Taxpayers with iffy charity claims get a chance to reconsider

Shelters: Infl ated receipts for donations won’t be processed, saving fi lers fi nes and interest

If you are gullible and/ or greedy enough to fall for one of those give- a- little, gainalot tax scams based on inflated claims for charitable donations, then the taxman likely will do you a favour this year.

Your too- good- to-be-true deduction will not immediately result in an income tax refund, or a reduction in what you owe — not until the tax shelter you invoke has been audited, according to a Canada Revenue Agency release. And if your claim is based on one of those scams where the tax relief you seek is higher than the amount you gave, the chances it will pass muster and you will ever get the break you are claiming are just about nil.

“The CRA continues to alert taxpayers that if they receive a charitable donation receipt for an amount higher than the value of property donated, the receipt is not valid and can’t be used to claim a tax credit,” the release says. “The CRA is auditing all such gifting tax shelter schemes, and to date, none has been found to comply with Canadian tax law.”

Various manifestations of this scam have been around for decades. Details differ, but in all of them taxpayers get inflated receipts for things they have donated to a complicit charity — often art, but also books, medicines and much more. These might be worthy gifts, but the scam is that the receipt value is often so high the income tax break would, if the deduction were allowed, be worth more than the donation.

Withholding an improperly claimed refund or billing you for more than you think you owe might not sound like much of a favour, but it is. Until last year, the CRA would initially issue refunds or forego collections based on these kinds of bogus claims, then follow up later — often much later. Of course, the agency would demand payment if or when the charitable scheme failed to pass its smell test. The interest and penalties assessed were huge — usually much more than the tax filer had tried to save.

Since 2000, 182,000 taxpayers — roughly one out of every 140 who will file returns this year — have been stung by this to the tune of $ 5.9 billion in disallowed donation claims. Their tax break would total only a percentage of this, of course, depending on their tax bracket. But with penalties of up to 50 per cent and interest rates of up to 10 per cent, repayment obligations compound quickly in the months and years it takes to straighten out the mess.

As well, 47 organizations have lost their charitable status for participating in these scams, and third- party promoters and tax- preparers have been assessed $ 137 million in penalties.

The new CRA practice of not processing claims that look suspect until the tax shelters have been audited won’t save all claimants from all penalties. But at least it gives them a chance to reconsider and, if they are smart, get advice from a neutral professional. And it will let these people, if they are wise enough to act before push comes to shove, to pay any money owing before penalties and interest make their bad situation worse.

“If a taxpayer makes a claim under a gifting tax shelter scheme, the taxpayer can have his or her tax return assessed before the related tax shelter has been audited if they agree to remove the claim from their return,” the release notes.

Of course, taxpayers can still dig in and formally object to CRA rulings on gifting tax shelters. If they do, new legislation allows CRA to collect half of what it thinks is owing, or to pay out just half of what the tax filer is claiming as a refund, while the issue is being adjudicated. So some taxpayers hellbent on trying to wrest a personal advantage may still set themselves up for sizable penalties and interest charges if they insist on trying to defend the indefensible.

I think it would be far wiser and cheaper for taxpayers never to put themselves in a position where they will be subject to scrutiny that their actions cannot withstand.

The rule of thumb is simple. If it sounds too good to be true, it is. And if you think tax laws would, or should, let you qualify for a charitable refund that is larger than the amount you donated, you need to give your head a shake.