I noted a year-end news item last week that will be of interest to those involved with donation appraisals, and familiar with the ongoing battles between the Canada Revenue Agency and those seeking to avoid taxes through various tax-sheltering donation schemes. To date, the CRA has denied more than 5.9 billion dollars in donation claims involving tax shelter schemes. In particular, the CRA has demonstrated zero tolerance for companies posing as charitable organizations. On December 13, 2014, the Charities Directorate of the CRA revoked the charitable registration of Ecotecture: Centre for Ecological Art and Architecture for its involvement in a scheme known as the VIA Project (Vintage Iconic Archives).
This may be a classic case of closing the barn door too late; the former registered charity had issued over $200 million in receipts to investors. This finally closes the book on a long-running skirmish between the government’s tax agency and a group of financial advisors, investment promoters, galleries and art-world flunkies formerly involved with Ecotecture, who have by now departed to greener pastures. Many will remember the charity’s ill-fated gifting and tax-shelter projects over a decade ago involving the Maclaren Art Centre in Barrie. These included the ArtCity project, the initial gifting of the Sovfoto archive to Maclaren, and the debacle involving a collection of alleged Rodin sculptures originally commissioned as a fund-raiser for the gallery that proved to be a spurious and, in some cases, non-existent. I recall with a wince that some of these sculptures were briefly exhibited at the Royal Ontario Museum in 2001.
Second-generation “leveraged donation” schemes similar to the VIA Project usually involve a circular flow of funds through a network of related companies, with no real donation prospect and vastly inflated receipts for the investors. Such schemes have been testing the boundaries of tax law (and the patience of the CRA) for several years now. The VIA project has been in hot water since 2010, when questions about Ecotecture’s activities began to surface in an article by Chris Sorensen titled “An artful scheme” in the 2010 MacLean’s Magazine. VIA involved a dizzying sequence of buy-and-shell-games, whereby two photo collections totaling some 825,000 images were sold to investors (to be eventually donated to an “un-named university”).
Participants were asked to put a down-payment on some ‘vintage’ photos from Toronto’s Deleon White Vintage Images and commit to hold them for three years. These pictures, from a collection of Chicago Tribune press photos, were then used to secure a loan from a company called Vintage Capital, created alongside the VIA Project to facilitate the scheme. These funds were then used to buy yet another photographic collection, the Sovfoto Archive, which would then be donated as cultural property to the receiving institution. The promise: Big tax receipts all around to the investors.
Here is the recent press release from CRA, and their findings (highlighted) make for interesting reading:
“The Canada Revenue Agency (CRA) will revoke the registration of Ecotecture: Centre for Ecological Art and Architecture. The notice of revocation will be published in the Canada Gazette with an effective date of December 13, 2014. On October 29, 2014, and in accordance with subsection 168(1) of the Income Tax Act, the CRA issued a notice of intention to revoke the registration of Ecotecture as a charity. The letter stated, in part, that: “The audit by the Canada Revenue Agency (CRA) has revealed that the Organization primarily operated for the non-charitable purpose of furthering a gifting tax shelter, Vintage Iconic Archives (the VIA Project), by agreeing to accept alleged gifts of property from participants and to act as a receipting agent for this donation arrangement. As a direct result, from 2009 to the present, the Organization issued donation receipts nearing $200 million for supposed gifts of vintage photographs. It is the view of the CRA that the property was overvalued; therefore the value of the corresponding tax receipts was overstated. Further, not only did the Organization fail to demonstrate it had actually received the tax-receipted property, it was unable to show that it carried out any charitable activities, using the alleged property or otherwise. In addition, the audit revealed that the Organization has failed to comply with several other requirements set out in the Income Tax Act. In particular, it was found that the Organization provided undue benefits to one of its members, gifted to a non-qualified donee, failed to promote the objects for which it was registered, did not maintain adequate books and records, did not file an accurate T3010 Information Return, failed to meet its disbursement quota and allowed its corporate status to lapse. For all of these reasons, and for each reason alone, it is the position of the CRA that the Organization no longer meets the requirements necessary for charitable registration and should be revoked in the manner described in subsection 168(1) of the Act.”
Registered charities perform valuable work in our communities, and Canadians support this work in many ways. The CRA regulates these organizations through the Income Tax Act and is committed to ensuring that they operate in compliance with the law. When a registered charity is found not to comply with its legal obligations, the CRA may revoke its registration under the Income Tax Act. The CRA is committed to protecting Canadians from abusive tax shelter gifting schemes and audits every gifting tax shelter scheme brought to its attention. To date, not a single gifting tax shelter audited has been found to comply with the Income Tax Act. Registered charities participating in gifting tax shelter schemes risk losing their registration.
An organization that has had its registration as a charity revoked can no longer issue donation receipts for income tax purposes and is no longer a qualified donee under the Income Tax Act. The organization is no longer exempt from income tax, unless it qualifies as a non-profit organization, and it may be subject to a tax equal to the full value of its remaining assets.”