As suggested in a series of past articles, charities that are offered the opportunity to participate in charitable donation tax shelters should be very wary. Over the past few years, the Canada Revenue Agency(CRA) has expanded its response to donation shelters from merely reassessing donors to deny or reduce their charitable donation claims, to also revoking the charitable registration of charities that participate in donation shelters. The CRA has revoked the registration of charities participating in shelters even where the charities are not issuing official donation receipts at all or have only issued receipts for gifts of cash. For example, on June 8, 2009 the CRA issued a press release dealing with the revocation of Living Waters Ministry Trust in which it stated:
Our audit has concluded that from August 11, 2004 to December 31, 2006, Living Waters Ministry Trust issued in excess of $41.6 million in receipts for cash received through a tax shelter arrangement. The Charity, in turn, directed $40.7 million of the cash to another registered charity also participating in this arrangement. Our audit revealed that the vast majority of the cash sent to the other participating charity was subsequently paid to the promoters of the tax shelter arrangement. Of the remainder, the Charity itself paid $443,000 in fundraising fees to the tax shelter promoters and retained $416,000 for use in their own activities.
It is our position that the Charity has operated for the non-charitable purpose of promoting a tax shelter arrangement and for the private benefit of the tax shelter promoters. The Charity has issued receipts for transactions that do not qualify as gifts, issued receipts otherwise than in accordance with the Income Tax Act and its Regulations, has failed to maintain sufficient books and records to support its activities and has used its income for the personal benefit of its trustees. For all of these reasons, and for each of these reasons alone, it is the position of the CRA that the Charity's registration should be revoked.
The CRA states in the donor context in its most recent donation shelter Tax Alert, Warning: Canada Revenue Agency has Denied over $2.5 Billion in Tax Shelter Gifting Arrangement Donations:
If you are still thinking about participating in a tax shelter gifting arrangement, it is very important that you get independent legal and tax advice. Independent advice means advice from a tax professional that is not connected to the arrangement or the promoter. If property is involved, you should also get independent advice on its true value. Packages from promoters will often claim to have legal or tax opinions from a law firm. You may find that these opinions contain very general comments and do not provide unconditional support for the scheme. Ask to see them, and have them reviewed by an independent professional.
Charities that have participated in past donation tax shelters but have not yet been audited by the CRA should obtain professional advice immediately. It may be possible in some circumstances for a charity to avoid revocation even if it participated in a donation shelter. However, the odds of survival increase dramatically if a charity can show a pro-active approach to compliance.