notorial dissent wrote:I know this is probably a dumb question, or at least a response to a really dumb situation, but why, if CRA has uniformly rejected these types of transactions, and I would think by now it would be fairly widely known, why are your taxpayers still either indulging in it or falling for it, whichever it is. I mean, me being me, I would sort of assume/expect that anyone who had that kind of money to throw around/give away, would have to have at some point some gotten competent tax advice, am I confused here, yet, that doesn't seem to be the case judging by the number of cases we seem to be discussing. I know a lot of it is the good old trying to get something for nothing or get away with something, but some where along the way you'd think.
I know this is sort of the pot calling the kettle griege, as since we certainly have enough of our won home grown varieties, but still!!!!
The quick answer is that people are no longer getting suckered into these schemes, or at least these specifically structured schemes. There are similar donation scams still floating around but in much smaller volumes.
What you are reading in my Quatloos postings is largely a culmination of transactions from over a decade ago. Reading the court decisions in the donation scams is like watching a star go super-nova; fascinating but just the record of a long-ago, long expired event. Take Kossow, the case just concluded and cited above. It involved the reassessment of the taxpayer's 2000 to 2003 income tax returns to disallow the claimed deductions. This delay of thirteen years between claiming the deduction and final resolution is by no means unusual. Why so long?
The charitable donation scams really started, tentatively, in the mid-late 1990's. When shyster promoters realized their potential they went nuts and by the early 2000s were being flogged to Ma and Pa taxpayers in huge volumes. They had opinion letters \from legal firms saying it was all ok, the schemes were often incredibly complex (which seemed to confirm legitimacy in taxpayer's eyes) and they offered money for nothing. You pay the promoter $1.00 and you get a guaranteed tax refund of say $1.50. They started hitting the Tax Court in 2004 with Klotz;
http://www.canlii.org/en/ca/tcc/doc/200 ... IzNgAAAAAB
an art donation scheme in which a taxpayer claimed, in his 1999 tax return, a donation amount of $258,000 for art that cost him $75,000.
By that time the CRA was overwhelmed, responding to an unprecedented tidal wave of these schemes, all of which had to be audited. Essentially we were hit by them after they had conned a huge number of taxpayers into participating. I was very deeply involved in this and the review of these schemes, particularly the donation of computer software, took up most of the last five years or so of my CRA career. The whining (sorry, standard complaint) of taxpayers was "if these schemes aren't allowed why didn't the CRA stop me or shut them down". The answer is we couldn't. The CRA only has the power to reassess filed tax returns. We can't go out into the tax marketplace and beat people over the head not to be so damned stupid nor could we shut down tax schemes which, while doomed to failure, were not illegal. So we reassessed masses of filed tax returns.
Use Kossow as an example of the timeline. Her last reassessed return was for the 2003 tax year. She would have filed that in 2004 and, under the rules, the CRA had until 2007 to reassess her. We had a habit of reassessing at the last minute because we tried to get as much information about the schemes as we could before reassessing. There was also the issue of volume. Ms Kossow was one of over 1,500 taxpayers in this scheme with a total of about $200,000,000 in claimed deductions. All had to be reassessed and reviewed. And Kossow was by no means the biggest, either in terms of deductions and participants. Then there were what I call the procedural skirmishing prior to the Tax Court hearing. The taxpayers went to Tax Court and Federal Court of Appeal in 2006, 2008, 2009 and 2010 over pre-trial procedural issues. The case was slated for a Tax Court hearing on September 8, 2008 but was stayed on the taxpayer's request to the Federal Court of Appeal pending some other application she planned to make. In 2009 she filed a motion in the Federal Court of Appeal asking that the already extensive discovery process be extended even longer. In May 2010 she had a hearing at Tax Court where she asked, yet again, for an extension on discovery. Denied. At that hearing the court set the case down for a hearing in January 2011 but it did not get heard until April 2011 with the decision not released until August 2012. Appealed by the taxpayer to the Federal Court of Appeal and heard there October 17, 2013 with decision released December 06, 2013. Note that the Crown had no control over any of this since all of the motions and appeals were by the taxpayer. This type of delay was typical for the large files.
While all of these cases were winding their slow way through the system promoters were telling new and old suckers that yes, there had been reassessments but the CRA had not, and would not, win in court. And people bought it. Some were participating in later iterations of the same schemes that they'd already been reassessed for, just doubling down on a losing bet.
Another reason that taxpayers kept buying was that the plans evolved. Initially they were very simplistic, buy something for $1,000 donate it and get a receipt for $3,000 with a piece of paper saying the property was actually worth the $3,000 amount. They failed in court because the judges essentially said "Who cares what is on that paper? You paid $1,000 arm's length and that is, at most, what it is worth". So the legal profession got the bright idea of having only cash donations (called levered donation schemes by the tax community).Can't argue the value of that, right?
Since I've explained them before I'll be brief and simplistic but with a personal anecdote. The legal geniuses though up schemes where taxpayers donated, say, $10,000 but only $3,000 was actually from their own money. The rest was covered a $7,000 interest free very long-term to the taxpayer from a third party. Kossow was one such scheme. Ms. Kossow got (or thought she got) the whole cash amount as a donation, the scheme promoters got her actual personal cash payment. I remember when I read a legal opinion on this type of scheme by one of Canada's largest tax law partnerships. The writer just about peed himself in glee over how airtight it all was. The hook? When the taxpayer signed a contract binding him/her to donate they did not have a contractual right to the loan so, for one moment, they were personally liable for the whole amount. A third party might, or might not, agree to make them an interest free loan. So, legally, the taxpayer had donated straight cash out of his own funds and the opinion actually said the CRA could not deny the donation. It went further and said that the courts could not rule against the taxpayer because they could not legally attach the loan to the donation since there was no contractual right to the loan at the time of the donation. Huh? A court can do what it wants. Takes a lot of hubris to put down on a legal opinion which the court will read a comment that that the court is powerless to rule against the scheme. I was incredulous at the stupidity involved. I figured there was no way the courts would allow such blatant, almost contemptuous manipulation of tax law. I was right.
It ended very badly for taxpayers, far worse than the prior property-in-kind donations. At least with those they got the cash amounts they paid to purchase the donated property. The levered donation taxpayers got nothing, even their own personal cash. In law something is not a gift if the donor gets something back in consideration. If a donation is not, legally a gift, then it cannot be deducted for tax purposes. The Crown argued that the donors under these schemes got valuable consideration back, long term interest-free loans which vitiated the payments as gifts or donations. When the taxpayers lawyers argued that the loan could not be considered as part of the donation scheme because the taxpayers had no legal right to it the court said essentially "so what?". The Tax Court said that everybody in these schemes got a loan and, contract or not, knew they would get one so it had to be included as part of the scheme. As far as value went one court basically said, go to your bank and see if you can get an interest-free twenty-five year loan. So valuable consideration received back, no gift so no donation, and no tax deduction at all. However I'd estimate that the levered donation schemes kept the the charitable donation scams running another five years or so after taxpayers started getting wary about the donation in kind schemes.
This is where we currently stand but no doubt some other big scheme will pop up eventually. I was never concerned about running out of work while at theCRA.
For a current discussion on the legislation just passed to stop all this go to;
http://www.taxtips.ca/personaltax/taxsh ... ations.htm