Donation Tax Shelter in Canada How it Works?

In Canada a tax payer can claim 75% of his income as donation and get a Tax Credit of 43% (combined Federal and BC Province) as a tax payable reduction or cash refund.

Donation is a very attractive Tax Shelter for people in higher income tax bracket.

Donations to Canadian registered charities and other qualified donees approved by CRA can only be claimed as charitable donations.

At the end of each calendar year many tax shelter advocate give attractive and compelling presentation to tax payers to donate money to their tax shelter and either reduce tax or get a big refund.

Many tax payers each year participate in tax shelter donation/gifting arrangement by “leveraged cash donations” and “buy low, donate high” donation programs, without clearly understanding how the program works or what is the motivation of the person who is selling the tax shelter program to them.

In my practice I often meet clients with their fancy glossy covered tax shelter package complaining about the promised refund they did not get back from CRA or a letter from CRA disallowing their donation all together.

If a tax shelter donation arrangement has a tax shelter number, this does not mean that the tax shelter is approved by CRA. This number is for identification purposes only.

This is how a Donation Tax Shelter works as far as I understand.

A tax payer wishes to donate food/medicine or any other item to a registered charitable organization in Canada. For example, tax payer wants to donate 100 units of medicine which cost $100/unit to the charity. So, the dollar value of his donation is $10,000.

The tax shelter program organizer buys the medicine in huge quantity and from the world wholesale market. It cost them $10/unit and they buy 100 units for the tax payer at a cost of $1,000. The tax payer pays the tax shelter cost of the medicine $1,000. In return, the tax shelter program gives the tax payer a donation slip for $10,000.

Tax payer claims the $10,000 donation and gets a 43% ($4,300) refund back from CRA. So, for actual cash outlay of $1,000 the donor claim a tax credit of $4,300.

CRA has been vigilant with this kind of charitable donation arrangement and in some cases denied all donation of a tax shelter program. According to CRA, a tax payer can only claim up to actual cash donation or cost of the actual donation to a charitable organization.

Even you are convinced to participate in a Donation Tax Shelter program, be certain that your tax return will be audited, you will be required to provide additional information and your donation to the charity could be denied and you might be asked to return the money with interest.

As a Canadian tax payer, you are the only one, who is responsible for your tax liability. Don’t expect the tax shelter program organizer to defend you against CRA.