CRA recently revoked the registration of Canadian Friends of Pearl Children. Here are the CRA letters to the charity. According to CRA the organization issued over $167 million in inappropriate official donation receipts. On July 20, 2015 I blogged about the revocation of Canadian Friends of Pearl Children.
Here are the reasons CRA gave for the revocation:
The audit by the Canada Revenue Agency (CRA) has revealed that the Organization operated primarily for the non-charitable purpose of furthering a tax shelter donation arrangement, the Missionlife Financial Inc. Canadian Relief Program. The Organization agreed to accept alleged gifts of property from participants and to act as a receipting agent for this donation arrangement. For the period June 1, 2008 to December 31, 2012, the Organization improperly issued receipts totalling over $167 million for purported donations of cash and pharmaceuticals, which were not legitimate gifts. Of the over $4 million in cash contributions it received, the Organization paid $3.19 million to the promoters of the tax shelter. With the over $163 million worth of tax receipts issued for the gifts of pharmaceuticals, the CRA determined that the Organization significantly over-reported the value of the alleged property, resulting in grossly inflated tax receipts to participants. Further, the Organization failed to demonstrate that it had actually received the tax-receipted pharmaceuticals or that it had carried out any charitable activities using these pharmaceuticals.
The audit has shown that the Organization has failed to comply with several requirements set out in the Income Tax Act. It is our opinion that the Organization has operated for the non-charitable purpose of promoting a donation gifting arrangement. The Organization also failed to devote all of its resources to charitable activities, failed to accept valid gifts in accordance with the Act, failed to issue receipts in accordance with the Act, failed to maintain or provide adequate books and records, and failed to file an accurate T3010, Registered Charity Information Return. For all of these reasons, and for each reason alone, it is the position of the CRA that the Organization no longer meets the requirements necessary for charitable registration and should be revoked in the manner described in subsection 168(1) of the Act.
The CRA notes in its letter:
In October of 2009, the Organization established a relationship with Mission Life Financial Inc., a registered tax shelter whereby the Organization was named as a participating charity. The tax shelter program is a leveraged donation arrangement in which participants purportedly donated pharmaceuticals to a registered charity for which "innovative financing" was provided for the purchase of the pharmaceuticals. The basic premise of the tax shelter is that participants acquire "credit certificates" though the tax shelter that allows them to exchange the credit certificate for pharmaceuticals. The pharmaceuticals acquired by the tax shelter participants are then donated to the Organization along with a small, 3% of the pharmaceuticals alleged fair market value, cash contribution. The Organization purportedly distributes the pharmaceuticals as part of its own charitable programs and issues official donation receipts to the participants as directed by the tax shelter promoter. As a result of its tax shelter participation, the Organization has receipted for nearly $164 million in pharmaceuticals and cash.
By comparison, during the four years under audit, the Organization reports gifting $87,558 to qualified donees and increasing its total revenue from $1,754 in 2008 to $39.9 million in 2009; the year it willingly agreed to promote and facilitate the tax shelter program. It is our opinion, viewed as a whole that the primary purpose of this arrangement is to allow participants to profit from making a "gift" through the claiming of a donation credit. As an example, a $10,000 loan would be granted to a participant in exchange for four years of prepaid interest totalling $1,800. The participant would also have to pay a 3% cash donation to the participating charity. So, in essence the participant would be out of pocket $2, 100 yet obtain donation receipts totalling $10,240. Ultimately, participants are out of pocket no more than 20% of the total receipted value. Using the Ontario tax credit rate of 46.41%, a participant's tax credit for a net donation of $10,563 is $4,752 and net return on cash outlay is $2,652. The return on cash for residents of other provinces varies based on the tax credit rates applicable to each province. Based on the promotional material provided by the tax shelter, the cash return can be increased in increments with the same cash on cash return so that virtually 100% of a participant's income tax is refunded.
In 2009, the Organization began issuing receipts for the participants' "gifts" of treatment units, receipting over $164 million for treatment units to date. The Organization also continued to receive cash "gifts" from participants as a part of the series of transactions required to participate in the donation arrangement. Of the over $4 million received in cash during the audit period, the audit revealed that the Organization spent $3.19 million on marketing fees paid to the promoter. This represents, an average, 79% of the total funds received from the participants of the tax shelter. In summary, during the four years under audit, the Organization spent approximately $468,585 on charitable activities in support of its charitable programs while over $3.19 million was paid to the promoter for what the Organization identified as administrative payments.
We find the Organization's participation in this tax shelter arrangement to be problematic, as, in our view, the Organization appears to be facilitating an arrangement designed to avoid the application of the provisions of the ITA and may be designed to create improper tax results. In our view, the Organization is operating primarily for the purpose of promoting a tax shelter program as the Organization has not shown or otherwise indicated it is conducting any other activities aside from the small portion of gifts made to qualified donees. The Organization is an integral part of the arrangement being paid to issue tax receipts and circulate funds (as directed) in an artificial manner to facilitate and lend legitimacy to the overall arrangement.
