March 17, 2020
Tax credits on donations made to the GLGI were rejected by the CRA and taxpayers were sent reassessments which often resulted in incredibly large tax bills. Find out more on the GLGI case and what taxpayers can do.
Global Learning Gift Initiative–The CRA Wants to Recover Hundreds of Millions from GLGI Participants: What Does This Mean?
The Canada Revenue Agency (CRA) is looking to recover more than $500 million from taxpayers who participated in the Global Learning Gift Initiative (GLGI) between 2004 and 2014. Approximately 40,000 Canadians participated in the program, claiming a charity tax credit many times higher than their initial cash donations.
These credits have been rejected by the CRA and taxpayers have been sent Notices of Reassessment requiring them to pay the tax that should have been paid initially, plus interest on the outstanding amounts dating back to date that the taxes should have been paid. These amounts are often considerable, leaving many taxpayers wondering what to do next.
What is the Global Learning Gift Initiative (GLGI)?
The Global Learning Gift Initiative (GLGI) was a registered tax shelter that accepted monetary donations and provided charitable tax receipts to participants. The program was involved with an offshore entity, Phoenix Learning Corporation, which was a Bahamian corporation. Between 2004 and 2014, participants in the Global Learning Gift Initiative program made donations to a charity named Millenium and then became beneficiaries of the Global Learning Trust. This trust gave them rights to educational software licences. Participants then donated this software, claiming a market value of several times higher than that of the initial cash payment.
Taxpayers who took part were then given tax receipts for both the cash donation and the value of the software donation. This meant that the tax benefit was much higher than the amount initially donated. In short, a person could donate a sum of money and receive a tax receipt for several times the amount donated, leading to a charity tax credit that was much higher than the initial donation and a significant tax savings for the participant. Several thousand Canadians took part in GLGI, many on the advice of friends, relatives, and even financial advisors.
The CRA stated that those involved are not entitled to a donation credit for the money they gave and started sending out tax reassessments demanding taxpayers pay millions of dollars in taxes, interest and penalties.
The Global Learning Gift Initiative is no longer in operation
In 2015, the Federal Tax Court of Canada issued a ruling that called the GLGI program a sham. The court ruled that the donations claimed by GLGI were greatly inflated and overvalued. It concluded that the program was an illegal tax shelter and that the CRA was correct in disallowing the GLGI donations. The court also stated that it believed those who gave money to the GLGI did so to receive a tax benefit and not for the purpose of donating to charity.
This decision was not binding on other Tax Court justices, but it did outline the legal justification for rejecting the charity tax credits.
The CRA states that it first began reassessing tax returns in relation to the GLGI in 2006 and denying tax credits at that point, but the tax shelter continued to operate until 2014. Thousands of Canadians participated in the program, some giving money and claiming tax credits multiple times.
What is a Tax Shelter?
A tax shelter is a gifting arrangement or the acquisition of property where it is represented to the donor or purchaser that the tax benefits and deductions arising from the arrangement will equal or exceed the costs of the donation or purchase. Tax shelters are defined in the Canadian federal Income Tax Act.
Tax shelters are designed to reduce taxable income.
In Canada, every promoter of a tax shelter must have a tax shelter identification number. Those who promote tax shelters can be penalized if they file false or misleading information in their tax shelter number application or if they sell, issue, or accept consideration before the number has been issued. If this penalty (and any related interest) is outstanding, no tax shelter participants can claim the benefits associated with the shelter.
The promoter must also provide the CRA with a list of investors or participants. This list must include their names, social insurance numbers, and other relevant information.
The CRA states that having a tax shelter identification number does not automatically entitle participants to tax benefits. The agency says that the tax shelter identification number is intended only to track tax shelters, not to legitimize or guarantee any tax benefits.
Are Tax Shelters like GLGI Legal?
Most legitimate tax shelters target specific sectors of the economy and are designed to stimulate growth of that sector and in the overall economy. If there are areas where the government wants to attract investment, for instance, it may provide generous tax breaks to those who give money to these tax-assisted investments. By offering generous tax breaks, the government encourages investment in areas that it deems important.
The CRA reviews all tax shelters and audits those that it considers potentially abusive.
If the CRA determines that a tax shelter is operating in an unlawful manner, it can challenge the operation in tax court. If this challenge is successful, those who claimed the deduction on their taxes will lose this deduction. They could also potentially face penalties.
