Charitable Donations, Tax Shelters and the Sham Doctrine
Taxpayers can claim tax credits or deductions for charitable donations in certain circumstances. The Income Tax Act (“ITA”) proves a regime of charitable donation deductions and credits to encourage philanthropic and public service functions which benefit the community.
Tax deductions in respect to charitable donations first appeared in 1917 for Canadians who contributed to certain patriotic and war funds. The charitable deduction was increased following the Great Depression and continued to be prioritized following World War II. From 1948, the ITA required charitable organizations to issue receipts and register in prescribed form.
Claiming Charitable Donations
Under the current regime, individuals may claim a tax credit against their tax payable and corporations may claim a deduction for eligible charitable donations. The former reduces the tax owed, at prescribed rates, providing a dollar-for-dollar reduction of tax payable. The latter reduces the corporate income subject to taxes for up to 75% of net income.
The charitable tax credit for individual donors is a non-refundable tax credit that can be carried forward five years or ten years for ecological gifts. Individuals can only claim the amount that is eligible.
Corporations can claim a deduction for the eligible amount of their charitable gifts for up to 75% of net income for the year. Donations that exceed the 75% net income can generally be carried forward five years.
Charitable Donation Requirements
There are certain requirements to be met for the charitable donation tax credit or deduction to be claimed. Donations must be made to qualifying donnees, there must be a valid gift, the value of the gift must be for an eligible amount, and the donor must comply with requirements for filing of receipts.
For the purposes of charitable donations, only certain organizations or entities will be eligible to issue charitable receipts. These include, but are not limited to: registered charities in Canada; registered Canadian amateur athletic associations; Canadian municipalities; United Nations agencies; and certain universities outside of Canada
For a gift to be valid, there must be a charitable intent or absence of receiving something in return. Generally, the donor must own the gifted property, gift same voluntarily and without receiving any benefit in return. The gift must be property and not services.
Value of Gift
The amount eligible for the gift is the excess of the value of the gift over any advantage received. Any advantage can include broad benefits conferred to the taxpayer. For instance, in the case of dual secular and religious private schools, despite older guidelines providing otherwise, the child’s private education is considered a benefit to the donor.
Tax Shelters and the Sham Doctrine
In certain cases, tax shelter programs may provide substantial tax benefits far above the actual contribution amount. Given the significant cost to the federal and provincial treasuries of these shelters, tax shelters involving charitable donations will be highly monitored and subject to CRA scrutiny. Programs which are found to be tax shelters will be subject to additional reporting and compliance requirements. These additional reporting requirements are also extended to individuals who participate in the program.
In circumstances where there is evidence showing the legal effect of a transaction was to achieve a tax benefit that would otherwise be denied, the court may arrive at a finding of a sham. Essentially, the sham doctrine states that: “…acts done or documents executed by the parties to the “sham” which are intended by them to give third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create..”
In cases of an alleged sham, the court will examine the objective reality of the situation, and will determine what actually happened. In the case of many tax shelters, the Courts are only willing to provide a donation credit for the actual cash contribution. There are even times where the actual cash contribution is denied if the tax shelter was considered extremely abusive.
The CRA continues to conduct routine mass audits of tax shelters and charitable programs to ensure compliance. What is considered an eligible gift for the purposes of obtaining a charitable donation depends on a case-by-case basis. In findings of a sham transaction, the CRA will deny the credit or deduction with applicable interest and or penalties, even where the participant was unaware of the sham. If you are experiencing any issues regarding your charitable donations, or a tax shelter you have been involved with, speak with a qualified tax lawyer today! We can help discuss the eligibility of your charitable donation tax credit or deduction and if a charitable donation tax shelter or sham applies to you.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.