Avoiding 'Charity' Scams
January 2012
The first class action lawsuit involving what CRA terms an “abusive charity gifting tax scheme” has settled at a Settlement and Class Counsel Fee Approval Hearing that was held on January 17, 2012 in Toronto. The material for that hearing is on the Scarfone Hawkins website and is quite interesting reading providing lots of interesting details about the scheme. Here is announcement from the Plaintiff’s lawyers Scarfone Hawkins LLP.
Ken Berger, the President & Chief Executive Officer, of the US charity watch dog group Charity Navigator will speaking at the CLIP conference “Being Good at Doing Good” on the subject of “The Battle for Transparency in the Non-Profit Sector”.
Lois G. Lerner, the Director of the Exempt Organizations Division of the Internal Revenue Service will be speaking at the Charity Law Information Program (CLIP) Conference “Being Good at Doing Good” in Toronto, which is taking place on February 13 and 14th. http://www.clipconference.wildapricot.org/ As head of the Exempt Organizations Division she is responsible for the regulation of US charities or exempt organizations including registration, education, and compliance. She will be giving two presentations - one focusing on why regulators care about governance and the second on top compliance issues for US charities. We will also have speakers from the CRA and Charity Commission of England and Wales and other experts in charity governance, financial controls and compliance.
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Avoiding 'Charity' Scams
The Toronto Star’s Investigative Reporter Kevin Donovan, who frequently covers the charitable sector, will be presenting at the Charity Law Information Program (CLIP) conference “Being Good at Doing Good”. Increasingly the media has been focusing on charities and certain hot button issues. Those involved with charity governance, financial management and communications will find his comments very useful.
On December 21, 2011 the Department of Finance announced a consultation on “updating Canada’s regime for combating money laundering and terrorist financing.” They also put out a consultation paper, “Strengthening Canada’s Anti-Money Laundering and Anti‑Terrorist Financing Regime,” which contains a number of proposals, a couple of which relate to charities. The deadline for submitting comments is March 1, 2012. The two proposals relating to charities are pretty minor - first for the Canada Border Services Agency (CBSA) to share information with CRA Charities Directorate on seizure reports when they seize forfeited currency. Second, the Financial Transactions Reports Analysis Centre of Canada (“Fintrac”) already provides disclosure to CRA but such disclosure may be more proactive. These recommendations will facilitate the Charities Directorate having greater awareness of potential money laundering or terrorist activities that could potentially involve charities.
Here are some upcoming Charity Law Information Program (CLIP) seminars which I will be presenting across Canada. The format will be a morning discussing the 2011 Budget provisions for charities, some information on the new Federal Canada Not-for-profit Corporations Act, and a detailed discussion of fundraising regulations in Canada. The afternoon will focus on The Dos and Don’ts of Charitable Receipting.
The 2011 Federal Budget received Royal Assent on December 16, 2011. There were a number of changes that affect charities, RCAAAs and other types of qualified donees that were in the budget.
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Here is an interesting article on transparency in the Chinese charitable sector. “Charities will lose public credibility without transparency,” said one researcher. It is interesting to note that in one scandal involving the Red Cross Society of China (RCSC), the ” the scandal led to an 86.6-percent drop in donations to national charity organizations over the following six months”. It appears that the Chinese government is taking steps to bring in greater transparency.
December 2011
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Avoiding 'Charity' Scams
Scarfone Hawkins LLP has announced that a there is a settlement of the Banyan Tree class action lawsuit, subject to court approval. On their website they state: “Settlement of Action This action has been settled. The settlement is subject to court approval. A court approval hearing will take place on January 17, 2012, at 10:00 a.m. at 361 University Avenue, Toronto, Ontario. The settlement agreement and distribution plan will be published here prior to the hearing date.” This was the first class action lawsuit brought in the area of the “abusive charity gifting tax schemes”. On the Scarfone Hawkins website there is a lot of interesting detail and background including an FAQ.
It is the time of year that many are thinking about and giving to charity. The Federal government sent out a press release stating “We encourage Canadians to donate generously but also to do their homework to ensure that the funds they donate will be put to good use.” I cannot emphasize enough the importance of avoiding charity schemes or investments that promise you tax savings greater than the amount of your investment and also doing your due diligence on the charity that you are donating to. You might find a new micro-site I am working on helpful - http://www.smartgiving.ca
In Sarsonas v. The Queen, 2011 TCC 559 (December 8, 2011) Sheridan J. delivers a decision on a claim by Mr. Sarsonas that he donated thousands of dollars to charity. Sheridan J. describes in detail a scheme in which some tax preparers prepared false receipts for their clients and were paid 10% of the face value of the receipts. Sarsonas lost at the Tax Court. One may think that this sort of receipting is an isolated event however according to CRA over 100,000 Canadians have submitted false receipts and another 175,000 Canadian haves been involved in abusive charity gifting tax schemes.
The CRA just put out a press release entitled “The Canada Revenue Agency revokes the charitable status of the Canadian Foundation for Tamil Refugee Rehabilitation”.
