Charitable giving tax shelters

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
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LAJ
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Post by LAJ »

With a pondering tone in my voice I ask myself, what will the rep say? Hmmmm, let me think, it's getting close to the end of the year, I wonder....
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Post by TMG »

bylo (and kombat): it is worse than a three-year delay. Three years is just the timeline for CRA to start the formal review (aka audit).

The case with which I am familiar relates to a charitable contribution scheme from 2002 - the audit books were opened in 2005 but the review is not yet complete. More than three years of interest can pile up.

The individual in question paid the reassessed tax, penalties and interest "under protest" to stop the interest clock ticking. He is still "protesting" the reassessment and is paying, along with a bunch of other people, into a legal defense fund to appeal the reassessments.

In this case, which I am not suggesting is representative, CRA disallowed the charitable contribution amounts, as well. This individual is out the money they paid to the "charity," plus they had to pay all the tax originally deferred, plus penalties and interest on the outstanding taxes, and now they are paying into a legal defense fund on top of everything else.

This guy was introduced to this scheme by his (former) accountant, a CA no less, which lent a veneer of respectability to the arrangement in the client's eyes.
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Post by kombat »

LAJ wrote:With a pondering tone in my voice I ask myself, what will the rep say?
I don't know, but I do have a question of my own ready for him: "If the CRA audits this program and deems it to be disqualified as a charity and demands repayment, with interest and penalties from us, will ParkLane pledge to cover those costs for members who participated in the program? Can I get that in writing? Tonight?"
LAJ wrote:Hmmmm, let me think, it's getting close to the end of the year, I wonder....
Heh, funny you should mention that. When I spoke with the investment club rep on the phone to confirm the location and time of the meeting, he reminded me that there's still time to participate in the program for the 2007 tax year. :) They'll be taking sign-ups at the meeting tonight! Yah-right-no-thanks!
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Post by LAJ »

kombat wrote: Can I get that in writing? Tonight?"
:lol: :lol: :lol: :lol: :lol: Stop it, you're killing me!

No, I think you'll get:

1) CRA has not won in any court case for our program.
2) We have a HUGE defense fund in case of a CRA challenge.
3) We can sell you insurance in the event of a challenge.
4) Thousands of people have taken advantage of our unique program.
5) Better get in quick before the government writes new legislation to counter our program.
6) This is a program the government does not want you to find out about.
7) Trust me, believe me.

Okay, I have to go wipe the tears of laughter away....

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Post by kombat »

So I went to the meeting last night, and it was actually very informative. When my wife and I participated in the program last year, it was explained thusly:

1) We contribute $11,200 to charities and get a receipt.
2) We apply to become beneficiaries of a trust.
3) Upon being granted entrance into the trust, we're issued shares in a subtrust.
4) We donate those shares to the charities.
5) The charity redeems those shares for $30,000, and sends us another receipt.
6) We claim both receipts (total: $41,200) on our taxes and get a refund which covers our actual out-of-pocket donation of $11,200, plus some extra.

The thing I never understood was, "where does that other $30,000 come from, and why are they willing to just give it to a charity and let us take the credit for it?"

Well last night, we finally learned the answer. There's a guy in Bermuda with $200M. When we donate our $11,200 to the charity, he adds $30,000 of his money to the trust and we get the "units". The units are worthless on their own (indeed, they have to be, otherwise it would be a taxable benefit), and can only be redeemed by someone who has all the units for the whole trust. So everyone who participates donates their worthless units to the charity, where they suddenly have value (when they're all together) and are redeemed for the cash. So whats-his-name's money goes to the charity, along with our original $11,200 donation.

The charity actually does receive $41,200 cash. This is key. This is no re-valuation scheme or anything, they're actually receiving $41,200 in cold, hard cash, about which its value is indisputable.

That answers the "where does it come from" question, but not the "why would he just give his money away" question. It turns out that the answer lies in what the charities do with the money.

1% gets put to immediate use within the charity.
8% goes back to ParkLane Financial Group as marketing expenses (this is valid, since charities are in fact allowed to spend money on marketing, and ParkLane is actively out there soliciting donations on their behalf).
91% gets invested with "Trafalgar Trading Limited (TTL)", which gives Buddy (I can't remember his name, but it was mentioned repeatedly at the meeting) back his original $30,000, and the rest is invested in an account which leverages it up to 5 times and returns 75% of the profits back to the charity (with Buddy keeping the other 25%, thus explaining his motivation for the original transaction)

Basically, people are investing money through the charity and he keeps 25% of the profits.

