Widespread Scam Has Michael Hlinka arguing to Abolish the Charity Tax Credit

Widespread Scam Has Michael Hlinka arguing to Abolish the Charity Tax Credit

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“Christmas is a time for giving”, says Matt Galloway, host of the popular CBC morning show Metro Morning. Unfortunately, because donations made before December 31 can be used to reduce your income tax, “this is also the time when some Canadians try to take advantage of the system” he says. [CBC Metro Morning Show: Charity Claims with guest Michael Hlinka.]

CBC business columnist Michael Hlinka, Galloway’s guest on December 14 explains: the Canada Revenue Agency has uncovered widespread abuse of our tax system which gives Canadians a tax credit of 17% on the first $200 of charitable donation and 29% on anything above that in a calendar year. How are they abusing the system?

According to Hlinka, Canadians have been working with tax preparers, or what he calls “co-conspirators,” to fake donations and issue forged receipts. [CBC Metro Morning Show: Charity Claims with guest Michael Hlinka.]

Sumac Research looked into it, and the problem is real. In documents the CRA turned over to the Canadian Press, the CRA reveals how big the problem has become, citing the results from three successive investigations. The most shocking results were in 2008 when they “identified 66 tax preparers associated with 132,000 tax returns and false tax deductions with an estimated tax at risk of $216 million.” [Beeby, Dean. The Canadian Press. Probes of tax scams prompt revamp of charitable receipts. December 12, 2010. ]

What’s strange, however, is Hlinka’s proposed solution to the problem: To put an end to the tax credit for charitable donations all together. Ahem, come again? That’s right, Hlinka reasons that it’s not really needed anyway. He says “…people give money to the extent that they think it is going to be used well,” not for the tax credit. In fact, he says “you would be surprised at how little the impact would be” on charitable donations. [CBC Metro Morning Show: Charity Claims with guest Michael Hlinka.]

While one cannot argue that abolishing tax credits would solve the fraud problem, is this really the solution? There are good public policy reasons for governments to provide tax benefits to taxpayers donating to charities:

  • Tax benefit provide an additional incentive for taxpayers to give to charity.

  • Charities, by definition, must provide benefit to the public.

Doing away with tax credits for donations, therefore, would almost certainly have a negative impact on charities and society as a whole. So why does Hlinka assume that the impact on charitable donations would be minimal? Well, it seems it’s just based on his personal opinion. He says tax benefits do not influence his personal donation decisions, so he assumes everyone else is the same.

Fortunately, the CRA has other plans for putting a stop to this abuse. Because paper receipts are so easily faked and forged, agency officials are proposing “tougher rules requiring charities to electronically track and account for their receipts, to help the taxman flush out fraudsters.” [Beeby, Dean. The Canadian Press. Probes of tax scams prompt revamp of charitable receipts. December 12, 2010.] This sounds like more reasonable solution, and one that won’t put charities out too much.

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