In particular, the CRA has been aggressive in tax shelters that operate primarily in association with charitable donations. These tax shelters are also often known as mass marketed gifting tax shelters. The CRA states that the goal of these operations is primarily to avoid the payment of taxes, not raising funds for charities. This is the classification that the GLGI found itself in.
The CRA states that it audits every mass-marketed tax shelter and that “no arrangement has been found to comply with the Income Tax Act.”
“The old adage ‘if it sounds too good to be true, it is’ has particular resonance to donation tax shelters,” says James Bell, Managing Director, Farber Tax Solutions.
“Whether it is due to a lack of clear and timely warnings from the Canada Revenue Agency or bad advice from so-called financial advisors – the end result is unmistakeable: thousands of hard-working Canadians have had their lives turned upside down because of donation tax shelters such as the Global Learning Gifting Initiative.”
The 2015 GLGI Court Case
The 2015 court case involving GLGI (Mariano v. Her Majesty the Queen) was an appeal of a CRA reassessment that was issued as a result of a GLGI donation. In the case, the appellants took the position that “that the only real issue in dispute is the fair market value of the gift in kind of licences” that were purchased and donated through the GLGI program. They claimed that their expert witness confirmed that the value of the software was actually higher than the value of the tax receipts claimed.
They also claimed that they made the donation to a registered charity, that they obtained a valid donation receipt, and that they claimed the deduction in the appropriate year. They argued that the cash gift was voluntary and that they made the donation to benefit the charity. In their eyes, the CRA should not have reassessed their returns and rejected their tax deductions.
The court concluded that the value of each software licence would range from 13 cents to 26 cents, far lower than the amounts claimed by the appellants. Justice Pizzitelli also found that “the Appellants did not have the donative intent to make any of their gifts, did not own or transfer the property that is the subject matter of the gift in kind, i.e. the Licences, and that the Program was a sham.” The appeals were dismissed.
How the CRA is Responding to Tax Shelters Like GLGI and What the CRA Could Do Next
Once the CRA reviewed the GLGI program, and determined that the operation was acting in an unlawful manner, it began to deny tax credits and reject tax deductions associated with GLGI. This was done through CRA reassessments. Once a tax return is filed, the CRA is able to reassess the return. If this happens, and the result is that more tax is owed than initially claimed by the taxpayer, the agency will require payment of the outstanding amount as well as interest on these amounts.
Since the CRA charges compound daily interest dating back to the time when the taxes should have been paid, and since many of the deductions claimed by GLGI participants were very large, these reassessments often amounted to considerable sums of money. In addition, the agency is allowed to charge a penalty of up to 50% of the repayment being sought if it believes the taxpayer knew or should have known that the benefit claimed was not legitimate.
As the taxes owing in relation to GLGI are often very large, many taxpayers have had difficulty paying them. As a result, the Canada Revenue Agency sent out several settlement offers back in 2015, prior to the conclusion of the Mariano v. Her Majesty the Queen appeal. In these offers, the agency agreed to allow a tax credit equal to the initial cash outlay as well as reductions in interest. These offers also agreed to cancel all interest related to the cash portion of the donation tax credit, as well as interest related to the gift portion from the date of the audit reassessment to the date of the new reassessment, which would follow the acceptance of the offer.
Objecting to GLGI Reassessments and Subsequent GLGI Appeals
Around 32,000 taxpayers filed objections with the CRA when their tax credits were denied. About 17,000 of those are challenging their reassessments in court. If a taxpayer accepted the CRA’s settlement offer, they would have had to agree to waive their right to any further objection or appeal in respect to these reassessments. While many taxpayers accepted the CRA settlement offers, many did not. Some chose to participate in a GLGI lawsuit or legal appeal.
Several court cases and appeals have been heard regarding the GLGI and other similar tax shelters. In most that have been concluded to date, the result has been similar to the 2015 Mariano case.
In one 2018 case (V. Ross Morrison v. The Queen), the court concluded that the appellant should be allowed a tax credit for the cash portion of their donation, but that the charity tax credit for the gift portion was not legitimate. However, this case related to the Canadian Gift Initiatives donation program and the Canadian Humanitarian Trust donation program, which operated in a similar manner to GLGI, but not specifically to the GLGI situation.
In a January 2020 appeal ruling relating to GLGI participation (Tudora v. The Queen), Justice MacPhee found that his “ruling should be and will be consistent with Mariano concerning donative intent” and that “the Appellant, as a result of his participation in this arrangement expected to be enriched. He therefore did not have the requisite donative intent.”
