Charitable Donation Tax Problems
Donating to a Charity Donation Scheme that gives you a greater receipt than your cash amount can get you in a lot of financial Hot Water!
It is not just you, but your advisor could be in even greater trouble than you.
For over the last decade, Canada Revenue Agency has allowed the promotors of questionable charitable donations where donors received receipts for amounts 4 or 5 times greater than the actual cash donation amounts.
Now that the donors are all identified and are in some process of reassessment, CRA now has turned their sites on the promoters of the schemes. It is not a pretty picture out there.
I have been against these plans from the beginning, so at least, I can state that there is a huge amount of people out there know that if they decided to not heed my advice, then they are much more accountable to themselves for the trouble they are in. Hopefully there is a large number of people who did not donate because of my messages. I have to tell you that I had a lot of people mad at me over my stance on this.
We handle a lot of these cases and in most instances we are able to get rid of the gross negligence penalties and get the actual donation amount accepted.
If you are an accountant, it is now double jeopardy. You are liable for a civil penalty by CRA for 50% of the tax amount the inflated donations generated, you may also be required to refund 100% of the inflated donations, plus the amount of penalties, plus the amount of interest and plus the amount you received in commissions. In other words, a tax savings of a thousand dollars to a client could cost you about $4,100 required to pay to the donors.
In the case of Lemberg v Perris (2010 ONSC 3690), the judge ruled the accountant being the one who prepared their tax returns had a fiduciary duty to look after the best interests of his clients and not to put themselves into a conflict of interest situation.
On June 30th, 2010, the Ontario Superior Court of Justice released a completely understandable decision this case.
In Lemberg v Perris (2010 ONSC 3690), husband and wife participants in an art donation program sued their accountant for promoting the plan to them. They not only sued, but they won.
The art donation program in this case was appealed to the Tax Court and then the Federal Court of Appeal in a group of cases known generally as the Klotz cases.
The simple in a nutshell version of what happened was, the donors buy art, then donated it to a related charity. They receive a receipt for about 4 times the value of the donation. The Court found that the valuations used on the receipts were very inflated and only allowed the donors a receipt for the amount that they were actually out of pocket.
The insanity of all this is, that by getting an inflated value receipt it triggers a capital gain. 50% of the capital gain gets added to the donor’s income. So if you look at the math. A $1,000 donation gives you a tax refund of about $500, so you are still $500 out of pocket. So if you get a receipt for $4,000 then you have a capital gain of $3,000 of which $1,500 is added to your income and you will pay up to $750 in income tax on that. So your net out of pocket on the deal is $1,250. The refund you will receive will be about $1,500. So based on these rough numbers it is not hard to see that it is no great deal at best, being that your real savings is about $250 and at worst it is going to generate a tax bill of about $9,000 when CRA gets done with you.
Now naturally most people did not know that they had to claim the capital gains at tax time, so they unknowingly entered into a risky deal.
While precedence is no guarantee that a new case will get the same results, it does carry considerable weight in future court cases. However the calculation of the damages has far more precedential value.
The parties agreed that the Lemberg’s were financially worse off by the amount they paid for the artwork less the amount of the tax credit allowed. Further, the Civil Court added the amount of commission that Mr. Perris had received of $7,500 and ordered Mr. Perris to pay the amount to the Lembergs
This case serves as a warning, not just to accountants but also to any adviser’s that receive commissions paid by promoters to avoid potentially conflicting situations regardless of their own confidence in the tax shelter.
If you are in trouble over one or more of these schemes, and are being charged gross negligence penalties and huge amounts of interest, let us know. We can help, just give us a quick overview and we will get right back to you.