Now, that sounds like a lot of financial magic. But the reality is, it doesn't matter what the charity does with its money. All that matters is whether or not they received money equal to the amount they wrote me a receipt for. And it turns out they did. There was no art that was revalued, or antiques or anything - just cold, hard cash.

The legal challenge to this program hinges on the definition of a "gift." Ron Olsthoorn (the president of ParkLane Financial Group, the guy who was running the meeting last night) cited several instances of case law which support his assertion that the donors "motivation" is irrelevant, despite the CRA trying to claim that if your sole motivation for making a donation is to receive a tax benefit, then it is invalid.

He also mentioned a "test case" that is already before the courts that would establish the definition of a "gift" and set the precedent for the program we participated in. He has consulted with "hundreds" of lawyers and accountants in constructing the program, and is confident it will hold up in court. The key factor is that there is no property being re-valued, but merely actual cash, whose value is inarguable.

The fly in the ointment, however, is a bill (C-10 or C-33, I can't remember, one was an old one that died and was revived as the other) which is already at second reading in the Senate that would severely limit the amount donors are able to claim (restricting it to the actual cash donation, and excluding in-kind donations). He made it sound like it is currently a race to get the case decided before the bill passes final reading, since it would be retroactive to 2003.

Regarding my own situation, he indicated that even though my "review" is completed and no adjustment is necessary, I could still be "re-assessed" for up to 3 years.

The timeline of my events are like this:

1. Fall, 2006, made an $11,200 donation to charity, applied to be admitted to this Trust, and signed papers directing them to donate my trust units to the same charity, if I'm admitted into the trust.
2. I was admitted into the trust, my units were given to the charity and redeemed for another $30,000. I received 2 receipts: 1 for $11,200 and 1 for $30,000.
3. Spring, 2007 - Filed my 2006 taxes with H&R Block, claimed the donations and a huge refund. Received my Notice of Assessment, and my refund for the full amount I claimed.
4. August, 2007 - Received a letter from the CRA indicating my participation in the ParkLane charities was being reviewed, and asked for supporting paperwork, which I provided.
5. September, 2007 - Received another letter from the CRA, saying I'd been selected for an audit (yes, they used that exact word, "audit"), and that an auditor would be contacting me shortly. To date, no auditor has contacted me. They included literature describing fraudulent donation schemes, and saying that everyone who participates will be audited, and to date, everyone who's been audited has been required to repay everything in full, with interest and penalties. On the same day I received this letter from the CRA, I received a letter from ParkLane, reassuring me that the CRA isn't talking about their program, but rather the "re-valuation" schemes.
6. October, 2007 - I received a letter from CRA returning my documentation, and stating that they'd completed my review and found that no adjustment is necessary.

So where am I now? I have not yet received a "notice of reassessment", nor has this auditor contacted me, despite the letter 2 months ago indicating he/she would be contacting me "shortly." I still have my refund, sitting in a bank account, and I want to put it in my RRSP before the February deadline, but if I receive a Notice of Reassessment, I'll need access to the cash to repay it. I'm anxious for the case to be decided so I'll know whether or not we'll have to repay the money. :(
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Post by Bylo Selhi »

kombat wrote:So where am I now?...
Without getting into a debate about whether the "scheme" as you related it is acceptable to CRA it seems to me that you need to see an independent (of ParkLane, etc.) tax pro ASAP. Perhaps a poster here can suggest someone who specializes in these sorts of donation programs.

There's a lot of money at stake for you in this, so paying a pro to give you expert advice will be worthwhile no matter how this plays out. Note too that even if the program you've invested in meets the letter of the law CRA can still challenge it, e.g. using GAAR. The cost of defense may vastly exceed the monies at stake. Only a tax pro can advise you whether it's better to fight or fold.
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Post by Icarus »

Bylo Selhi wrote: it seems to me that you need to see an independent (of ParkLane, etc.) tax pro ASAP.
Hear, Hear. I think you've reached the limit of what you can learn from an anonymous forum. I think these forums are great for raising awareness of issues to consider, and I think the forum has served you well here. But I think it's a mistake to take the advice here (which is often contradictory) as fact, especially when the posters are not necessarily aware of all the relevant facts.

