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Canada Tax: Canada Revenue Agency and courts crack down on tax schemes

If you are involved with a donation tax scheme, either as a charity, donor or even a promoter, May 2010 may well go down as your "monthus horribilis."

Last month saw the deregistration by Canada Revenue Agency of two charities for their involvement in donation tax shelters, three Tax Court decisions dismissing donors' claims for inflated donation receipts and even one civil lawsuit between a promoter and a charity for unpaid tax shelter commissions.

On May 8, the Canada Revenue Agency (CRA) revoked the charitable status of the Henvey Inlet First Nation Community Support Organization. After an audit, it found that over a five-year period, it issued in excess of $44-million in donation receipts, of which 99% was turned over to tax-shelter promoters while the charity retained a mere 1%.

The CRA also revoked the charitable status of the Orion Foundation, which over three years issued in excess of $91-million in receipts for medicine units received through the Canadian International Aid Program tax-shelter arrangement. It received about $1-million, yet devoted only $70,000 to its own charitable purposes.

Turning to the donor side, the Canada Revenue Agency (CRA) revealed that in fiscal 2008-2009, it identified more than 17,000 participants claiming donations of $484-million in tax-shelter arrangements.

The Tax Court also heard three related appeals concerning charitable donations in May. Originally part of a group of 40 different donors, only three individuals eventually went to trial. In each case, the individual donors purchased donation receipts from their tax preparer, which contained "grossly inflated face value amounts," in some cases up to ten times the amount donated. The tax preparer was charged with fraud.

The Court denied the donation claims in all three cases.

Perhaps the most interesting case of the month was an Ontario Superior Court decision in a civil lawsuit between Innovative Gifting Inc., a charitable donation tax-shelter promoter, and four charities.

Innovative advised the charities that a donor could turn a $1 donation into a $5 or greater tax receipt. Innovative assured the charities that its fundraising initiatives and agreements were legal and in compliance with Canadian tax laws.

The charities entered into contracts with Innovative to pay commissions based on amounts raised, and paid more than $1.1-million in commissions before becoming suspicious.

Innovative sued in court seeking payment of unpaid commissions. The charities counter-sued, seeking the return of all commissions paid.

The judge found that the agreements entered into between Innovative and the charities were "repugnant" and were void "for being contrary to public policy."

She ordered Innovative to return all commissions paid to the charities.

Adam Stephens of Miller Thomson LLP, who represented the charities, advises charities that paid large fundraising fees to tax-shelters to consider if some or all of these fees are recoverable from the promoters.
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