November 2011
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David Baines of the Vancouver Sun just wrote an article dealing with the VIA Project entitled “Ontario company pitching controversial charitable donation scheme in Victoria: Canada Revenue Agency has disallowed similar ‘buy low, donate high’ schemes”
I recently gave a presentation to the Law Society of Upper Canada’s 14th Annual Estate and Trust Summit providing the Charity Law Update.
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Today the Toronto Star posted an article entitled “Audit of charities encounters resistance”. I think that it is very important that there be transparency about charities and I have written quite a bit on the subject. Charities must be transparent with various stakeholders because such transparency is important in informing stakeholders of the work of the charity, and maintaining public trust and confidence in the charitable sector. However, I have a number of concerns with some of the statements and quotes in the article and also the article fails to broach many important issues and complexities with transparency in the charitable sector.
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The Toronto Star has written about a Canadian charity named HEDAC in an article entitled “Toronto charity goes from zero to $60M in a year”
Another Canadian charity has been revoked involvement with “abusive charity gifting tax shelters”. [Update] Here is a copy of various letters from CRA to The Malvern Rouge Valley Youth Services.
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It seems that the Australians are also suffering from some of the tax schemes that have plagued Canada. The Australian Tax Office notes “Examples of tax schemes Tax schemes often involve a series of complex transactions. They may also involve distorting the way funds are being used to enable you to claim deductions you are not entitled to. The following examples might not seem like tax schemes on the surface, but getting involved could be costly.
Inflated tax deductions for donation of goods to charity - A promoter may claim you can make a charitable donation and obtain a tax deduction for an amount that is significantly greater than the actual cash amount you outlay.”
October 2011
Here is a copy of the Blumbergs Canadian Charity Law List - October 2011. To sign up and receive monthly updates go to http://www.canadiancharitylaw.ca/index.php/pages/subscribe/
I am working through the Charity Law Information Program of Capacity Builders to prepare a “Receipting Kit” which is a 25 page explanation of how charities should receipt. It also includes an appendix with CRA policies or guidances on receipting that is about 120 pages long. Together it will be a “Receipting Suitcase”. I don’t expect people to read the 120 pages of CRA policies and guidance but it is good for searching through to find references to “auctions” etc.
September 2011
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Here is an interesting report involving a UK charity with many lessons that can be learned by Canadian charities. The UK charity raised money for the Tsunami in 2004 and the Pakistan earthquake in 2005. In 2006 there were allegations in the media that the UK charity was involved with supporting terrorism. Charity Commission of UK and Wales spent a number of year investigating. “The Inquiry concluded that from the information examined, there was no evidence to indicate that the trustees diverted charitable funds for unlawful or non-charitable purposes. However, the Commission concluded that the trustees were unable to satisfactorily verify the end use of charitable funds in both Indonesia and Pakistan. It found that the measures taken to control, monitor and document the use of charitable funds by third parties overseas were insufficient. This prevented the charity’s trustees from being able to demonstrate that those funds had been used legitimately and in furtherance of the charity’s purposes.” “The report provides various lessons for the wider charity sector which trustees are encouraged to read. The lessons include the steps which trustees should take to put safeguards in place to mitigate the risk of charitable funds being used unlawfully. This is particularly important for charities working overseas and potentially working through partners. The report provides important advice on trustee responsibilities in financial management and the supervision of overseas activities, and the importance of charities having effective governance where all trustees are aware of their responsibilities in terms of setting polices, decision making, and ensuring the charity is run in line with its governing document and general law.”
Here is an interesting article by Jamie Golombek entitled “A crazy tale of tax fraud”. Unfortunately these types of unsophisticated schemes cost hundreds of millions of taxpayer dollars. They are referred to as receipting fraud.
Here is an upcoming webinar “The role of the Not-for-Profit Board Treasurer”.
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Here is an archived webinar that was originally recorded on March 23, 2011 entitled “Dangerous Opinions – Legal and Ethical Issues with Legal Opinions on Charity Law and the Income Tax Act” with David Thompson from Scarfone Hawkins LLP. Mr. Thompson is a class action lawyer who has launched the Banyan Tree Foundation lawsuit and more recently the class action in the case of Redeemer University and its forgivable loan program.
The Chronicle of Philanthropy has published a lengthy article by Caroline Preston entitled “Multiple Methods of Valuing Drugs Create an Unclear Picture of Aid Totals”. It covers a number of important issues for both Canadian and US charities who either receive pharmaceutical donations or who purchase pharmaceuticals to use in developing nations.
In March 2011 a $6 million dollar claim was launched against Redeemer Foundation and Redeemer University College and their “Forgivable Loan Program”. CRA disallowed certain years of the program. We have covered the Redeemer University on this blog in its unsuccessful fight against CRA that went all the way to the Supreme Court. By my count this is the 5th class action lawsuit against a Canadian charity for issuing allegedly inappropriate official donation receipts. None of the allegations have yet been proven in court.
I requested from CRA information about the status of Third Party Penalties (TPP). Some Third Party Penalties are applied to individuals (who are involved with charities) and some to the registered charity itself.
Here is an article that appeared in Valuation Law Review entitled “Lemberg, et al. v. Perris” dealing with accountant liability when referring clients to charity schemes.
Here is an article in Valuation Law Review entitled Tax Donation Fallout