You need professional, objective advice.
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Post by Yukon Maiden »

Was the focus of the meeting to sooth everyone's nerves and/or prepare for a potential battle, or was it to try to hook you for another year?
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Post by kombat »

Yukon Maiden wrote:Was the focus of the meeting to sooth everyone's nerves and/or prepare for a potential battle, or was it to try to hook you for another year?
To my surprise, it was to soothe everyone's nerves. I was expecting him to gloss over concerns and hit us with another pitch, but the whole 2 hours was explaining how the program works in detail, citing case law, supporting legal opinions, and so on.

The only time he mentioned participating again was as a suggestion of where to get the money to re-pay last year's refund if the CRA re-assesses you. He actually made a good point. :) If CRA re-assesses you for the 2006 year and requires you to pay back $15,000 (or whatever), you could make a donation in 2007 and use the refund from that to repay the money from 2006. At the same time, you file a "notice of objection" for the re-assessment. If later on down the road you win your objection, you get the money back, if you lose, you've already repaid it anyway. You're covered both ways.
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Post by WishingWealth »

bylo: 'There's a lot of money at stake for you in this, so paying a pro to give you expert advice will be worthwhile no matter how this plays out.'

Just wondering; if a tax expert gives a 'this is an unlawful scheme', advice, does that constitute some sort of liability later on?
It would become difficult to plead "I'm a poor immigrant who got suckered into an awful scheme by a bad accountant, so can I get a bit of sympathy" from the executioner aka taxman.

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Post by Bylo Selhi »

kombat wrote:He actually made a good point. :) If CRA re-assesses you for the 2006 year and requires you to pay back $15,000 (or whatever), you could make a donation in 2007 and use the refund from that to repay the money from 2006. At the same time, you file a "notice of objection" for the re-assessment. If later on down the road you win your objection, you get the money back, if you lose, you've already repaid it anyway. You're covered both ways.
Huh? If you lose on the 2006 claim then how likely are you to lose again on the 2007 one? And how likely are you to try that stunt again in 2008?

Ponzi and Barnum in one manoeuvre :(
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Post by kombat »

Bylo Selhi wrote: Huh? If you lose on the 2006 claim then how likely are you to lose again on the 2007 one?
The thing is, you haven't conclusively lost the claim. But if they re-assess you, then the interest and penalties clock starts at that point. So if you pay what they're asking for, but still file a "Notice of Objection" within 90 days, then you're not accruing any penalties or interest, but you still have a chance of getting your money back as your objection works its way through the dispute resolution process.

If you decide not to pay upon getting the notice of re-assessment, and in the end you lose, then you have to pay interest and penalties back to the date when you received the notice. But if you've participated again in the subsequent year and used that refund to pay the disputed amount for the previous year, then you haven't had to pay any interest or penalties. It's simply over with. They just keep the money you've already repaid to them.

The current year, however, is a different story. You would undoubtedly get challenged again, and a year later, would likely be re-assessed, again. But that gives you another year to come up with the money, without the interest/penalties clock ticking away in the background.
Bylo Selhi wrote:And how likely are you to try that stunt again in 2008?
Are you asking about me, specifically? Personally, I won't be participating again, ever, even if it does pass the court challenge.
Last edited by kombat on 09 Nov 2007 12:08, edited 1 time in total.
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Post by AltaRed »

Kombat has yet to acknowledge the need (or interest) to consult with a tax expert as advised a number of times. But as others have said, it is important to know where he stands.

I believe CRA can wait this thing out. AFAIK, they are not under any tight time obligations to audit nor re-assess. They have provided notice to do so and may well wait (drag feet) for the referenced legislation to pass before proceeding further.

Anecdotally, my 2006 tax return (dealing with dual residency) has yet to be processed and the large firm representing my filing with CRA says "CRA has advised they have been bogged down in exceptional workload with no projection on when my return may be processed". Coincidence maybe. Read into that what you wish.
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Post by kombat »

AltaRed wrote:Kombat has yet to acknowledge the need (or interest) to consult with a tax expert as advised a number of times. But as others have said, it is important to know where he stands.
Well, for one thing, I filed my taxes through H&R Block under the assumption that they were credible, competent tax specialists and that if there was a problem with my return, they'd be liable. However, it's starting to sound like my faith and confidence in H&R Block was misplaced.

