Canada: Donating May Hurt

To date, the Canada Revenue Agency (CRA) has denied more than $5.5 billion in donation claims and reassessed over 167,000 taxpayers who participated in gifting tax shelter schemes. 44 charitable organizations were found guilty and each one had their charitable status revoked.

Effective January 1, 2012, the CRA will not assess returns for individuals suspected of being involved in tax shelter schemes. Attempting to discourage participation in such arrangements, and to avoid the issuance of invalid refunds, the CRA will not proceed with assessments and refunds until they complete an audit on the tax shelter, which may take up to two years. Taxpayers wishing to relinquish their gifting tax shelter receipt claim will have their withheld returns assessed.

Since 1998, the CRA has issued several warnings against tax shelter fraud. By way of news releases and alerts, the CRA has cautioned taxpayers to refrain from non-compliant financial and business practices that could result in losing principal investments, the repayment of taxes owed, and penalties and interest. Depending on the extent of the infringement, it might also lead to fines and imprisonment.

To protect yourself, you should know how the CRA defines "gifting tax shelter schemes." These schemes promise tax shelter relief through a gifting arrangement where you get a donation receipt that is typically four or five times the amount you donated. "Tax shelter" includes any property that a promoter (who is responsible for actively locating funding for a specific arrangement) represents to an investor who may claim tax deductions or receive tax benefits which equal or exceed the amount invested within four years of its purchase.

We often see gifting tax shelter schemes in what we refer to as "buy-low, donate-high" charitable donation arrangements. Consider a situation where a promoter presents a plan whereby you buy property at a bargain price. The promoter then arranges for the property to be appraised at a value far greater than what you paid for it. The issued tax receipt will be based on the appraised value. This produces a tax credit greater than the cost of the property and the tax associated with the gains you would trigger by donating the property.

The CRA can deny all tax deductions or credits claimed by taxpayers who the Agency determines are participating in charitable tax shelter arrangements that are non-compliant with Canadian tax laws. In addition, the CRA can charge unregistered tax shelters with interest and penalties of up to 50% of the taxes payable.

Precautionary Measures

If you are considering entering into one of these arrangements, you should take the following precautions:

• Be wary of advertised arrangements that promise substantial tax savings to taxpayers from pre-selected charities from tax receipts that are much higher than the amount paid;
• Inquire about the nature of the promoter's compensation with respect to the charitable arrangement;
• Review the promoter's track record to determine if products previously sold have been audited or are presently under audit;
• Ensure the appraisers are qualified and acting independently of the promoters;
• Review the appraisal report;
• Ensure the charities are registered with the CRA and acting independently of the promoters;
• Review the professional opinion explaining the income tax consequences of the donation arrangement;
• Ensure the arrangement has a tax shelter number; however, note that the tax shelter number offers no guarantee that taxpayers will receive the proposed tax benefits;
• Determine if advanced income tax rulings were obtained; and
• Obtain competent and independent advice from your professional tax advisor.

Conclusion

All gifting tax shelter schemes are now audited by the CRA; and of all the schemes, none have been found to be compliant with Canadian tax laws. If you are considering entering into a tax shelter arrangement, we strongly recommend that you obtain independent, professional advice from your tax advisor before signing any documents or writing any cheques, because, as the old adage goes, "if it seems too good to be true, it probably is" continues to hold true.

Jamie Herman

Jamie Herman is a tax specialist who works in all aspects of the firm's tax practice, including domestic and international tax.