Leveraged Charitable Donations - Don't fall for it!

I  ran across this three times in the first half of 2013. Twice where I work and once where my wife works. This scam had been around for years before then and is still around today (2017). You can find the most recent convictions on the CRA website. And, just to be clear, the convictions are of the people who fell for the scam. That's right. The scam victims are the ones who pay the fines and possibly go to jail.

Leveraged Charitable Donations are, to my mind, one of the most obvious frauds in the pantheon of scams. It seems that in a lot of cases the scammers tell you right up front that you will get in trouble with the Canada Revenue Agency, but with a combination of Mumbo Jumbo and Pixie Dust you can just blow them off and not pay your taxes. And what do you have to do in order to thumb your nose at the folks who can put you in jail? Why, just open your wallet and hand over some of your hard-earned cash to the scammer and he'll give you a 'Get out of Jail Free" card.

Okay, the scammer will use different words to describe the chain of events as well as what he will give you in exchange for your hard-earned cash, but, for all the good his explanation will do you, you might as well use mine, it's just as accurate...and yet people still seem to fall for it.

Just in case you have been approached about making a donation to a charity that is offering to give you a receipt for three times-, or four times-, or six times-, or more times as much as you give as a donation, you should know that the scheme is a fraud. The receipt you will receive is valueless.

If you have already given money to one of these scammers then it might help to read the note that I wrote to one of the guys at work, who is in the same shoes as you.

Here it is:

Hi Dan:

I just felt like I had to say more about the organization that I think you made a charitable donation to. As you know, I believe it to be a fraud. A scam. You don’t need to take my word for it. Look into it for yourself before you do something that will injure your finances further.

First – Don’t use the Tax Receipt that this organization gave you until after you talk to the Canada Revenue Agency. Tell them all the particulars and get an opinion in writing. Don’t worry, you won’t get in trouble. Until you try to use the receipt you’re just a victim, not part of the scam. You might also want to talk to a tax lawyer and the RCMP. If you’re in a hurry to file your tax return, you can file it in the usual way, without using the receipt and, if the CRA later says “That receipt’s fine,” you can file an amendment and still get the big refund you were planning on.

If you file a tax return with a bogus receipt and the CRA rejects it later (and it could be 2, 3 or 4 years down the road before they get around to checking into it) the usual penalty for that sort of thing goes like this:

Pay back the tax refund you got + pay the taxes that you should have paid + pay an equal amount as a penalty + pay interest on the total amount (at about 1% per month) all the way back to when the tax was due. That could be 2 or 3 or 4 years and you could easily end up owing 3 times your original tax bill.

Check out this tax court decision: http://www.carters.ca/pub/bulletin/charity/2009/chylb184.htm

You can get the jist of it by reading ‘B: Facts.’ Donation and tax deduction made in 2001 and legal decision made in 2009. That guy got a bill for double tax plus 84 months interest and he lost his original “donation.” With compound interest it came to about five times what his original tax bill would have been. Oh yeah, and he got a lawyer’s bill too.

The folks you gave your money to told you that their tax scheme was legal and that the CRA might threaten you but there was nothing that they could do about it. Rest assured that THERE IS something that the CRA can do about it. They can come after you.  They can garnish your pay cheque. They can seize your assets. And while you try to stone-wall the CRA you are giving the guys who took your money more time to pack their bags and head off to The Bahamas or Grand Cayman or someplace else where they have palm trees and rum drinks and no extradition back to Canada.

CRA website references -

A quote from this CRA page - http://www.cra-arc.gc.ca/gncy/lrt/vshlt-eng.html

"Mass-Marketed Tax Shelters

Mass marketed gifting tax shelter arrangements are made for the primary purpose of avoiding the payment of the required taxes rather than raise funds for charities. Mass marketed gifting tax shelters include schemes where taxpayers receive a charitable donation receipt with a higher value than what they paid. This can typically be four or five times their out of pocket cost.

The Canada Revenue Agency (CRA) audits every mass-marketed tax shelter arrangement and no arrangement has been found to comply with the Income Tax Act."

Let me just take a quote from that last sentence because it bears repeating. “…no arrangement has been found to comply with the Income Tax Act.”

Here’s a lawyer’s web page: http://www.troublewithtaxes.com/services/donations.html

And another: http://taxinterpretations.com/?p=9274

You’re not the first person to be drawn into a scheme like this and you won’t be the last. As you can see from the CRA website, and others you can find on Google, there have been thousands of folks who have fallen victim over the last decade. All I’m saying is that you need to protect yourself. Ask someone who knows.

The CRA writes the tax rules, they interpret the tax rules, they enforce the tax rules. If some guy tells you, “The CRA doesn’t know what they’re talking about when it comes to tax law,” you should ask yourself, “Why does that guy want me to believe his story?” …..And then you should check your wallet.

If, after you’ve done your due diligence, you show me a note from the CRA that says this charity is on the up-and-up and your tax receipt is good, I’ll buy you lunch.

Good luck.

Brent

                                                                     - 30 -

So here's how my first contact with this scam went:

A new guy got hired at work. The second or third day he was there he started talking about money. This immediately seemed strange to me simply because I'm usually the first person to mention money in a conversation.

He said he hated giving money to the greedy government (a common enough complaint) and said he had a great tax shelter, “if you want to get in on it.” He said he hadn't paid taxes the previous year and wouldn't have to pay taxes this year.

(Two things caught me here: First, I'm pretty conversant with the normal tax deductions and tax credits that are available to the average 'wage-earner,' I use most of them. I couldn't think of any that would allow me to pay no tax at all. Logic would dictate that if such a thing existed, the government would see it and slam that door quickly. After all, the government wants my money.

