Donating Safely: A Tax Litigator’s View on Charitable Giving Pitfalls

As advisors, we are often asked to give advice on charitable giving. The only thing clients enjoy more than having the chance to give back and help others is receiving a tax benefit while doing so. Too often, clients think that receiving a tax benefit for a donation is guaranteed because they have a receipt. A donation receipt is not a blank cheque; it is the beginning of a conversation with the CRA, and there are many ways for that conversation to go wrong.

As a former counsel for the Department of Justice litigating on behalf of the CRA—and now as a tax dispute litigator defending against the CRA—I have seen these fights from both vantage points. This article covers some of the primary pitfalls associated with charitable donations.

Invalid Gifts: When is a Gift not a True Gift? (The Redeemer Problem)

A foundational principle of a "gift" for tax purposes is that a true gift is one in which the person giving receives no benefit in return. If the donor or their family receives a direct benefit, it is not a gift; it is a quid pro quo, and the donation itself is invalid. For a transfer to qualify as a "gift" eligible for a tax credit, it must satisfy several key common law tests recognized by the courts and the CRA. The transfer must be:

1. A voluntary transfer of property.
2. An actual transfer, meaning the property is truly delivered to the charity.
3. Made with donative intent, meaning the donor genuinely intends to give the property away with no expectation of benefit in return.
4. An impoverishment of the donor and an enrichment of the donee (the charity).
5. A complete transfer with no retention of control; the donor must give up authority over the property.

If a donation fails any of these tests, it is not a gift, and the tax credit can be denied.

The classic example is the Redeemer Foundation case. The Foundation, affiliated with a private college, ran a "forgivable loan program." Parents would "donate" funds and receive a charitable tax receipt for the full amount. A substantial portion of that "donation" was provided back as a scholarship cover their own child's tuition.

The CRA investigated, arguing these were not gifts but tuition payments in disguise. The ensuing legal battle reached the Supreme Court of Canada, which affirmed the CRA's broad audit powers, noting the "reciprocal nature" of the tax relationship between charities and donors. This scheme failed as there was no "donative intent" (families expected their child's tuition would be covered). This was a clear victory for the CRA, empowering it to unravel the scheme and reassess the participating parents, denying their donation credits and charging interest.

Inflated Valuations: What Happens When the Tax Benefit is Worth More Than the Donation? (The Klotz Problem)

In the late 1990s and early 2000s, "art flip" tax shelters became a major headache for the CRA. Promoters pitched these schemes to investors: buy a portfolio of art prints for a low price (e.g., $300 per print) and, after a short hold, donate them to a charity or museum for a much higher appraised value (e.g., $1,000 per print), claiming a tax credit on the inflated amount.

The CRA reassessed thousands of taxpayers caught in these schemes, leading to a series of landmark cases, most notably Klotz v. Canada. The taxpayers argued the "fair market value" (FMV) was the retail price an individual might pay in a gallery. The CRA argued the FMV was, at best, what the donors themselves had just paid for the art in an open market transaction.

In Klotz, Tax Court Chief Justice Donald Bowman delivered a famous and scathing rebuke, writing that the transaction was "devoid of common sense and out of touch with ordinary commercial reality." He ruled that the best evidence of the art's value was the price the donor paid. The Federal Court of Appeal agreed, and the Supreme Court declined to hear a further appeal.

The fallout from this "gifting arrangement crisis" was immense. The CRA denied billions in claimed donations, leaving participants with massive tax bills. In direct response to these schemes, Parliament amended the Income Tax Act in 2003 to clamp down on all "buy-low, donate-high" arrangements, deeming the FMV to be the donor's cost if the property was acquired within three years of donation (or 10 years if part of a tax shelter).

The Klotz case cemented a simple rule: if a deal sounds too good to be true, it is. The CRA and the courts will look past a "promoter's appraisal" to the "economic reality" of the transaction. An advisor’s duty is to flag any scheme offering a tax credit far above the client’s actual cash cost—a guaranteed reassessment.

Charity Non-Compliance: What Happens When the Charity Itself is the Problem? (The Revocation Problem)

A donor can do everything right—have pure donative intent and a perfectly valid appraisal—and still have their donation denied. This happens when the charity itself is the problem. The most severe risk for donors is that the CRA, after an audit, revokes the organization's charitable status entirely. A revocation is a charity’s death sentence: it means the organization can no longer issue any charitable donation receipts, rendering all subsequent gifts ineligible for a tax credit.

Charity non-compliance is a critical risk in the post-October 7th climate for clients supporting causes in Israel.

CRA guidance states that while it is charitable to enhance the effectiveness of Canada's armed forces, "it is not charitable to support the armed forces of another country." Under the current government, this rule is being enforced without hesitation, putting any donation that could be construed as supporting the IDF—directly or indirectly—at risk of revocation by the CRA.

In 2024, the CRA revoked the charitable status of the Jewish National Fund of Canada (JNF). While the JNF is contesting this in court, the CRA's publicly stated concerns include findings that the JNF's activities were "inconsistent with Canadian laws governing charitable activity." This was based on evidence that the charity used donations to build infrastructure for the IDF.

