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Moncton Times & Transcript ~ Tax Help Plus ~ Donate Low Schemes ~ November 14, 2006 - 29 Nov 2006 by TaxHelp
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People look for tax relief through all sorts of mechanisms. Probably the very best available for most of us is by contributing to a Registered Retirement Savings Plan (RRSP). After all, the payment works in two ways. First, there is the tax deduction that one may take (provided they qualify) that saves taxes at the highest tax rate the individual pays. The second benefit comes later, when someone attempts to retire and finds that there is an accumulated fund to draw upon.
Another area that one doesn’t naturally think of as a tax planning idea is in the realm of charitable giving. New rules have made this good-for-the-soul gift even more attractive. First, once a taxpayer donates more than $200 cumulatively, his or her contribution generates a tax credit at the highest possible tax rate – no matter what the person earns! And recent budget changes have allowed for an even greater benefit for those who give listed shares that have accrued in value.
However, sometimes people need to really question what their personal motives are. For a number of years there have been schemes operating at the periphery of the charitable world that are marketed almost like securities. First, let me put out this disclaimer – I don’t know if these are valid or acceptable or even worthwhile. I do know that just because the government gives someone a refund based on the documentation when they file their return, it doesn’t mean that the assessment is carved in stone. Many of these types of programs are reviewed and reversed, resulting in the original refunds being recaptured along with significant additional payments.
And people who refer contributors into these programs often receive large commissions – ten to 25 per cent of the donations. As I said earlier, since these are not investments, the promoters and their salespeople (and your local point of contact) are not usually licensed. I might also point out that while these are framed as charitable donations, the accompanying documentation often also includes tax shelter slips.
One of the first programs in the “too good to be true” category dealt with literacy. The donor purchased comic books at a discounted price. These were then gifted to an organization which issued a receipt for the fair market value (whatever that may be). Apparently the comics were then distributed around the world to teach reading. How did the numbers shake out? The first clue should have been that the minimum donation was $2,000. Apparently this generates a tax donation of $14,000 which is worth about $6,500 in direct refund. I’d hate to be telling the tax court judge that my interest was strictly altruistic on this one! Anyway, these refunds have now been reassessed and reversed. But creativity being what it is and under the category of one born every minute, a plan participant can now buy a warranty to protect themselves against any upcoming tax bill – with a premium in the thousands of dollars – and with oversight by some top-notch actuary I’m sure!
Feeling more like making a healthy difference? How about having the opportunity to give medicine? There is a program out there where you can make a donation of approximately $12,000. And imagine, as a result, there is a trust out there that the donor can apply to become a beneficiary of. This trust may then give him or her some pharmaceutical units that they can give away as a charitable gift-in-kind for say $30,000. Imagine that – this philanthropist ends up with two tax receipts totaling $42,000 and a refund opportunity of almost $20,000. Guess what – these people end up with a tax shelter reporting slip to file with their taxes as well.
The latest one making the rounds is one where you can support other Canadians. By donating through this promoter the money makes it to some registered charity – sporting associations are popular. And not surprisingly, this entitles the donor to become a beneficiary in a trust for an amount worth about three times the original contribution. Put another way – give $2,500 and end up with a donation of $10,000. I had an opportunity to chat with this promoter who pointed out to me that the charity actually ends up the money. When I asked why the donor had the full deduction he kindly pointed out that someone might as well take it – and the resulting $4,700 in refund.
Are these things legitimately tax deductible? That’s something that will be played out over time. But I would point out that the Canada Revenue Agency has their eye on these types of schemes, and it’s my experience that if someone loses, the payment at the end always seems to end up being massive. As a matter of fact, the CRA as recently as two weeks ago put out a press release cautioning that these types of schemes are reviewed and reassessed continually.
So the point of the story is to make sure you understand the risk when you give. As the kids point out, it’s all fun and games until someone gets hurt. Put another way, when most of the canvassers show up at my door, the last thing I would expect them to give me is a tax shelter slip along with the charitable receipt! If they did, I know that I wouldn’t have a bandage that big!
Roger Haineault is with Help 4 Taxes. His column "Tax Help Plus ..." appears each Tuesday. For questions, comments or column suggestions he can be reached by calling 855-HELP (4357) or by emailing roger@help4taxes.ca
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