Thousands of Canadians claim charitable donations each year on their annual tax returns. If those donations are significant they can end up lowering the amount individuals have to pay (or increase the amount they get back). But what if those claims are false? Charity tax schemes in Canada are a type of income tax fraud.
Income tax fraud involving charitable donations is a serious issue. In May, tax preparer Dele Afolabi was convicted of tax evasion and sentenced to six months of house arrest and a fine of $1000. This came as a result of false charitable donation claims made on behalf of his clients. The claims, totaling over $370,000, were made on 59 separate income tax returns made between 2006 and 2008, reducing the amount of taxes owed by over $100,000.
But this is someone else’s fault, so those clients are not liable, right? Wrong. It is your responsibility to ensure that your tax returns are correct, so if there are mistakes the consequences of this income tax fraud will impact you as well. As far as the Canada Revenue Agency is concerned, taxpayers who claim false deductions (this includes charitable donations) are responsible for correcting those mistakes and paying any amounts of tax owing, plus penalties and interest. Therefore, Afolabi’s clients are liable for the money owed due to the false reporting.
If you find yourself in the situation that Afolabi’s clients now find themselves, you do have some options – but you need to make sure that you approach it the way that will not make your situation worse. Even with the best of intentions and the best taxpayer history one wrong step in this complex area and your credibility with CRA and your eligibility for a fair resolution may be destroyed. Rather than calling the CRA directly (this may only lead to further problems as they attempt to extract more information from you), contact a professional organization and let them take you through the process of disclosure and repayment. The Voluntary Disclosure Program is an important option to consider as it may give you relief from the penalties for incorrect filing; however, you will still be required to pay any taxes owing.
If the CRA has already approached you about involvement in a charity scheme, the Voluntary Disclosure program will no longer be an option to you and you will need representation quickly to mitigate possible consequences. This could include filing an objection or making an application for Taxpayer Relief – both of which should be prepared and filed by a professional.
Once CRA has assessed your tax debt, penalties and interest, and in the absence of an objection or appeal to tax court, they will proceed with collection action. They will often try several different methods of collection, especially if you are unable to pay the full amount on demand. Wage garnishments, property liens and frozen bank accounts are all realistic techniques that the CRA may employ. These can cause significant strain on your personal and professional life.
Unfortunately, when you employ the services of a tax preparer, you are still required to ensure that your returns are filed correctly. If they are not, as is the case with those individuals who used Mr. Afolabi’s services, you will be on the hook for any discrepancies.
Our advice? If you know you may have participated in a charity scheme, have your professional advisor get to CRA before they get to you. Get in touch with an organization that can work with you on a realistic and achievable resolution to your tax problem.
For more information about the consequences of charitable income tax fraud, please contact Tax Solutions Canada at 1-888-868-1400 or visit us online at http://taxsolutionscanada.com.