It is important to consider the “direction and control” test. A registered Canadian charity cannot simply act as a "conduit" to funnel money to a foreign organization. To be compliant, the Canadian charity must be the one carrying out its "own activities." This means the Canadian charity must, as part of its own books and records, demonstrate that it:

1. Makes all the key decisions about the activity.
2. Provides clear, detailed directions to its foreign intermediary.
3. Receives regular, detailed reports on the activities and use of funds.
4. Can demonstrate meaningful and ongoing oversight.

In the JNF case, the CRA cited a lack of direction and control as a key failure. For advisors, this is a major red flag: if a charity's T3010 shows it is just passing money to a single foreign entity without clear evidence of its own activities, it is at high risk of facing revocation by the CRA.

Advisor Due Diligence: A Practical Checklist for What to do Before a Client Donates (The Kueviakoe Problem)

As advisors, we must be diligent. The case of Kueviakoe v. Canada provides the final, chilling answer to "who is responsible?" In that case, a donor's credit was denied simply because the charity's receipt was deficient—it was missing mandatory information. The donor argued the charity was at fault, but the Federal Court of Appeal rejected this, stating:

"A donor who wishes to claim a tax credit for a charitable donation must be responsible for ensuring that he meets all of the requirements for making such a claim, even if he must rely on documents obtained from a third party."

The burden rests on the donor—and by extension, on us as their advisors—to get it right. Here is a systematic procedure to follow before a client donates.

Step 1: Verify charitable registration status by accessing the CRA Charities Listing. Verify that the charity is registered and confirm the key details, such as the nine-digit BN registration number (ending in RR0001).

Step 2: For significant donations, go beyond the registration and review the T3010. Check for sanctions and review the financials (Schedule 6) and analyze "Gifts to Other Donees" (lines 5010-5040). You should also examine non-cash gifts (Schedule 5) and check foreign activities (Schedule 2).

Step 3: Identify gifting tax shelter warning signs. Spotting the "too good to be true" schemes is a critical duty. Look for red flags such as inflated receipt value, existence of a tax shelter number, complex financing, and third-party promoters. If you see these signs, you must warn your client.

Step 4: Document your advice by maintaining detailed notes and providing written advice. For any complex arrangement, advise the client to get an opinion from a qualified tax lawyer not connected to the promoter.

Step 5: Reconfirm the charity’s registered status one last time before the client’s tax return is filed.

Advisor Liability: A Final Warning About Your Own Professional Risk in Giving this Advice (The Guindon Problem)

Beyond protecting clients, advisors must be aware of their own liability. Recognizing that taxpayers were not the only ones at fault in these rampant schemes, Parliament introduced third-party civil penalties in 2000. Section 163.2 of the Income Tax Act was designed to deter advisors, planners, and preparers from promoting or facilitating abusive arrangements. The penalties are severe: they can equal the greater of $1,000 and the total of the advisor's gross fees plus 50% of the tax benefit the client could have obtained.

What does "promoting or facilitating" mean for an advisor? This is the critical question. The penalty isn't just for the masterminds. Section 163.2 applies to any person who "makes or furnishes, participates in the making of...a statement" that they know (or would know, but for "culpable conduct") is a false statement. In the context of a donation scheme, a "false statement" could be:

• An opinion letter blessing the scheme's valuation.
• A verbal assurance to a client that the scheme is "CRA-approved."
• Preparing the T1 return that claims the inflated credit, thereby "participating" in the use of the false statement.

The real danger for advisors is the "culpable conduct" standard. This is a legal term for gross negligence, or "willful blindness." The CRA does not have to prove you knew it was a fraud. They only need to prove you should have known and were grossly negligent in your failure to find out.

This is exactly what happened in the Guindon case. The advisor provided a legal opinion for a scheme without doing her own due diligence. She "participated" by issuing a statement, and her failure to review the underlying documents was deemed "culpable conduct." The Supreme Court ultimately upheld her penalty, confirming that the CRA’s evidentiary bar is low.

For an advisor, "facilitating" can be as simple as failing to perform the due diligence, relying on a promoter's marketing materials, and passing that "advice" on to a client.

Conclusion

Integrating charitable giving into a client's financial plan is a worthy goal, and the tax credit is a powerful incentive. But that benefit is far from guaranteed. As advisors, our primary goal is to protect our clients. This requires more than just looking for charitable receipts; it requires active diligence. By following the practical framework outlined in this article, we safeguard our clients from reassessment and ourselves from liability. This is how we ensure our clients' good intentions are rewarded, not penalized, all while keeping their donation claims off a CRA auditor's desk...and out of my office.

About the Author

Brandon Siegal is the founder of Siegal Tax Law—a boutique tax dispute resolution firm that embraces using technology to reach collaborative, pragmatic, and cost-effective solutions to tax disputes. Before founding the firm, Brandon was a member of the tax group at McCarthy Tetrault LLP, where he focused on tax disputes and transfer pricing, representing many of Canada’s best-known corporate brands. Prior to that, Brandon was counsel at the Department of Justice representing the Canada Revenue Agency on hundreds of matters, including high-profile international issues and large projects. He has won more than 50 cases before the Tax Court, the Federal Court of Appeal, the Ontario Court of Appeal, the Federal Court, and the Ontario Superior Court of Justice. Brandon started his career clerking for the judges of the Tax Court of Canada. When not resolving tax disputes, Brandon freelances as a red carpet reporter for US Weekly—an international celebrity news magazine.