Tax shelters and why you should avoid them - Segment 4
Welcome to segment 4 called "Tax shelters and why you should avoid them", part of the "How to donate wisely - Information for donors" recorded webinar.
Tax shelters and why you should avoid them
What is a tax shelter?
Under the Income Tax Act, a tax shelter can be a gifting arrangement or the acquisition of property, where a promoter says that the tax benefits and deductions arising from the arrangement or acquisition will be the same as or more than the net costs of entering into the arrangement or acquiring the property.
Also, a gifting arrangement where the donor incurs a limited recourse debt for the gift will be a tax shelter. Generally, a limited recourse debt is one where the borrower is not at risk for repaying it.
Every promoter of a tax shelter has to include the following statement on every written statement that refers to the identification number of the tax shelter:
"The tax shelter number issued for this tax shelter shall be included in any income tax return filed by the investor. Issuance of the identification number is for administrative purposes only and does not in any way confirm the entitlement of an investor to claim any tax benefits associated with the tax shelter."
The identification number allows the CRA to track these arrangements and the taxpayers who participate in them. The CRA reviews all tax shelters and, if they are considered potentially abusive, audits the taxpayer.
Promoters that include false or misleading information in their application for a tax shelter number, or that sell, issue, or accept consideration for a tax shelter before an identification number has been issued, may have to pay a penalty. While this penalty or any related interest is outstanding, no participant in the tax shelter can claim the tax benefits associated with the tax shelter.
In addition, the promoter has to give the CRA a list of investors or participants, including their names, social insurance numbers, and other required information.
Generally, there are three types of tax shelter schemes involving charities:
- Buy low, donate high
- Gifting trust arrangements
- Leveraged cash donations
In all three cases the donor spends only $300 but receives a receipt for $1,000.
Gifting trust arrangements are the most highly promoted scheme.
Under this type of scheme, the promoter provides the valuations or appraisals to the investor or the receipting charity or both and there are usually restrictions on the receipting charity's ability and entitlement to use the property received from an investor. For example, marketed schemes have restricted participating charities in where and how they can distribute property or with whom they can invest their leveraged donations.
CRA approach to tax shelters
The CRA has serious concerns about registered charities becoming involved in tax shelter gifting arrangements.
There are several taxpayer alerts and fact sheets posted on the CRA website. The CRA reviews all mass-marketed gifting tax shelters to make sure the tax benefits being claimed meet the requirements of the Income Tax Act.
The CRA intends to challenge and proceed with compliance action against any arrangement that does not comply with the Income Tax Act.
The CRA continually audits tax shelter gifting arrangements.
Implications of tax shelters
The CRA has to date denied more than $5.9 billion in donation claims and reassessed over 182,000 taxpayers who participated in gifting tax shelter schemes.
In addition, the CRA has revoked the charitable status of 47 charities that participated in gifting tax shelter schemes.
Since June 2000, the CRA has also assessed $137 million in third-party penalties against promoters and tax preparers.
Starting with the 2012 tax year, the CRA will postpone assessing individual returns for taxpayers claiming a credit because they participated in a gifting tax shelter scheme. This will avoid issuing invalid refunds and discourage participation in these abusive schemes. Assessments will not be done and refunds will not be sent until the audit of the tax shelter is finished, which may take up to two years. Additionally, for 2013 and later years, the amounts denied, in whole or in part, in relation to a tax credit for donations made under a gifting tax shelter for which the taxpayer has filed an objection to this decision or appealed to the Tax Court of Canada, the CRA can collect 50% of the amount in dispute or withhold 50% of the refund of the amount in dispute.
Potential indicators of abusive tax planning schemes
The following may indicate an abusive tax shelter gifting arrangement:
- The participant's tax savings are greater than the out-of-pocket cost.
- A gift-in-kind appraisal or valuation is grossly overstated.
- A direction is attached to the donation, for example the charity has to invest or use the proceeds for a prearranged purpose (investment or property).
- And if it seems too good to be true, it probably is.
Anyone considering entering into a tax shelter arrangement should get independent professional advice from a tax advisor before signing any documents. In addition, they should:
- know whom they are dealing with and ask for the prospectus or offering memorandum and any other documents available that deal with the investment and carefully read them;
- they should also pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment, because these opinions will often tell the investor about the problems that can be expected and suggest that the investor get independent legal advice;
- they should also not rely on verbal assurances from the promoter or others; they should get them in writing; and lastly
- you should ask the promoter for a copy of any advance income tax ruling from the CRA for the investment, and then read the ruling and note any exceptions in it.
Protecting yourself from fraud
Learn and confirm and take action in order to donate wisely:
- Confirm that a charity that claims to be registered with the CRA is, in fact, registered.
- Consult the List of Charities at www.cra.gc.ca/donors or call our Client Service Section at 1-800-267-2384.
- Confirm with the charity that you will receive an official donation receipt if you want to claim a tax credit. Tax receipts must meet specific requirements. For more information, go to www.cra.gc.ca/donors
- Be informed and ask the charity what activities your donations will support.
- Make sure you know to whom you are donating. Some fraudulent organizations use names that are similar to well-known and respected charities.
- Beware of schemes that promise you tax savings greater than your cost, thus allowing you to "profit" from donating to a registered charity. For complete details, see the donor alert section of www.cra.gc.ca/donors.
- Ask yourself: Am I satisfied that my donation will support the work of a legitimate charity? You may want to research the charity before donating.
- Write cheques payable to the charity, not an individual, or make sure that your online payments are secure.
- Refuse to donate if there are signs of fraud, such as inappropriate pressure to give immediately or being offered a receipt for more than you actually donate.
- Report fraud to PhoneBusters, the Canadian Anti-Fraud Call Centre (CAFC), at 1-888-495-8501. The CAFC plays a crucial role in educating the public about specific mass marketing fraud pitches and in collecting and disseminating victim evidence, statistics and documentation, all of which are made available to law enforcement agencies.
Subscribe to the "Charities and Giving - What's New" electronic mailing list.
Add the "Charities and Giving - What's New" RSS feed to your feed reader.
As previously mentioned, the CRA posts alerts about abusive income tax schemes: subscribing to our mailing list or adding us to your feed reader are two ways to help you avoid such trouble.
CRA also has a twitter account.
If you still need information after consulting our website, call our toll-free telephone service weekdays (except statutory holidays) from 8 a.m. to 9 p.m. Eastern Time.
Thank you and we hope you enjoyed this recorded webinar. If you would like more information on this topic, please contact our Client Service at 1-800-267-2384.
If you haven't already signed up for the Electronic mailing list, we invite you to register on the Charities and giving website. Once registered, you will receive emails as new information and updates, affecting registered charities, become available. The Electronic mailing list is also one of the communication channels we use to let you know when the next Charities Webinar will take place.
Report a problem or mistake on this page
- Date modified: