A recent Federal Court decision serves as a reminder that ignorance of the law is no excuse and that receipting fraud can have consequences to the all of the individuals involved. In this case, the Canada Revenue Agency denied a tax preparer the privilege of filing his clients’ income tax returns electronically by way of the EFILE and SEND programs, as a result of the tax preparers’ involvement in a fraudulent receipting program. The Chief of Appeals confirmed the CRA's decision.
According to the Court, the tax preparer accepted money from taxpayers who wished to donate to charitable organizations in exchange for “enhanced receipts” for tax purposes. The tax preparer forwarded these “donations” to one of his clients, who then prepared inflated receipts. The tax preparer received $25 for each “donation” forwarded. For example, a client would pay $500 in exchange for a receipt for $7,500 from the tax preparer’s client. The Court noted that there was no evidence that the receipts came from the charitable organizations or that the charities knew about this scheme. The tax preparer argued that he had no reason to suspect that the enhanced receipts were fraudulent and therefore he had not engaged in any form of misconduct.
The Court upheld CRA’s decision to deny the tax preparer the privilege to file electronically. The Court stated that electronically filing income tax returns is a privilege that can be denied to participants engaging in fraud or other conduct that is disreputable in nature. The Court found the tax preparer’s conduct was disreputable in nature because of his involvement in selling charitable donation receipts to his clients for profit. Even if the tax preparer did not have any reason to question the authenticity of the receipts his clients received, he certainly knew that the amounts paid by the clients were not equal to the amounts they were given credit for when he was preparing their income tax returns. The mere fact that the tax preparer did not believe his conduct to be fraudulent did not justify his involvement in the scheme.
We note that charities involved in receipting fraud can have their charitable registration revoked and that the individuals involved may face criminal charges. While the penalty to the tax preparer was small in comparison to these penalties, the case is a useful reminder that ignorance of the law is not an excuse. It is important for individuals involved with charities to strive to know and comply the laws respecting charities.