Here we go again..
Would you give $2,500 to a charity if you were promised a tax receipt for $10,000? Sounds too good to be true? Read on!
We first wrote about this in November, 2010 but it bears noting again given recent law suits on the topic.
In Jeff Gray’s Globe&Mail article (http://t.co/XbqXQIl), he indicates tens of thousands of Canadians have participated in such programs over the past decade, based on the advice of their financial advisors. Now donors who thought they were getting a good deal are finding the Canada Revenue Agency (CRA) knocking on their doors asking for hundreds of thousands of dollars in back taxes and interest. Charities who participate in such schemes are losing their charitable status. Now there are several law suits against the tax promoters and their lawyers.
Why would anyone think such a deal could possibly be legitimate?
Clever marketing for sure, uninformed advisors are also to blame – and toss into the mix some individuals wanting to take advantage of anything to reduce their tax bills. The problem is, not everyone knows the ‘ins and outs’ of charity law, not even your most trusted advisor (and even they can be duped into thinking the process makes sense). It might seem believable if you are not all that familiar with the CRA or with charitable giving and are only concerned with getting a tax credit. Through a complicated process the charity would indeed receive $10,000. With $2,500 from the donor and the rest coming from a trust company–so that’s good right? Well, here is where it gets shady: Charities may provide a tax receipt for donations received, however, the tax receipt must be given to the actual person or organization who actually made the donation. Charities know this and they take a big risk at giving out inaccurate tax receipts – so the receiving charity knows it is in the wrong to give the donor a tax receipt for $10,000 when indeed that individual has only given $2,500. In reality they should have issued two receipts, one to the donor for $2,500 and one to the trust company for $7,500. Then the charity has agreed to return almost all of these funds only keeping a very tiny amount for real charitable purposes. Again, the charity knows this is not legitimate. A charity cannot just hand over their funds to anyone they like. They either must run their own programs or transfer funds to another charity. So why would a charity take such a risk? Well, in some of these cases, these charities were only set up to be a part of this scheme, so the intent was only to provide a very small amount to charity. In other cases, many charities scrape for every dollar. So, when someone approaches a small charity with a proposal on a way they can increase their revenue very easily, some can be convinced it is a quick and easy source of funds, regardless of the small return. In either case, with over 85,000 registered charities in Canada, both the tax promoter and the legitimate charity knows it may be years if ever before the CRA gets around to auditing them.
So, what should a donor do? Stay away from any tax schemes that seem too good to be true and know who you are giving your money to. Make sure any charity you are giving your money to is indeed a legitimate charity, registered with the CRA. You can search all registered charities at: http://www.cra-arc.gc.ca/chrts-gvng. But even then you are not safe if you do not know the charity. Google to see if they have a website, see what programs they run or organizations they support. Learn all you can about the charity, and if they promise you a tax receipt for more than what you gave them, take your money and run very quickly! If you need help selecting a charity, contact us.