Consequences of investing in a Canadian abusive charity gifting tax shelter

Abusive charity gifting tax shelters have had many consequences for both charities and “investors”.

Charities

Failure to prepare proper donation receipts can result in the suspension of receipting privileges and revocation of charitable status. However, there are also intermediate sanctions. If incorrect information is placed on a receipt a charity can be fined or provided with a penalty equal to 5% of the eligible amount on the receipt for a first infraction. If the charity places deliberately false information on a tax receipt it is liable to a penalty equal to 125% of the eligible amount stated on the receipt. Furthermore, there are Third-Party Civil Penalties that can be assessed.

In this recent press release from CRA they noted that “Promoters and other third-party representatives are penalized when they make false statements involving schemes that are against the law. Currently, there are 71 audits involving promoters. Recent examples include…a tax shelter gifting arrangement case where the Canada Revenue Agency (CRA) proposed two penalties of $24 million against the promoters involved.”

There can be significant reputational harm to a charity and its board if there is inappropriate receipting. In some cases, CRA has put out press releases on charities that have been suspended as a result of improper receipting or have lost their registered status. As mentioned above also CRA in some cases of fraudulent receipting has been successful in obtaining criminal prosecutions.

Donor/Investors

CRA considers these abusive charity gifting tax shelters and in many cases has reassessed the “gift” to zero. Investors usually lose their investment and have to pay the foregone taxes as well as interest and substantial penalties. As these cases can take 8-12 years to resolve themselves in many cases the taxes, penalties and interest can be very substantial, not to mention legal fees and additional fees requested by the tax shelters.