Fraudulent donation tax schemes continue to tempt Canadians, despite Canada Revenue Agency’s repeated warnings.
A particularly egregious case concluded this past November in a series of court rulings.
Mehfuz Trust and the Raza brothers
According to the judgments, Mashud Miah’s son survived a premature birth in Vancouver, motivating the father to establish a charity in the child’s name around 2000 or 2001. In its early years, the Mehfuz Trust may have properly served its purpose of funding a children’s medical clinic in Miah’s homeland, Bangladesh. But, by 2009, a tax controversy led to the closure of both charity and clinic.
Miah served as chairman of the trust, which was established with the assistance of Fareed Raza, a tax preparer. Miah’s other occupation was in janitorial services, which included cleaning Raza’s office.
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At a CRA internal training session in 2008, an investigator from the Vancouver enforcement office learned her Toronto colleagues had been uncovering false charitable receipt schemes perpetrated by some tax preparers. Upon returning to her home office, the investigator began looking into significant donations going to the Mehfuz Trust through the tax preparation offices run by Fareed and Saheem Raza. Not only were the donations out of character with past giving patterns, but many taxpayers appeared to be donating significant portions of their net incomes.
A criminal investigation of the tax preparation office led to the seizure of files and records. The evidence showed actual amounts donated were as little as 10% or less of amounts claimed by taxpayers. Also, the form used for the inflated receipts differed from official receipts issued by the Mehfuz Trust.
Miah reported the Raza brothers to CRA in the spring of 2008 after seeing the impugned receipts in the hands of Saheem Raza. Even so, the judge was critical of Miah, as he had signed the charity’s annual returns each year, which clearly showed the inflated receipt amounts.
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Seized office records told CRA which taxpayers to audit and eventually reassess as far back as 2003—well beyond the normal reassessment period of three years from original assessment.
These court rulings dealt only with those taxpayers who had appealed their reassessments. The Vancouver CRA investigator estimated total forged receipts amounted to approximately $12 million, resulting in initial lost tax revenue of about $4.7 million.
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Latest warnings from CRA
Unrelated, but roughly coinciding with the release of these judgments, the CRA posted yet another alert on its website about gifting tax sheltering schemes in late November 2014.
The alert is a reminder that taxpayers who claim credits based on such tax shelters will have their assessments (and potential refunds) withheld until the corresponding tax shelter has been audited. And, if a claimed amount is in dispute, 50% of the assessed tax must be paid pending resolution of the dispute. That said, the cases above were not registered tax shelters, but simply the sale of fraudulent charitable receipts.