ARCHIVED - Ombudsman Update - Donor Beware (2013)
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The Office of the Taxpayers’ Ombudsman’s (OTO) provided the systemic examination report, Donor Beware, to the Minister of National Revenue in December 2013.Footnote 1 This report examined the Canada Revenue Agency’s (CRA) warnings about questionable tax shelter schemes. The OTO received many complaints from donors whom the CRA had found to be participating in gifting trust tax shelter schemes. The donors alleged that the CRA provided insufficient information to warn them of the consequences. The idea behind the gifting trust tax shelter scheme (tax shelter scheme) was that people make a charitable donation and receive a tax break equal to or larger than their charitable gift. For example, an individual donates $3,000 cash to a charity and then "receives" property (art, photography, medicines, software, etc.) with a purported "fair" market value of $7,000 from a trust. The property from the trust is then also donated to a charity. The individual receives a $10,000 donation receipt ($3,000 for their initial cash donation, and $7,000 for the donation of the property), which they then claim on their income tax and benefit return (return).
The CRA consistently reduced or disallowed claims for these types of tax shelter donation schemes, including the actual amount paid by the donor because the donations claimed were not a true gift in accordance with the law. As a result, the donor's return was reassessed, the charitable donation claim was removed, and the donor was required to pay any increase in tax owing, repay any refund received, and pay accrued interest from the date the refund from the CRA was issued or tax was deemed as owing. Additionally, the CRA could impose a gross negligence penalty, which was the greater of either $100, or 50% of the understatement of tax and/or overstatement of credits related to the false statement or omission, plus interest.
The Income Tax Act states the CRA has three years from the time an individual’s return is assessed to determine whether credits or deductions resulting from an investment in a tax shelter are legitimate. As a result, many donors had been participating in a tax shelter for a few years before the CRA completed its audit and determined the tax shelter was not operating lawfully. The CRA then reassessed the donors' returns to deny their donation claims. As a result, the donors were required to repay any refunds they received, as well as penalties and interest if applicable. Since the final resolution often happened many years after the initial returns were filed, especially if the donor's objections were held in abeyance pending a court case, the amount of interest accrued on both the amount owing, and the penalty, was often considerable.
We found the CRA was taking steps to reduce the impact on donors as well as protect the tax base by holding the assessments in abeyance pending an audit of the tax shelter. In addition, the CRA released information and warnings through various channels, such as different types of media, Internet, and printed publications. Organizations nationally and internationally were warned of the consequences of getting involved in tax shelter schemes. And based on the decrease in participants, it was fair to say that the majority of potential donors were getting the message. Furthermore, the CRA began issuing tax shelter identification numbers that are valid for only one calendar year, making it easier for the CRA to track the status of the tax shelters and deterring the operation of these donation schemes.
Although the CRA had taken great steps towards addressing the issues raised, we found the CRA needed to do more to warn Canadians about tax shelter donation schemes and their promoters as there were still people who continued to participate in tax shelter donation schemes. We found that while some of those people were no doubt motivated by greed and were willingly taking the risk of investing in dubious tax shelter donation schemes, we heard from donors who claimed to have been duped into participating in what they thought was a legitimate charity. We found the CRA needed to continue its efforts to inform people about the dangers of investing in a charity-related tax shelter, as well as analyze the trends in tax shelter contributions to develop and target appropriate communication products.
To address the findings, the Taxpayers’ Ombudsman recommended that the CRA:
- Continue to develop and apply innovative and effective communication strategies to warn taxpayers about the potential consequences of participating in tax shelter donation schemes, including a determination of key audiences and distribution targets.
- Develop effective communication products that provide clear examples of tax schemes that do not conform to the Income Tax Act as well as warn of the potential consequences of participating in tax shelter donation schemes and distribute as effectively as possible.
- Warn taxpayers about questionable tax schemes in a timely manner by monitoring trends in the structuring of, and investing in, tax schemes and make such information publicly available as soon as possible.
- Explore ways of preventing promoters of questionable tax schemes from using information from the CRA to promote their products and provide clear warnings to the public that by issuing a "tax shelter identification number" the CRA is not approving a tax shelter or confirming that it conforms to the Income Tax Act.
The Minister of National Revenue accepted all of the Ombudsman’s recommendations, and the CRA provided our Office with an action plan outlining how it intended to address the recommendations.
Since the publication of our report, the CRA sent Tax Alerts and/or News Releases to identified participants as a means of warning them about the consequences of becoming involved in tax shelter donation schemes. The CRA updated its Tax Alerts and website with helpful tips, general warnings, and reminders, including:
- to be diligent in reviewing a tax shelter before participating in it;
- the use of CRA material or of links to the CRA website in promotional products does not mean the CRA has approved or supports the scheme; and
- a tax shelter identification number does not indicate the CRA’s approval of the tax shelter nor does it guarantee a participant will be entitled to any of the tax benefits associated with the tax shelter.
The CRA will issue News Releases if registered charities have their status revoked because of their involvement in gifting trust tax shelter schemes.Footnote 2 The CRA also adopted a proactive approach and now provides cautionary information to newly registered organizations to discourage their future participation in tax shelter schemes.
To better target messaging to vulnerable groups, the CRA conducted research on the demographics of participants in more recent schemes. Stories appeared on NewsCanada.ca and on the CRA website during Fraud Prevention Month explaining the tax consequences of participating in these schemes. Several media requests and an on-camera media interview gave the CRA the opportunity to again warn Canadians of the consequences of participating in these schemes.
The key issue in the initial examination was that the CRA was not sufficiently warning people about the consequences of participating in gifting trust tax shelter schemes. The Taxpayers’ Ombudsman finds the CRA has taken appropriate steps to address this issue and the recommendations in the Donor Beware report.
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