Is having a charitable donation the same as participating in a tax shelter? It’s a question that thousands of Canadians ask each year when they find their charitable donations called into question by CRA.
Having your charitable donations come into question can happen at the time that you file your return, especially if you have donated or participated in a program that is already on CRA’s radar, or worse, years after your refund is received and CRA decides to audit or reassess you and disallow all or part of your donations.
When CRA disallows charitable donations after they have already assessed and accepted a return they will also assess regular penalties plus interest retroactively to the tax year in question AND may also add gross negligence penalties of up to 50% of the amount of the tax debt plus interest retroactively on those penalties as well.
Some people who participate in charitable programs to help and give back end up not just owing the government taxes but seeing the amount of the tax debt balloon in size to double or triple the size of the principal tax debt.
You can donate to a charity in the cleanest and simplest form, which is to make a cash donation and receive a donation receipt for the amount of your cash donations, or with complex programs offered, such as the Global Learning and Gifting Initiative, which promises credit for donations that exceed the cash value of a direct cash donation.
CRA has called some of these programs into question. Where the GLGI is concerned, thousands have had their returns reassessed, charitable claims disallowed and are before the courts as we write this blog.
What can you do if your return is reassessed and charitable deductions are disallowed – deductions that you believe you were entitled to?
Get a tax professional – you are going to need to file a series of applications and if you do not have experience in this regard, you seriously risk weakening your position by disclosing information you ought not to disclose:
- Make an Objection – within 90 days of receiving your reassessment you can file an Objection explaining why you are entitled to the deductions and providing further evidence. If the 90 days has already passed you can still file an Objection for up to 1 year from the 90 days but you will first have to apply to CRA to have the Objection period extended. This extension is far from automatic and is one key reason why you need professional help. If you cannot prove contrary to the reason CRA provided for rejecting the actual donation, you can still file an Objection to penalties and interest and this is your first step towards trying to mitigate the financial consequences associated with getting onto CRA’s radar. CRA will not take enforcement action against you while you have an Objection in process.
- Make an application for Taxpayer Relief – this should be made concurrently with the above Objection. This is where you can explain why, if CRA decides to reject your Objection, they should grant you relief of interest and penalties. There is a 10 year limitation on relief applications so they should be filed as soon as possible.
- Get ready to fight! If your Objection is rejected by CRA your next step is to proceed to tax court or to await the outcome of your Taxpayer Relief application.
If you decide against tax court your Taxpayer Relief application will usually take more than a year to process (again far from an automatic “yes” but it can be appealed). Unlike the Objection, CRA will continue to collect from you while considering a Taxpayer Relief application. Your tax professional will need to negotiate a fair and reasonable plan with CRA for you to pay the tax debt it is estimated you will owe if the application for relief succeeds.
If CRA thinks that you have made a charitable donation that they view as a tax shelter you could be in for a surprising amount of financial pain. Call Tax Solutions Canada today at 1.888.868.1400.