The CRA recently revoked the charitable registration of the Skyway Foundation of Canada ("Skyway"), a charity based in Bolton, Ontario, for issuing receipts in 2008 totalling approximately $2.6 million for donations that did not legally qualify as charitable gifts. The receipts issued by Skyway were determined to be part of a tax shelter arrangement whereby taxpayers engaged in transactions which artificially inflated the value of certain publicly-traded shares. These shares were then donated to Skyway and the receipts issued reflected their inflated value. The CRA determined that the value of the shares had been inflated when it discovered that the same shares inexplicably plummeted in value the next year. Based on this, the CRA took the position that "the charity operated for the non-charitable purpose of facilitating the tax planning arrangement".
The revocation of Skyway comes on the heels of a notice (the "Notice") published by the CRA earlier this month explaining tax shelters generally. As we have previously reported, the CRA is very aggressive in auditing tax shelters, and courts have nearly always upheld reassessments of donors to these arrangements. As pointed out in the Notice, the CRA is committed to continuing its audit of tax shelters and also "mass-marketed tax shelters", as defined in the Notice.
At a high level, the Notice explains the relevance of tax shelter identification numbers and points out that simply because a tax shelter has been issued an identification number does not mean that a taxpayer is entitled to claim a credit or deduction in respect of that particular shelter. Tax shelter identification numbers simply allow the CRA to track the schemes and their participants.
The Notice goes on to explain that the presence of a charity's registration number on the receipt issued for a donation does not automatically validate the gift. If the donation is ultimately determined not to be a "gift" or the amount has been inflated from the actual value of the property donated, then the receipt will not be allowed and the donor will not be able to claim the tax benefit. Furthermore, if the donation is determined to be part of an abusive tax shelter arrangement, the taxpayer's income tax return will be subject to reassessment by the CRA.
In addition to highlighting three significant Federal Court of Appeal cases which rendered judgements against tax shelter participants, the Notice also recommends the following four steps that taxpayer should take before entering into tax shelter arrangements:
- Know who you are dealing with, and request the prospectus or offering memorandum and any other documents available in respect of the investment and carefully read them;
- Pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment. Often, these opinions will tell the investor about the problems that can be expected and suggest that the investor obtain independent legal advice;
- Do not rely on verbal assurances from the promoter or others-get them in writing; and
- Ask the promoter for a copy of any advance income tax ruling provided by CRA in respect of the investment. Read the ruling given and any exceptions in it.
This Notice is evidence that taxpayers and charities should continue to proceed with extreme caution in respect of tax shelters.
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.