For many people as year end approaches so does the planning for this year’s donations. From a tax perspective donating later in the year makes sense, because it minimizes the time from when you make the donation to when you get to claim the credit on your tax return, and recover part of your donation from the government. This can be especially important for larger donations when cash flow impacts need to be carefully considered.
It is also the season when many charitable organizations are in full marketing mode, seeking your donation dollars. Be careful, however, when a promoter comes calling with an offer for you to get back two or three times your donations in tax credits. By now most people have heard of these “donation schemes” but what is being done about them?
Well, for its part, the CRA has been warning people about donation schemes for years, advising them to avoid any promotion which offers more money back than the donation itself. In fact, they have been tracking these schemes and have been systematically auditing people who have claimed them on their tax return. To date over 26,000 Canadians have been audited and had $1.4 billion dollars of donation claims from various schemes overturned. An additional 20,000 audits are currently underway and another 50,000 are planned. Check out the official news release: http://www.cra-arc.gc.ca/nwsrm/lrts/2007/070813-eng.html
The moral of the story appears to be that if you want a CRA audit, claiming one of these donation schemes on your tax return is a really good way to get one. So please think twice if you hear a promoters pitch for donations of art at inflated appraisal prices or a donation of medical supplies to the third world for three times what you contribute. The amount of money you think you are saving will not be worth the years of aggravation that will come with it and the cheque you have to write at the end of the day.
Just what are the risks:
- your donation credit will be reduced to a fraction of what you originally claimed and perhaps to nothing and you will be required to pay the extra tax plus interest and possible penalties from the date of the re-assessment. This could be done years after the fact;
- Are you likely to get a refund from the promoter for the original “donation”? Not likely;
- Legitimate charities lose out on your donation dollars
What can you do if you reported one of these donations in years past but haven’t yet been advised of an audit by CRA? In this circumstance, consider making a voluntary disclosure which will potentially allow you to avoid penalties, although you will still be required to pay all tax due including interest. Consult your adviser for assistance.
There are other, legitimate, tax planning investments available to you if minimizing tax is a significant goal without the need to resort to shady plans that will almost certainly blow up in your face.