Even if subsequent GLGI appeals conclude that the cash portion initially given to the GLGI is deemed a legitimate charitable expense, this will only reduce the money owed to the CRA by a relatively small amount. This is because the tax credits relating to the gift donations are for much larger sums of money. If these donations are still deemed ineligible, taxpayers involved will continue to be responsible for paying significant amounts in tax debt and possible interest charges as well.
It seems very unlikely that the courts will determine that the gift donations were legitimate as several rulings in other cases have either rejected the gift donations or rejected the entire donation including the cash portion.
Interest continues to accumulate on outstanding tax bills relating to the GLGI program. Unless it is ultimately determined that all donations are legitimate, taxpayers involved in the program will continue to be charged interest until they settle with the CRA or pay their tax debts.
This situation highlights the fact that Canada’s tax system is based on self-assessment, which depends on taxpayers being responsible for accurately reporting their income and ensuring that any deductions that are claimed are legal.
“When claiming a charitable donation, a taxpayer should consider any valuation reports if the donation receipt amount is higher than the cash amount in fact paid and even then one should certainly consider consulting the merit of the donation claim with a tax practitioner,” says Boris Stanislav, Associate, Farber Tax Law.
“Every taxpayer should remember that her or his tax reporting obligations are based on a self-reporting system and therefore; the onus of proof, in general, rests with the taxpayer to support their own reporting – in other words, the onus does not rest with the CRA.”
GLGI Class Action Lawsuits
Class action lawsuits have also been launched relating to the GLGI scheme. These suits have been filed against Global Learning Group Inc. as well other entities involved in the Global Learning Gifting Initiative. The basis of these lawsuits is that GLGI led taxpayers to believe that the program was a legitimate charitable enterprise and that donations would result in gifts to registered charities.
However, any class action GLGI lawsuit that has been filed is a suit against the Global Learning Group. If these legal attempts are successful, the group could be required to make payments to those involved. However, these class action lawsuits and any other GLGI lawsuit will not have any affect on the amounts owed by taxpayers to the CRA.
How Taxpayers Can Handle GLGI Tax Debt
Taxpayers who have been reassessed and who owe significant tax debt to the CRA as a result of the GLGI program have several options.
One is to appeal the situation in the Tax Court of Canada. While this could possibly result in a favourable outcome, many appeals have already been heard and there has not been one case where all cash and gift donations made as a part of the GLGI program have been deemed legitimate tax deductions.
Some taxpayers may have chosen to accept the settlement offered by the CRA, but these settlements were time-sensitive and they may not be offered again. Therefore, taxpayer who did not accept them may have to consider other options.
Paying the tax debt in full will resolve the situation. Interest continues to accrue on the debt, and paying the full amount owing will stop this interest from accumulating. It will also stop the CRA from taking collection action and legal action against the taxpayer.
However, many of the amounts owed to the CRA are very large and, therefore, many taxpayers will have significant issues paying the debts in full. In these situations, taxpayers can apply for relief from interest and penalties. Taxpayer relief only applies in certain situations, such as ones where a taxpayer would be faced with significant financial hardship if they were held responsible for paying the full amount of interest and penalties that have been charged. For instance, if the interest charges represent a significant portion of the payments or if payment of the accumulated interest would cause a prolonged inability to provide basic necessities of life, relief may be granted.
Dealing with a professional is crucial when applying for taxpayer relief. Not only does the CRA expect the money that it is owed (including all interest and penalties charges) but, in the case of the GLGI situation specifically, it will want to show that those who participate in dubious tax shelters will be held responsible for their decisions and punished for their attempts to avoid taxes. Having an experienced professional on your side can increase your chances of your relief application being successful.
Some GLGI participants currently have collectible balances and others will have to deal with CRA collections in the near future if their tax debts are not paid. The CRA has very strong collection powers and, if taxpayers do not pay what is owing or come to a payment arrangement with the agency, the CRA may take legal action to collect the debt. This can result in serious financial or legal consequences, including the possibility of wage garnishment, seized assets, and other potential actions. Those who owe the CRA and are unable to pay should consult tax professionals. CRA legal action can quickly become very serious so it is crucial to have a plan for how to deal with it before it arrives and to have professional help to resolve the situation if collection action has already begun. A professional can help put a stop to CRA collection action and work to negotiate a payment arrangement with the CRA, stopping the situation from escalating.