Dealing with Fraudulent Donations
There is a great deal of information available for individuals on how to avoid donating to a fraudulent or otherwise problematic charity. But the donor-donee relationship goes two ways: what happens when a charity receives a donation that turns out to be fraudulent in some way?
You may have heard of some high-profile examples of fraudulent donations, usually in connection with donations made by people involved in large scale investment fraud. In these situations, the donee often chooses to return the donation in the interests of protecting its reputation.
But facing a national public relations nightmare is one thing – more pedestrian situations are quite different, and much likelier to occur. As the Shinerama campaign at the University of PEI unfortunately discovered recently, fraudulent donations are frequently made using stolen credit cards as a way of testing that the cards are active.
So what is an organization to do when it discovers itself to be the victim of fraud? In some circumstances, keeping the fraudulent donation will not necessarily present a threat to a charity’s reputation. A charity must then evaluate its legal obligations when deciding what to do with the gift.
Returning a donation is not simply a matter of giving the gifted property back to the donor. The process is rather tightly controlled by forces external to the charity; there are few instances in which a charity can simply choose to return a gift, and some in which it has no choice but to do so.
Returning A Gift. Or Trying To
Because registered charities are not allowed to transfer property to anyone besides a qualified donee (as defined in the Income Tax Act), the CRA generally does not allow them to return donated property. If the return is for moral reasons, for example to protect a reputation, the charity will in most cases need to seek permission from the Attorney General of Canada or the courts.
In Ontario, the Attorney General is represented by the Ontario Public Guardian and Trustee. That province’s Charities Accounting Act allows charities to seek the OPGT’s consent to a draft order – a considerably cheaper alternative to petitioning the court directly, though there is no guarantee that the OPGT will indeed give its consent.
Even if a registered charity or other qualified donee finds a clear path to returning a donation, it should be aware that the CRA oversees the process. If the donated property has a fair market value of more than $50 and the donee had originally issued a charitable receipt for it, the donee must file an information return within 90 days of returning the property. This gives the CRA the opportunity to reassess any tax advantages to both the donor and the donee that may have arisen from the original donation.
Keeping A Gift. Or Trying To
On the flip side, there are various legal situations in which the donee may be compelled to return donated property. Under federal criminal law, a charity may be required to return property that is deemed to be the proceeds of crime. Similar circumstances may arise under various provincial laws. Criminally speaking, a conviction or discharge is necessary in order to force the return of a fraudulent gift. Such an outcome is obviously not guaranteed. When choosing to keep a gift that you may be compelled to return, make sure you are not relying too heavily on your continued ownership of that property.
However, there is a more pressing danger to keeping a questionable gift than an unexpected adjustment to the charity’s bottom line. Charities may find themselves facing legal action by the victims of the original fraud under principles of common law. Using the law of trusts, the rightful owner of the fraudulently donated property may attempt to not only recover their lost property but also make a claim against anyone to whom they can trace the property, including the charity.
The law in this area is complicated by the interaction of common law with the differing statutory laws of the various provinces. For example, certain provinces have passed legislation that specifically precludes certain common law rules relating to trusts. The full range of legal possibilities is beyond the scope of this article, but it is important to recognize that risks may exist. If you have received a donation that you suspect or discover is the result of fraudulent activity, you should consult a knowledgeable lawyer regarding your options and obligations in that particular jurisdiction.