Second, was the phrase “if you want to get in on it.” Think about that phrase. “If you want to get in on it” suggests that there is something special or hidden to “get in” on. It also suggests that the person saying it has some sort of special access or may be a gate-keeper of some sort....or it might be an innocent turn of phrase. I'm a tolerant person, so I heard him out.)

He knew a guy who operated a charity. This charity provided AIDS drugs to orphans in Africa. They were doing a lot of good work. They needed donations to continue their good work. They needed donations so badly that they were willing to lend me the money to donate. (Huh?!?) If I donated $1000 they would lend me another $5000 to donate and give me a receipt for the full amount. $6000.

I needed details. If the charity already has this $5000 what's this deal about them handing it to me so that I can hand it right back? They'd only be up by my $1000 donation so what's the thing about the inflated receipt? Would I be agreeing to some sort of a “subscription donation” (my phrase) where a donation of $1000 would oblige me to a further $5000 donation in the future? Like $1000 per year for the next 5 years?

(And then the story changed.)

“No,” He said. “Drug companies are greedy.” He told me that drug companies are greedy and always screwing people. (a common enough complaint). AIDS drugs are especially over-priced, he said. This charity could get AIDS drugs in one of the former Soviet states for 1/6th of what the greedy drug companies were charging in North America. They would take my $1000, go to Uzbekistan to buy 6 times the drugs they could buy in Canada for the same price. They would then carry those drugs on their books at the Canadian price of $6000 and give me a receipt for that amount.

(This second story is substantially different from the first. There is no longer any talk of them loaning me money to donate. The talk is now about the charity committing fraud, by juggling their books, in order to give me an inflated tax receipt. If the first option was onerous the second was out-right illegal. I don't want to be involved in a fraud at any level of the operation.)

It took about 10 minutes of me saying, “No, that's not right,” for my co-worker to stop pushing me to come to a meeting, meet the guy who ran the charity, and “get in on it.” He said that lots of people would be at the meeting, lawyers, businessmen, graduates of Robert Kiyosaki financial courses too.

(“Come to a meeting,” is also one of the phrases that raises flags with me. At a 'Meeting' the people you are dealing with will be prepared with questions and answers and can steer the conversation. If you aren't already prepared you won't have time to check facts. You also don't know who the other people at the meeting are. The group could easily contain a claque, plant or confederate to pump up excitement about a statement, verify the “truth” of a falsehood or divert attention from weak points in the sales pitch. A claque can also start the rush, as in “Why only thousand dollars? This is such a great deal I'll donate $10,000. I'd donate more if I had it. Do you take MasterCard?” As a rule of thumb, I always consider any non-work related meeting to be a sales pitch. There could possibly be more than one claque.

“Come to a meeting,” also feels wrong for several other reasons. First, the co-worker and I aren't friends, we're co-workers. We've known each other for a short time. We've never socialized or done anything together away from the workplace. Why would he choose a sales meeting for our first off-site socialization? Second, if he has already made his charitable donation for the year why does he feel the need to accompany me? If I had bought a mutual fund that I was really pleased with, I wouldn't insist that you come to my bank with me and buy the same fund form the same salesman while I watched. I might tell you that I ran across a really good deal and that you should look into it; ask your banker or investment dealer for some information or an opinion. But that's about as far as I would go. Give you some information and leave the ball in your court. Third, if he was planning to make his donation for the year, why would he go to a meeting? Couldn't he just mail a cheque?

As an aside; Robert Kiyosaki doesn't impress me. I've read his most popular book and seen him interviewed on TV, seen clips of his seminars on the web. He strikes me as someone who makes his living from the credulous and ill-informed.

But what my co-worker had said caught my attention so I did my research on the CRA website plus a few others...Suspicion confirmed.)

A couple of weeks later my co-worker again brought up the topic of the African Charity. He was quite forceful in his insistence that I should take advantage of the opportunity. I told him that I had checked the CRA website and I was going to have to pass. It looked like a receipt from this charity would be no good. I clearly remember him saying, quite angrily, “The CRA doesn't know what it's talking about!” (Big Red Flag.) “They can bluster, they can threaten but there's nothing they can do.” (Alarm bells.)

I looked him in the eye and said, “It's fraud.” That pretty much ended the conversation but he stewed for the rest of the day. He didn't come to work the next day....or ever again.

(Afterwards I wondered if he was a scam victim or a perpetrator. Lots of times victims of scams become cheerleaders for that same scam. It helps assuage their doubts to see others drawn in. The thinking goes something like, “Well, if Bob thinks it's a good idea too then I can't be wrong.”

I started to wonder if my co-worker was part of the scam after my wife told me that she had been approached about a similar proposal at the office tower where she works. I'm a construction worker and folks from my work environment and hers would rarely cross paths. I had a thought that if my co-worker was a scam perpetrator he would need a partner to play 'the guy who runs the charity.' It would be an easy thing for the person promoting the scheme in the office tower to play 'the guy' on a Monday when my co-worker brings in prospective victims from the construction site and then my co-worker could play 'the guy' on a Tuesday when his partner brings in prospective victims form the office tower.....Just a thought.)

My experience with scam victims in the past leads me to believe most will reject any appeal to reason and be drawn to the promise of 'something for nothing' like a moth gets drawn to a candle flame. And with similar results. I expect my story will either be preaching to the converted or falling on deaf ears. But if I can save one person from losing their house I will have fulfilled my Cub Scout promise to "...do a good turn for somebody every day."