CRA Shuts Down Tax-Sheltering Charity

by Mike Godfrey, Tax-News.com, Washington

05 November 2008

The Canadian Revenue Agency (CRA) has announced that it plans to review charitable donation arrangements after revoking the charitable status of a charity found to be participating in a tax shelter arrangement.

The disclosure follows the CRA's decision to revoke the charitable status of the Choson Kallah Fund of Toronto effective November 1, 2008 after finding that it had abused its charitable status under Canada's tax laws.

On December 21, 2007, the Minister of National Revenue issued a notice of intent to revoke the charitable registration of the Choson Kallah Fund of Toronto, in accordance with subsection 168(2) of the Income Tax Act. The letter stated, in part, that:

"The audit conducted by . . . (the CRA), identified that Choson Kallah Fund of Toronto, based on the activities of the charity and the level of financial activity and resources devoted to this program, is operating primarily or collaterally for the purpose of furthering a tax shelter donation arrangement. In our view, the charity's original purpose, which is to provide funding for relief of poverty to impoverished individuals, has been sidetracked by its participation in this arrangement and has, in effect, become a secondary purpose..."

The letter went on to add that: "Accordingly, it remains our view that the charity has willingly lent its name and tax receipting privileges to the tax shelter in exchange for monetary compensation. In our view, the charity has participated in a program designed to abuse the charitable gift incentive provisions of the [Income Tax Act]. The charity's participation in this program is to issue receipts for property it neither uses nor sees for values established by the shelter promoters."

The CRA stated that the charity is compensated for its participation with a set fee representing a scant 0.05% of all donation receipts issued (after deducting expenses). The charity issued tax receipts for amounts in excess of CAD177m (USD152.3m) during the years under review.

The letter continued: "In our view, the charity's participation in this program has become an end in and of itself. Accordingly, it is our view that the charity has operated for the non-charitable purpose of promoting and participating in a tax shelter arrangement and, accordingly, cannot be considered to be a charitable organization all the resources of which are devoted to charitable activities."

Under Canadian tax laws, a charity that has had its charitable status revoked can no longer issue donation receipts for income tax purposes and is no longer a qualified donee under the Income Tax Act. In addition, the charity is no longer exempt from income tax, unless it qualifies as a non-profit organization, and it may be subject to a tax equal to the full value of its remaining assets.

Where a registered charity is found not to comply with its legal requirements, the CRA may apply monetary penalties or may suspend or revoke the charity's status under the Act.

The CRA is reviewing all tax shelter-related donation arrangements (for example, schemes that typically promise donors tax receipts worth more than the actual amount of the donation), and it plans to audit every participating charity, promoter, and investor.

Recommended