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.
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
Ensure the appraisers are qualified and acting independently of
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;
Obtain competent and independent advice from your professional
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 is a tax specialist who works in all aspects of the
firm's tax practice, including domestic and international
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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