With the current crop of charitable donation tax shelters circulating around
the financial community in the clamour for some last-minute year-end tax
planning, taxpayers should be wary that simply obtaining an "official"
charitable receipt for your donation may not be enough to be successful with the
Manjit Brar learned this lesson the hard way in a tax case released last week
-- one that didn't even involve a tax shelter.
In 2000, Mr. Brar and his wife took their three children out of the public
school system and enrolled them in Weldon Park Academy, a London, Ont., private
Before enrolling the children, however, Mr. Brar ensured that the total cost
of private school tuition would not exceed $10,000. Concluding that this amount
was both reasonable and within his budget, he paid the full amount by cheque
prior to Sept. 1, 2000.
Mr. Brar testified that shortly thereafter, he and his wife decided to make a
"voluntary donation" of $3,000, in cash, to Weldon Park in addition to the
$10,000 of tuition already paid. He testified that it was given "on a completely
voluntary basis without conditions or consideration."
The Canada Revenue Agency disallowed his donation tax credit in respect of
the $3,000 donation. The reason for doing so was that the CRA felt that it was
not a gift since a gift is a "voluntary transfer of property without valuable
consideration or benefit accruing to the donor or to anyone designated by the
donor as a result of the transfer."
The CRA concluded that the donation was actually an amount calculated by
Weldon Park -- in other words, part of the tuition, receipted as a donation, and
therefore not a voluntary gift.
In fact, in 2001, after becoming aware of "unorthodox or illegal charitable
donation receipts," the directors of Weldon Park fired their headmaster and
financial officer. In June 2003, the school shut down after a steady decline in
enrolment from 470 students in 2001 to 140 in 2003.
The judge had to determine whether or not the $3,000 receipt represented part
of the $10,000 tuition or was in fact a separate donation. If it was part of the
$10,000 tuition, then it was issued inappropriately by the school and invalid.
If it was a separate payment, then perhaps it was, indeed, a valid donation.
The judge doubted that a separate $3,000 "cash" donation was ever made. Mr.
Brar testified that he and his wife had a "reserve of cash at home" from which
she took $3,000 to donate to Weldon Park. The judge found this hard to believe
since Mr. Brar claimed that he could not even afford to pay the Tax Court's $100
filing fee, despite this "cash reserve." According to the judge, "the fact that
he claims the donation was made in cash makes me skeptical."
The judge denied the donation claim concluding that Mr. Brar "was on a
restricted budget and it is inconceivable that he made a voluntary $3,000
donation increasing the amount paid to Weldon from $10,000 to $13,000. ... The
$3,000 was part of the $10,000 tuition fees and on a balance of probabilities,
it was not given voluntarily."
The case serves as a warning to all taxpayers that just because you have an
"official" donation receipt from a registered charity doesn't mean the CRA can't
challenge your donation claim if the receipt was obtained inappropriately. Tax
shelter buyers beware.