As for consulting a tax lawyer on my own, I'm not sure what that would accomplish. ParkLane has already retained the country's foremost tax law expert (I forget the fellow's name, but he's argued precedent-setting case law in front of the Supreme Court before) and is already arguing a "test case" before the courts. Until that case is settled, the current laws are ambiguous, and I'm not sure there are any tax lawyers anywhere that could offer a conclusive, authoritative position regarding my liability here.
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Post by Yukon Maiden »

kombat wrote: The thing is, you haven't conclusively lost the claim. But if they re-assess you, then the interest and penalties clock starts at that point. So if you pay what they're asking for, but still file a "Notice of Objection" within 90 days, then you're not accruing any penalties or interest, but you still have a chance of getting your money back as your objection works its way through the dispute resolution process.

If you decide not to pay upon getting the notice of re-assessment, and in the end you lose, then you have to pay interest and penalties back to the date when you received the notice. But if you've participated again in the subsequent year and used that refund to pay the disputed amount for the previous year, then you haven't had to pay any interest or penalties. It's simply over with. They just keep the money you've already repaid to them.

The current year, however, is a different story. You would undoubtedly get challenged again, and a year later, would likely be re-assessed, again. But that gives you another year to come up with the money, without the interest/penalties clock ticking away in the background.
Yabut, if you lose you will have lost another $11,000 again without anything to show for it. No interest or penalties maybe, but losing $22,000 to this scheme over 2 years is going to hurt worse.
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Post by AltaRed »

kombat wrote:Well, for one thing, I filed my taxes through H&R Block under the assumption that they were credible, competent tax specialists and that if there was a problem with my return, they'd be liable. However, it's starting to sound like my faith and confidence in H&R Block was misplaced.
If you read your contract with H&R Block, I think you will find their only liability is to file a correct filing based on the information provided by the client, capturing income splitting and deduction opportunities where appropriate (as you might also get from the QuickTax tutorial doing it yourself). That is, they put the right information in the right boxes and make sure the math is right. You give them an official tax slip with a big donation and they will include it in your return.

I have never used H&R Block nor looked at their web site, but I believe they are strictly tax preparers, not tax advisors, and accordingly, they are in no position to make judgments on validity of tax slips. That is what CAs and tax lawyers do for a living.
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AltaRed wrote: I have never used H&R Block nor looked at their web site, but I believe they are strictly tax preparers, not tax advisors, and accordingly, they are in no position to make judgments on validity of tax slips. That is what CAs and tax lawyers do for a living.
Hmm, interesting. I assumed they were tax experts. If all they do is copy numbers over and fill out forms for you, then what do they do for the other 11 months of the year? :?
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kombat wrote:But if they re-assess you, then the interest and penalties clock starts at that point.
I'm no tax expert and it may just be the way it was written, but doesn't the "interest clock" start ticking on April 30th or somewhere around there of the year the claim was filed, not from the date of the re-assesment? It might behoove one to be sure of what one is into as far as interest owing.

I continue to ponder....

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Post by Jo Anne »

kombat wrote:
AltaRed wrote: I have never used H&R Block nor looked at their web site, but I believe they are strictly tax preparers, not tax advisors, and accordingly, they are in no position to make judgments on validity of tax slips. That is what CAs and tax lawyers do for a living.
Hmm, interesting. I assumed they were tax experts. If all they do is copy numbers over and fill out forms for you, then what do they do for the other 11 months of the year? :?
Most of the employees are seasonal. They get sent on a crash course in tax prep, then they work until April 30. Then they are laid off.

A skeleton staff is retained for the balance of the year to look after odds and ends.
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Post by brucecohen »

If you do want independent advice from a tax lawyer who specializes in charities, contact Arthur Drache. http://www.drache.com

Arthur spends most of his time providing legal advice to charities and publishes a professional newsletter for lawyers and accountants. (He's also a longtime columnist for the Financial Post.) I wouldn't be surprised if he has encyclopedic knowledge of Parklane's arguments and an informed opinion of their chance of success.

I have no idea of what he charges.
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Post by TMG »

AltaRed's assessment of H&R block is correct. They are not tax advisors.

Kombat: IMNSHO I think you would benefit from getting it clear that the response you got saying your "return is in order" was from the head of the Processing Review division of CRA. Not the audit division.

