CRA wins and warns on gifting tax shelters
The adage “if it’s too good to be true …” does not appear to be a sufficient warning for some taxpayers to resist participating in fraudulent donation tax schemes.
Indeed, it seems to have become a regular part of the Canada Revenue Agency’s communications efforts to warn against tax schemes masquerading as legitimate charitable operations. Unfortunately, the message does not appear to be getting to everyone, or at least it is not being heeded as much as may be hoped.
This past November, rulings were handed down denying nine appeals of reassessments originating out of the same tax preparation firm. But that’s just the tip of the iceberg.
Mehfuz Trust and the Raza brothers
According to the judgments, Mashud Miah’s son survived a premature birth in Vancouver, motivating the father to establish a charity in the child’s name in 2000-2001. In its early years, the Mehfuz Trust may have properly served its purpose of funding a children’s medical clinic in Mr. Miah’s homeland Bangladesh. By 2009, tax controversy led to the closure of both charity and clinic.
Mr. Miah served as chairman of the trust, which was established with the assistance of a Fareed Raza, a tax preparer. Mr. Miah’s other occupation was in janitorial services, including cleaning for Mr. Raza’s office.
Anatomy of a tax investigation
At a CRA internal training session in 2008, an investigator from the Vancouver enforcement office learned how her Toronto colleagues had been uncovering false charitable receipt schemes perpetrated by some tax preparers.
Upon returning to her home office, the investigator began looking into significant donations going to the Mehfuz Trust through the tax preparation offices run by Fareed and Saheem Raza. Not only were the donations out of character with past giving patterns, many taxpayers appeared to be donating a very significant portion of their net income.
A criminal investigation of the tax preparation office led to the seizure of files and records. The evidence showed that the actual amounts donated were as little as 10% or less than the amount claimed by the taxpayer. As well, the form used for the inflated receipts differed from the official receipts issued by the Mehfuz Trust.
It was Mr. Miah who had reported the Raza brothers to the CRA in the spring of 2008, having come across the impugned receipts in the hands of Saheem Raza. Even so, the judge was critical of Mr. Miah who had signed the charity’s annual returns each year, which clearly showed the inflated receipt amounts well in excess of the known actual donations.
The seizure of the office records gave the CRA a roadmap of which taxpayers to audit and eventually reassess as far back as 2003, well beyond the normal reassessment period (being generally three years from original assessment).
Of course these court rulings were only with respect to those taxpayers who appealed their reassessments. The Vancouver CRA investigator estimated that the total forged receipts through this operation amounted to approximately $12,000,000, resulting in initial lost tax revenue of about $4,700,000.
Latest warnings from CRA
Unrelated but roughly coinciding in time with the release of these judgments, in late November the CRA posted yet another Alert on its website about gifting tax sheltering schemes.
The posting is a reminder that taxpayers who claim credits based on such tax shelters will have their assessments (and potential refunds) withheld until the corresponding tax shelter has been audited. And if a claimed amount is in dispute, 50% of the assessed tax must be paid pending resolution of the dispute.
That said, the cases above were not registered tax shelters, but simply the sale of fraudulent charitable receipts. Perhaps “buyer beware” should be added to “too good to be true”.