Misdirection

I saw an ad in the paper for a seminar about finding the perfect investment for our times - with some very high profile speakers. So 'always looking for the better way', I went.

The seminar's guest speakers talked about how the handling of taxes in different investment types make a huge difference in their returns - absolutely true . The principal speaker (seller) pointed out how only investments that guarantee capital should be looked at.

He pointed out that he had picked the perfect investment, a Principal Protected Note, for which his assistants at the seminar were the exclusive agents. PPNs are interesting and have their strengths and weaknesses. See my posting on this blog for more information. But they are widely available.

Then came the actual message - the one that can separate the confused from their money. Turns out the seller used to hold seminars promoting a particular charitable donation program. In this program you donate a certain amount and end up with a charitable receipt or receipts totaling 3 to 6 times the actual donation - with the result of a tax refund which considerably exceeds the actual donation.

He pointed out that unlike the other programs that Canada Revenue Agency was challenging, HIS is NOW bullet proof because it uses CASH not loans. (I have since come to understand that CRA have started disallowing donations under the 2003-2005 versions of his program). He also pointed out that the CRA did not feel strongly enough about his program to challenge it in court.

This illustrates the art of misdirection. CRA does not challenge these programs by going to court. It simply sends the donor a letter saying that your donation reported on a previous years return is not allowable and instructs you to pay up. The DONOR could take CRA to court, if it wanted. If you don't you simply pay up or have their bill collectors turn you and your bank accounts and salary upside down until the money is paid. Why would CRA take the promoter to court, when the onus is on the donor?

The other element of misdirection is talking about CASH. The issue is not form of payment - but whether you made a free and clear donation. If you expect something back - it is not a gift. In the case of some schemes you use a loan with the understanding that you wont have to repay the loan. In this program, after you make a cash donation you apply to be the beneficiary of a consignment of medical supplies which you then donate back and get the receipt for the value of the medical supplies. Usually the amount is about 4 x the size of your original donation. PROBLEM is - from the CRA point of view (and any thinking adult) your original donation is part of a transaction buying the consignment of supplies.

To put it in perspective here are the numbers for a smaller donor.

• Contribute $10,000 to the foundation.
  
• Get a consignment on paper for $30,000. Donate the consignment.
  
• Get a receipt for $10,000 and $30,000.
  
• Use the receipts for tax returns and get refund of $17,000. Net profit $7,000.
  
• If reassessed then 2 to 4 years later pay back $17,000. Net cost $10,000.

The final piece of misdirection. The seller was claiming to sell PPNs, and only mentioned the Charitable donation program for NO APPARENT REASON. He did note that if you used the Charitable donation program then you COULD take the refund for the extra receipt and invest it in a PPN (which guarantees the Principal) just in case you are reassessed.

I would bet a coffee that when the prospective victim asks for info on the PPN then he/she will be strongly encouraged to make an even more profitable investment through the Charitable program.

There are good incentives to make donations. Alone a Charitable donation results in a reimbursement for your donation of 40% to 50% (after the first $200) depending on your province. You can also combine tax incentives to double up. For example you can buy 'Flow Through Shares' which give you a separate tax break (as a flow through credit) to encourage investment in Canada's resource industries. Then you can donate those shares to your favourite charity and get a charitable receipt (but only for the actual current value of your purchased shares) as well . This is legitimate and encouraged through recent changes to the tax act. And it goes directly to your charity - not a charity which you really know nothing about.

Where there are good incentives there are those who will use misdirection to lead you to the slaughter while they stand on the side and pocket your losses.