Based on the evidence provided during the audit and given the manner in which the Organization has structured its financial affairs for the private benefit of the tax shelter, its promoters and its directors along with its proportionally high levels of involvement and collusion in these financial arrangements, it is our view that a collateral purpose, if not the primary purpose of the Organization is, in fact, to support and promote the tax shelter arrangements. Operating for the purpose of promoting a tax shelter is not a charitable purpose at law. As such it is our view that the Organization does not meet the test of "charitable organization", as defined in 149.1 (1) in that it not constituted and operated for exclusively charitable purposes. For this reason, it appears to us that there may be grounds for revocation of the charitable status of the Organization under paragraph 168(1)(b) of the ITA.
The CRA also had significant concerns with the agreements and their implementation:
There were three agreements provided: one between the Organization and Saph Integrated Training Centre; another between the Organization and Pearl Children Care Centre; and the last one between the Organization and [REDACTED], all of which are located in Uganda. The Saph Integrated Training Centre is the sole recipient of the millions of dollars of treatment units purportedly received by the Organization from participants in the Mission Life tax shelter. The following deficiencies were noted with respect to these agreements and/or supporting documentation:
i. Agreement with Saph Integrated Training Centre
- the activities the Agent is required to carry out on behalf of the Organization are vague. It is not clear how the activities carried out on the Organization's behalf will meet its registered objects;
- there was no documentary evidence provided to support that the Agent maintained a separate bank account for the funds sent by the Organization;
- there was no documentary evidence provided during the audit to support that regular and comprehensive written reports were provided by the Agent outlining the activities that were carried out on the Organization's behalf or that goods shipped to it were ever received or distributed. The Organization's website contains limited photos displaying distribution of items yet it cannot be verified whether the items in the boxes shown are the pharmaceuticals received as a result of its tax shelter involvement nor are they proof of the Organization's continual oversight and direction of this program and its Agent;
- the agreement was signed June 16, 2010; however, came into effect as of January 20, 2009, nearly 18 months after signing; and
- an acknowledgement letter for receipt of goods allegedly provided to the Agent by way of this agreement was dated April 15, 2010; prior to the signing of the agreement.
ii. Agreement with Pearl Children Care Centre
-there was no documentary evidence provided to support that the Agent maintained a separate bank account for the funds sent by the Organization; and
-there was no documentary evidence provided during the audit to support that regular and comprehensive written reports were provided by the Agent outlining the activities that were carried out on the Organization's behalf, the goods that were received or any distribution details with respect to these goods;
iii Agreement with [REDACTED]
- there was no documentary evidence provided to support that the Agent maintained a separate bank account for the funds sent by the Organization; and
- there was no documentary evidence provided during the audit to support that regular and comprehensive written reports were provided by the Agent outlining the activities that were carried out on the Organization's behalf, the goods that were received or distribution details with respect to these goods.
Further, the Organization did not provide sufficient documentary evidence through board meeting minutes, correspondence or other related documents to substantiate that it had taken the appropriate steps to direct and control the use of its resources or allow the CRA to verify that all of the charity's resources have been used for its own activities. Given the manner in which the Organization allegedly structured and conducted its activities to accommodate the tax shelter, and the proportional levels of involvement in this arrangement, it is our view that a collateral purpose, if not primary purpose of the organization is, in fact, to support and promote a tax shelter arrangement. In this regard, it appears that the Organization enthusiastically lent its physical, financial and human resources (not to mention tax receipting privileges and registered charity status) to support the tax shelter arrangement, with little regard for the mandate and best interests of the Organization itself. Operating for the purpose of promoting tax shelters is not a charitable purpose at law. It is our view, therefore, that by pursuing this non-charitable purpose, the Organization has failed to demonstrate that it meets the test for continued registration under subsection 149.1(1) of the ITA as a charitable organization "all the resources of which are devoted to charitable activities".
It is further our view that by failing to demonstrate the Organization's on-going direction and control of its distribution of treatment units and permitting other organizations to use the Organization's registered status to flow donations through it, the Organization has failed to demonstrate that it meets the test for continued registration under subsection 149.1 (1) of the ITA as a charitable organization " ... all the resources of which are devoted to charitable activities". For this reason, it appears to us that there may be grounds for revocation of the charitable status of the Organization under paragraph 168(1)(b) of the ITA.
In the CRA letter there is also extensive discussion of valuation, fair market value, what is a gift, what are adequate books and records and concerns with how the organization completed the T3010 annual return.
Canadian Friends of Pearl Children has a Facebook page and the organizers of the charity have defended their work on that page. Furthermore, the revoked charity Canadian Friends of Pearl Children told those on Facebook that they were passing their operations to another charity called Lifecan International. Apparently, Lifecan International was later revoked for failure to file their T3010 form.
The CBC also had an article and interview with Canadian Friends of Pearl Children. As an aside here is information from Charity Intelligence on Canadian Friends of Pearl Children.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.