In one of the biggest tax scams in Canadian history, tens of thousands of Canadians claimed more than $500-million in illegitimate tax refunds over a decade based on bogus charitable donations, newly released figures from the Canada Revenue Agency show.
About 32,000 taxpayers filed objections with the CRA after they were denied tax credits they claimed after giving money to the Global Learning Gift Initiative (GLGI) between 2004 and 2014, the agency said in a statement to The Globe and Mail. Of those, 17,000 are challenging their reassessments; the CRA said it is seeking to recover $500-million from those active cases.
The total that the CRA ultimately recovers from taxpayers could be hundreds of millions of dollars more, once penalties and interest costs are added in, and funds from the already resolved cases are included.
It’s the first time that the CRA has made public numbers relating to the GLGI scheme, a leveraged-charity program that a 2015 Federal Tax Court ruling called a “sham.”
In such programs, participants receive receipts for charitable donations several times more than the amounts putatively donated. In short, such schemes promise participants that they can turn a profit from charitable donations. In the case of GLGI, participants gave cash, and then received rights to educational software that they donated to a separate entity at an inflated value, and then were issued tax receipts for both the cash and the donation of software. The value of the resulting tax benefit was several times higher than the initial cash outlay.
The number of taxpayers involved is “unusually large,” said Jonathan Farrar, an associate professor of accounting at the Lazaridis School of Business and Economics at Wilfrid Laurier University.
In a statement, the CRA noted that the 2015 decision, and a similar ruling published earlier this month, found that there was no “donative intent” – in essence, no act of charity – and therefore no gift, and no tax benefit to be claimed. No such tax shelter has been found to comply with income-tax law, the CRA said. The agency did not provide comment beyond its written statement, since the matter is still before the courts.
The CRA said it began denying such credits as early as 2006, in what it calls reassessments.
Even so, the GLGI scheme continued until 2014, by which time tens of thousands of Canadians had claimed bogus tax credits, some several times.
The amounts the CRA is seeking are huge. The agency is allowed to levy administrative penalties of up to 50 per cent of the repayment being sought – $250-million in the case of the 17,000 pending GLGI cases – plus interest on both the principal and penalties if a taxpayer knew or ought to have known that the tax benefit being sought was not legitimate, Mr. Farrar said.
Those interest costs could be steep: $1 owing to the CRA in 2004 would now have grown to $2.50. The exact amount of interest owing, however, would depend both on when a taxpayer claimed the erroneous tax deduction, and when funds were repaid to the federal government. The interest clock starts ticking after a refund is paid out, and doesn’t stop until it, and any associated penalty, has been repaid, even if a taxpayer is disputing the reassessment. (If the taxpayer successfully challenges the CRA reassessment, the tax refund is restored, and penalties and interest are nullified.)
“It’s going to be a whopping sum,” Mr. Farrar said.
The sheer volume of cases may reduce the amounts being sought, Mr. Farrar said. The CRA has flexibility in levying administrative penalties. Mr. Farrar said the agency is unlikely to waive fees outright, but it could opt to forgo interest charges on the penalties. The CRA would likely want to avoid a massive volume of court cases from thousands of reassessments, he said.
Christopher Small, an assistant professor of accounting at the University of Toronto’s Rotman School of Management, said the CRA might decide to exercise leniency with unsophisticated investors, or with taxpayers who would face significant financial hardship in paying their full penalties. Balanced against that, he said, is the consideration of sending a message of deterrence. “Bad behaviour is bad behaviour,” he said.
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