Partial Settlement Reached In Charity Scam Class Action
November 20, 2020
In early 2020, we wrote about a popular tax scam that operated for ten years from 2004 to 2014, in which people made cash payments directly to a charity in exchange for software licenses that were valued for a higher amount and then donated to another charity in exchange for a tax receipt. Our previous blog covered an unsuccessful appeal by one of the taxpayers involved. Just last month, the Ontario Superior Court approved a partial settlement agreement between the plaintiffs and the defendants in the case.
Too Good to be True
The tax scam was, in short, a way for people to make a charitable donation for a certain amount, and ultimately receive a tax receipt for a more sizable donation amount than the one they made. Taxpayers would initially make a donation to an organization called Global Learning Gift Initiative (GLGI). The taxpayers would then apply for and receive licenses to educational software with assigned market values of up to eight times higher than the amount they originally donated.
Taxpayers would then donate those licenses to a second charity called the Canadian Charities Association, which would then provide taxpayers with charitable receipts equal to the assigned value of the licenses. In turn, the taxpayers would then use those second receipts to deduct the higher amounts from their income taxes for the year. Over the time the scam was operating, nearly 40,000 taxpayers participated, paying nearly $300,000,000 in cash donations.
One of the taxpayers at the centre of the appeal donated $5,000 and received charitable receipts equal to $25,056. The Tax Court of Canada agreed with the CRA’s position that people who made such donations did so knowing that the scheme “defies common sense” and it would be “impossible not to conclude that the appellant intended to enrich himself by participating in the arrangement.”
Class-Action on Behalf of the Defrauded Taxpayers
A class-action lawsuit was filed against GLGI on behalf of the nearly 40,000 people to took part in the scam. The lawsuit, which was filed on June 26, 2019, alleged that GLGI knowingly led Canadian taxpayers to believe what they were doing was above board. In fact, the perpetrators of the scam ended up keeping 90% of the cash donations for themselves. Last month, the Financial Post reported that a settlement in the class-action lawsuit had been approved.
The settlement, which is associated with two of the defendants in the class action, will see $1,450,000 surrendered to the plaintiffs in the case, although they won’t actually see any of this money. Instead, those funds will be used to pay disbursements, pay a Class Proceedings Fund levy, and pay the counsel representing the Class against the remaining defendants. In addition, the defendants who settled have agreed to cooperate against those remaining defendants.
The CRA Continues to Pursue Funds
In the meantime, the CRA continues to try to collect up to $5.7 billion in refunds from 118,000 people it says should not have been issued refunds in the first place, based on the inflated donation receipts. However, one person involved says the CRA is not being fair.
A taxpayer told CTV News four years ago that he spoke to a CRA agent who told him that his donations, equaling $40,000, were “on the level.” As of 2016, the taxpayer said the CRA had ordered him to repay $100,000, which placed him in a difficult financial situation.
AT Feigenbaum Law, our team of lawyers, accountants, and financial planners has a rare combination of US and Canadian legal and accounting designations. We are in a unique position to help our clients on both sides of the U.S./Canadian border as they navigate cross-border complexities. However, we also work with clients without cross-border interests, particularly with issues related tax disputes with the CRA and tax litigation. We can be reached online or by phone at 1-877-275-4792.