Alice managed a fund that was owned by Kris. The fund sold charity donation packages to individuals (donors) in exchange for a tax receipt. Each donation was split into two parts, the cash donation and a donation of software. Each donor received two tax receipts for each donation. The first was for the cash amount donated, the second was for the additional software donation. The value of the software was inflated, resulting in a larger tax receipt for the donor. The fund would process the donation and distribute the money and software to a variety of charities.
In order for the charities to acquire the donations, they paid a large administration fee. After all of the administration fees were paid and receipts were issued, the charity received access codes to online software and approximately 10% of the initial cash donations.
Over the five years that the fund was in operation, Kris established several contracts with charities and promoted the donation scheme to donors. Donors were never informed that administration fees were high and the software was overvalued. In Alice’s time managing the fund, she promoted the donation scheme and made sure donation receipts were issued.
What happened next
The fund accepted donations from about 100,000 donors and issued donation receipts for over $2 billion. Of those donations, it was found that the fund had made thousands of false statements such as inflating donation receipts and exaggerating the value of the software being donated. These false statements are subject to third-party penalties under the Income Tax Act.
Because Kris had created the fund and was involved with it, he was aware of the false statements being made. Kris also made false statements himself, and he aided and encouraged other people to do the same. As a result, he was assessed about $21 million in penalties.
Alice acted as both a planner and a preparer under the Income Tax Act. She knew or would reasonably be expected to know that she was helping to make false statements with regard to the fund. As a result, she was assessed about $20 million in penalties.
Consequences for the participants
The CRA reviewed the tax returns of everyone who made donations under this scheme. All of the illegitimate donation receipts were denied, and the participant’s tax returns were reassessed. Interest and penalties were applied appropriately.
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