A. INTRODUCTION
On May 5, 2010, the Tax Court of Canada
released its decisions in three related appeals, Adomphwe
v. The Queen, 2010 TCC 240; Scott v. The Queen,
2010 TCC 237; and Tuar v. The Queen, 2010 TCC 236.
The appeals were part of a group that had initially involved
almost forty different Appellants. The Appellants were former
clients of tax preparer Abrose Danso-Dapaah, who pled guilty
to fraud on December 15, 2008 for issuing false donation
receipts and preparing false tax returns, and later Danso-Dapaah’s
successor George Gudu, who will be pleading guilty to fraud
pursuant to an agreement with CRA in the near future. Through
Danso-Dapaah and Gudu, the Appellants had each made donations
to several registered charities operating in Africa (the
“Charities”) which were subsequently disallowed by CRA.
B.
BACKGROUND
Abrose Danso-Dapaah was the owner of
a tax preparation business known as ADD Accounting, of which
George Gudu was a part-time employee. In December 2006,
Gudu purchased the client base of ADD Accounting from Danso-Dapaah
and began operating under the name Payless Tax. The Appellants
first became aware of the Charities through Danso-Dapaah
and Gudu. In the years at issue, the Appellants each made
gifts to the Charities by delivering cash and donated items
to Danso-Dapahh and Gudu, who would arrange for the donations
to be sent to the intended recipient. The Appellants would
then receive an official donation receipt from the charity
in an amount far exceeding the value of the donation. ADD
Accounting, and later Payless Tax, then prepared the Appellants’
tax returns, claiming a donation tax credit in respect of
the full receipted amount.
Following an investigation, CRA determined
that Danso-Dapaah and Gudu were participants in a tax scheme
whereby inflated donation receipts were being purchased
by their clientele for ten per cent of the amount represented
on the receipts. The investigation uncovered, among other
things, pre-signed receipt booklets and letterhead from
various charities in the Payless Tax offices and Mr. Gudu’s
personal residence and vehicle. The investigators also obtained
copies of clients’ tax returns from the computers and equipment
seized from the Payless Tax offices. Attached to these tax
returns were invoices, referencing the donation receipt
number and the face value amount of the receipt, but indicating
that only ten per cent of that amount had been paid in the
year the return was prepared and filed.
As a result of the fraud investigation,
CRA reassessed the Appellants and disallowed the donation
tax credits claimed in respect of the fraudulent receipts.
CRA’s position was that the Appellants did not make a true
gift as contemplated by the common law, but rather purchased
donation receipts from their tax preparers which contained
grossly inflated face value amounts.
C.
FACTS
1.
Adomphwe
The
appeals in Adomphwe involved the Appellant’s 2004,
2005 and 2006 taxation years. In each of the years at issue,
the Appellant claimed tax credits in respect of donations
made to the Charities which were subsequently reassessed.
With respect to 2004, the Appellant sought only interest
relief, which was not granted. With respect to 2005 and
2006, the Appellant produced bank records to show his withdrawals
of various cash amounts, which he testified he provided
to Mr. Gudu to donate to the Charities. The Appellant admitted
that the cash amounts he delivered to Mr. Gudu were less
than the face value of the receipts he received from the
Charities. However, the Appellant explained this discrepancy
by stating that he believed the accounting firms were “topping
off” his donations to make up the difference. The Appellant
requested that he now be permitted to claim as charitable
donations only the amounts of the cash withdrawals.
2.
Scott
The appeals of Mr. and Mrs. Scott involved their 2005 and 2006 taxation
years. The Appellants claimed that they had paid the full
dollar amount in respect of each donation receipt either
by way of cash or gifts-in-kind. The Appellants testified
that they had donated several items of furniture to the
Charities through Mr. Gudu. In contrast, Mr. Gadu testified
that the gifts-in-kind had primarily consisted of items
of clothing that were not appraised and that there was never
any attempt to correlate the value of the donated goods
to the value recorded on the receipts. Mr. Scott also claimed
that he had made cash donations in addition to the donated
goods; however, he could provide no documentation to support
this claim.
3.
Tuar
The
appeals in Tuar involved the Appellant’s 2002, 2003,
2004, 2005 and 2006 taxation years. The Appellant had made
donations to the Charities through Mr. Danso-Dapaah, consisting
of cash and property items, primarily jewellery. The Appellant
claimed that she had gifted cash and property in the full
face value of the receipts. However, she could provide no
evidence showing that the receipts were accurate. The reassessments
in respect of 2002 and 2003 were completed beyond the normal
period. For years beyond the normal reassessment period
to be reopened, CRA has the onus of establishing that a
misrepresentation occurred in each year that was attributable
to neglect, carelessness, wilful default or fraud. The TCC
found that the Appellant made a misrepresentation attributable
to neglect and carelessness which allowed CRA to reopen
the two otherwise statute-barred taxation years.
D.
ISSUES
The main
issues in each appeal were as follows:
1)
Whether the Appellant made any gifts to registered
charities that would entitle him/her to claim non-refundable
tax credits pursuant to section 118.1 of the Income Tax
Act; and
2)
Whether
the receipts issued by the Charities qualify as validly
issued receipts in prescribed form pursuant to subsection
118.1(2) of the ITA and Regulations 3500 and 3501(1)
of the Income Tax Regulations.
E.
DECISIONS
To determine the first issue, the TCC
examined the common law meaning of gift as defined in the
The Queen v. Friedberg, 92 D.T.C. 6031 and subsequent
cases. In Friedberg, a gift is defined as “a voluntary
transfer of property owned by a donor to a donee, in return
for which no benefit or consideration flows to the donor.”
The TCC considered the invoices uncovered by the CRA investigators
to be very persuasive and none of the Appellants were able
to provide convincing proof that they had donated the amounts
claimed. Therefore the TCC held that the Appellants paid
no more than ten percent in cash or goods in respect of
the face value of the receipts that were provided to accompany
their returns. In doing so, the TCC found that the Appellants
had attempted to take advantage of inflated tax benefits
and did not possess the requisite donative intent. Therefore,
none of the amounts paid to the Charities qualified as gifts
and the appeals were dismissed.
Even if the first issue had been decided
differently, the TCC held that the appeals should be dismissed
because the receipts did not meet the requirements set out
in subsection 118.1(2) of the ITA and Regulations
3500 and 3501. Pursuant to subsection 118.1(2), a gift is
not to be included as a charitable gift unless it is accompanied
by a receipt for the gift that contains certain prescribed
information. The receipts at issue in all three appeals
were deficient because they lacked certain information
prescribed by the Regulations. In particular, the receipts
contained no description of the property allegedly gifted.
In addition, the Appellant in Adomphwe had admitted
that the receipts were inflated. Therefore, the receipts
did not contain the correct amount of the cash donation.
F. CONCLUSION
Taxpayers involved in schemes similar to those discussed above involving
false or inflated charitable donation receipts, as well
as tax preparer fraud are being investigated as part of
Project Trident, a CRA-wide enforcement project pursuing
key players in fraudulent tax schemes and reassessing related
tax returns. Those involved in receipting for their charities
need to be vigilant in ensuring that all receipts issued
are in compliance with regulations 3500 and 3501 of the
ITA, and that their receipts do not fall prey to
being used by fraudulent tax preparers. Donors also need
to be satisfied that they are not entering into transactions
that can seem too good to be true in relation to charitable
donation receipts.
