Warning: Watch out for tax shelter gifting schemes
May 5, 2021
Canada Revenue Agency
The Canada Revenue Agency (CRA) is warning Canadians about getting involved in tax shelter gifting arrangement schemes. Promoters, including some representatives, tax preparers and investment professionals, are encouraging their clients to participate in gifting schemes to reduce the amount of income tax they owe and in some cases profit from the returns.
What are tax schemes?
Tax schemes are plans and arrangements that try to recruit participants by promising to reduce the tax they owe, for example, through large deductions or promises of tax-free income. Schemes can include other creative ways to convince people they could pay less tax.
What are tax shelter gifting arrangements?
In a tax shelter gifting arrangement, the taxpayer is presented with a strategy where the tax benefits and deductions they can claim from their donation will equal or be more than their first donation. This could take the form of an inflated donation receipt or in some more sophisticated arrangements involve a number of transactions.
All tax shelter promoters must get an identification number from the CRA for their tax shelter. The tax shelter number is for administrative purposes only. There are tax shelters that offer legal ways to reduce taxes or increase tax credits. However, it is important to know that a CRA tax shelter identification number does not guarantee that a tax shelter is legitimate or that the donor is entitled to receive the tax benefits promised by the promoter.
What could a gifting arrangement look like?
Gifting arrangements are sometimes marketed as profitable gifting. The taxpayer makes a donation to a Canadian registered charity by taking out a loan from a third party, arranged by the tax shelter promoter.
The promoter may offer the taxpayer an unconventional way to pay back the loan. Repayment could be through equivalent products. The loan repayment strategy might be how the promoter is offering to deliver a large income tax credit to the taxpayer, in some cases saying they can almost double their first donation.
The first donation may include a prepaid interest payment on the loan, an additional small cash donation to the charity, and other fees. The taxpayer could receive donation receipts for the total amount of the loan and cash donation.
CRA audits on tax shelter gifting arrangements
The CRA is keenly aware of, and routinely audits, gifting arrangements and tax shelters. If the CRA finds that the amount on a donation receipt is not legitimate, it cannot allow the taxpayer’s claim for that amount on their income tax and benefit return.
As a result of these audits, the CRA has generally reduced the donation amounts from gifting arrangements to the cash donation made by the taxpayer, if legitimate. Often the CRA finds that even that amount was not a true gift and reduces the donation claim to zero.
Your actions may have serious consequences
Through increased audits of promoters, improved intelligence gathering and strengthened communication with taxpayers, the CRA continues to identify and shut down illegitimate tax shelters and tax schemes. Those who choose to participate in these schemes, as well as those who promote these schemes, face serious consequences, including penalties, court fines and possibly even jail time.
What can you do?
The CRA encourages all Canadians to seek an independent second opinion from a reputable tax professional on important tax matters.
If you suspect tax evasion, you can report it online at canada.ca/taxes-leads or by calling the National Leads Centre at 1-866-809-6841. The CRA will take steps to protect your identity, and you may also provide information anonymously.
The CRA encourages taxpayers to come forward and correct their tax affairs through the Voluntary Disclosures Program. For more information, go to canada.ca/taxes-voluntary-disclosures.
For more information on tax schemes, go to canada.ca/tax-schemes.
Canada Revenue Agency
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