Despite discouraging words from the Canada Revenue Agency, charitable donation tax shelter schemes are brazenly operating in Canada.

In Vancouver, at least a half-dozen schemes are being actively marketed, mainly by word of mouth. These deals are advertised as great humanitarian projects — “win/win” situations for both donors and beneficiaries; however, they are really something-for-nothing schemes financed by taxpayers.

All are based on a provision of the Income Tax Act that permits people to donate items to charities and claim tax deductions based on their fair market value. In all these schemes, deemed fair market value is large enough to generate a tax refund far exceeding the donor’s contribution.

Promoters claim they are compliant with Canadian tax laws. Many note the CRA has allowed the deductions in previous years. But this doesn’t mean investors are home free. Last year, the Federal Court of Appeal disallowed tax deductions claimed by hundreds of investors in a scheme run by CVI Art Management Inc. of Toronto.

The CRA has this warning on its Web site: “Taxpayers should be aware of the risks of participating in tax shelter gifting and donation arrangements, including gifting trust arrangements, leveraged cash donations and buy-low, donate-high arrangements.”

The agency lists its enforcement actions over the past few years:

> For donations made before 2002, the CRA reassessed some 6,700 taxpayers, disallowing about $490 million in donations.

> For the 2002 tax year, a further 5,700 taxpayers, with donations totalling $360 million, have just been audited and reassessments have been issued.

> For the 2003 tax year, about 1,800 taxpayers have been audited to date with $66 million in donations disallowed.

“Generally,” the Web site states, “the CRA reduces the amount of the gift to no more than the cash paid by the taxpayer … In some cases it is reduced to nil, when the donation is not a true gift.”

Despite the warnings, the schemes are being openly marketed. One is the Ca-nadian Humanitarian Trust Donation Program, based in Mississauga, Ont. Investors make a cash donation to a registered charity and get a receipt for that amount. Then, the donor applies to become a beneficiary of something called Canadian Humanitarian Trust.

The settlor of the trust, domiciled in the British Virgin Islands, buys pharmaceuticals from an offshore supplier. The donor applies to become a beneficiary of the trust. If accepted (and there’s no doubt he will be), ownership of the pharmaceuticals is transferred to him. The pharmaceuticals are appraised at more than their cost (as they were acquired at a volume discount). This lets the investor donate them to a registered charity at a “value” far exceeding his donation amount.

According to marketing literature, a donation of $26,100 will generate a tax receipt of $99,900 and a tax refund of $43,656, for a net return of $17,556, or 67%.

Terence David, who markets the program in Vancouver, says over the five-year life of the program, $700-million worth of pharmaceuticals have been distributed to Third World countries. He says the fair market value of the drugs is determined by an independent appraiser who uses the Ontario health ministry’s wholesale price.

He says a $500,000 “defence fund” has been set up to fight reassessments. If investors lost, that wouldn’t pay for the millions of dollars of reassessments that would ensue. IE