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Article posted on Philanthropy.com by Caroline Preston 14 February
A Canadian nonprofit accused by the country’s government of facilitating a tax shelter that allowed donors to receive inflated tax breaks for medicine donations has lost its charity status, the Canada Revenue Agency announced last week.
The move is the latest crackdown on tax arrangements involving exaggerated values of medicines. As The Chronicle reported last fall, Canada’s government has been scrutinizing charities that worked with U.S. and Dutch drug suppliers to buy cheap medicines and then issued tax receipts to individuals showing donated medicines worth much higher amounts.
The Internal Revenue Service has also been looking more closely at how charities value drugs. The focus in the United States is on nonprofits that may inflate the value of noncash donations in order to look bigger and more efficient, not on individual taxpayers who receive improper tax breaks.
The Canadian government says that the charity, Escarpment Biosphere Foundation, acted as a middleman in the tax shelter, which involved charities and companies in Canada, Europe, and the United States. The group reported on its financial statements that it had distributed medicines worth $300-million, thereby lending credibility to the tax shelter, the Canadian government said. But the Escarpment group never had possession of the pharmaceuticals, nor did it independently verify their values, the Canadian tax agency says in its correspondence with the organization. The Escarpment group worked with another Canadian charity that found aid groups to deliver the medicines abroad, the government said.
The Escarpment group received $100-million in cash as part of the arrangement, most of which went to companies and organizations promoting the tax shelter and to pay shipping and other costs, says the Canada Revenue Agency. Escarpment Biosphere Foundation kept $1-million in fees from its work, according to the Canadian government.
“We believe the organization agreed, for a fee of approximately $1-million, to lend legitimacy to the donation program by representing that it had received and distributed the properties in its own charitable programs,” the tax agency said.
It also says the Escarpment group changed its mission statement so it could participate in the tax shelter. The group was established to protect the Niagara Escarpment, a geological formation in North America.
“The organization’s original purposes, those for the protection and preservation of the environment, have been modified and sidetracked to promote a tax-shelter gifting arrangement,” the Canadian tax agency said.
In a statement on its Web site, the Escarpment Biosphere Foundation says it never violated tax law. But the group also says it can no longer afford to stay open, in part because it spent the last four years defending itself against the government’s claims.
The organization says it has shipped hundreds of tons of medicines since 2003 to 47 countries, sometimes under the guidance of the World Health Organization.
“These distributions of needed medicines saved over 90,000 lives and treated more than 90,000,000 people,” the group says.
The alleged tax-shelter arrangements have involved many companies and charities on multiple continents.
Medicines came from drug suppliers Amstelfarma and MedPharm, according to the Canada Revenue Agency documents. Other Canadian charities participating in the tax shelter included Canadian Physicians for Aid and Relief and Universal Aide Society, the government said.
The medicines were sometimes transferred to U.S. aid groups, including the Adventist Development and Relief Agency and International Relief & Development, which delivered the pharmaceuticals in their programs.
The Adventist group says it stopped receiving medicines from the Escarpment Biosphere Foundation in 2007.
Jim Lanning, who ran the Adventist group’s noncash donation program until 2007 and now works at International Relief & Development, says the medicines were offered to the humanitarian aid organizations by a middleman charity in the United States: Medical, Education, Training and Development, or Metad. Mr. Lanning says he was told the pharmaceuticals came from Amstelfarma and other drug suppliers and that he was not aware of the tax shelter.
In e-mails to The Chronicle last fall, Metad’s director, Barbara Johnson, defended the work of the Universal Aide Society and other groups and said her organization had done nothing wrong.
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