Although CRA uses the term "review" somewhat indiscriminately, they are very clear in their distinction between a "processing review" (which you had) and an audit. Two people here, me being one of them, have pointed you to the relevant CRA link.

The problem with relying on "test cases" and prominent lawyers is that CRA's appetite for continuing to enter into test cases is limited. There are a number of appeals to the Tax Court of charitable donation schemes which have been disallowed and CRA and the tax court are saying they will not be allowing additional "test cases" to proceed. (I don't have the paperwork here with me, but could post links at a later date.)

I know you and the superpower lawyer at ParkLane are saying that this scheme is sufficiently different that in the event the donation arrangements are disallowed, the Tax Court will hear the case...I personally wouldn't bet on it. Especially if you have a bill at second Senate reading which would retroactively disallow the arrangement.
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Post by Yukon Maiden »

Jo Anne wrote:
kombat wrote:
AltaRed wrote: I have never used H&R Block nor looked at their web site, but I believe they are strictly tax preparers, not tax advisors, and accordingly, they are in no position to make judgments on validity of tax slips. That is what CAs and tax lawyers do for a living.
Hmm, interesting. I assumed they were tax experts. If all they do is copy numbers over and fill out forms for you, then what do they do for the other 11 months of the year? :?
Most of the employees are seasonal. They get sent on a crash course in tax prep, then they work until April 30. Then they are laid off.

A skeleton staff is retained for the balance of the year to look after odds and ends.
Not only that, they actually get the potential employees to pay for the crash course, after which they may be asked to interview for a job with them. Completing the course does not guaranty employment, however. What a shrewd business move to get your employees to pay for their own training.
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Post by brucecohen »

FWIW, your good buddy in Bermuda appears to be Edward Furtak, who is "known" to the Ontario Securities Commission.

Trafalgar Trading was involved in a tax shelter deal that was recently shot down by the Federal Court of Appeals. Leave to appeal to the Supreme Court has been filed. That case dates back to 1998. Details here
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Post by Yukon Maiden »

brucecohen wrote:FWIW, your good buddy in Bermuda appears to be Edward Furtak, who is "known" to the Ontario Securities Commission.

Trafalgar Trading was involved in a tax shelter deal that was recently shot down by the Federal Court of Appeals. Leave to appeal to the Supreme Court has been filed. That case dates back to 1998. Details here
Snakes in suits! :shock:
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Post by kombat »

TMG wrote: Although CRA uses the term "review" somewhat indiscriminately, they are very clear in their distinction between a "processing review" (which you had) and an audit. Two people here, me being one of them, have pointed you to the relevant CRA link.
I appreciate it. Rest assured, there's no confusion now. I understand the difference. A big part of the confusion was due to CRA themselves, which do not seem to know what other departments within their own organization are doing. I got 1 letter from the "Head of Review" saying everything is A-OK, and another from the "Audit Division" saying I'm going to be audited. Neither one mentioned anything about the other. Thus, my confusion. This seems very disorganized and very unprofessional, in my opinion.
TMG wrote: The problem with relying on "test cases" and prominent lawyers is that CRA's appetite for continuing to enter into test cases is limited. There are a number of appeals to the Tax Court of charitable donation schemes which have been disallowed and CRA and the tax court are saying they will not be allowing additional "test cases" to proceed. (I don't have the paperwork here with me, but could post links at a later date.)
The test case mentioned by Mr. Olsthoorn last night was launched in 2005.
TMG wrote: I know you and the superpower lawyer at ParkLane are saying that this scheme is sufficiently different that in the event the donation arrangements are disallowed, the Tax Court will hear the case...I personally wouldn't bet on it. Especially if you have a bill at second Senate reading which would retroactively disallow the arrangement.
Agreed. I'm not banking on keeping the money, but if ParkLane has already funded the legal effort to argue it on our behalf, I'm certainly willing to benefit from their efforts. In the meantime, I'm simply going to do as CRA asks. If that includes returning the money, I'll do it - it's still sitting in my bank account. I was hoping this would all be resolved by Feb. 28, so I could invest it in my RRSP. However, given that it doesn't look like that will be the case, I'll likely instead have to invest it in unregistered funds so I can retain quick access to it, in case I receive a "Notice of Re-assessment" (a virtual certainty) next year.
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