for the parents and tuition credits for their student children – an early education in double-dipping, one might say.

In 2003, a CRA auditor orally requested documentation from Redeemer, included a donor’s list.  While the information request was in support of the audit of Redeemer itself, CRA proceeded to contact certain donors to advise them that their donation deductions would be disallowed, and all were reassessed accordingly.

In 2004, a similar CRA request was made with respect to later tax years but Redeemer refused on the basis that CRA must first obtain a Federal Court order.  Income Tax Act section 231.2(2) specifically precludes a request for “information or any document relating to one or more unnamed persons unless the Minister first obtains the authorization of a judge.”

In 2005, Redeemer applied for judicial review of the original request, looking to have the donor list returned and the donor audits effectively rescinded.  

Eventually the case made its way to the Supreme Court of Canada (SCC), which issued its judgment on July 31, 2008, holding that CRA could obtain a donor list and use it to perform donor audits:

Redeemer had to maintain donor records as part of its normal course of operations.

The provision of such information to CRA on an audit is a legitimate and necessary part of verifying the bona fides of charitable activities.

It would be unworkable if judicial authorization was required whenever an audit of a charity entails a possibility that its donors might be investigated and reassessed.

A donor can reasonably expect that a donation will be examined if the registered charity is audited and that a claimed tax credit will be non-compliant if the charitable program is not valid. 

Three of the seven Supreme Court judges dissented, expressing the concern that the audit powers over the charity could and were being used improperly.  Specifically, CRA had indicated as early as the year 2000 that it intended to reassess the Foundation’s donors.  By its verbal request to the charity in 2003, CRA was able to circumvent the taxpayer protection rule and judicial scrutiny in s.231.2(2) to identify and reassess those donors.

A chilling effect on donations?

Bearing in mind that both these cases involved aggressive donation schemes, one is nevertheless left to wonder what effect the combination of these two cases might have on potential charitable donors generally.  

In the face of an active CRA with a bolstered audit tool, potential donors may be inclined to keep the chequebook in pocket for fear that they may be exposed to unwanted scrutiny, remote though that possibility may be.  Hopefully not, for charity’s sake.

Perhaps the best defense for both donors and charities is to be aware of the types of questionable schemes that may be targeted by CRA, and steer clear of them.  

For more information on CRA’s informational outreach efforts to donors and charities, see www.cra.gc.ca/donors.