THE CANADA REVENUE AGENCY (CRA) has escalated its long-running battle against tax-sheltered gifting strategies with a stern warning for taxpayers: the agency will place a hold on the tax returns of individuals that contain a claim from such a tax shelter.
Tax-sheltered gifting strategies typically are mass-marketed, complex structures that offer tax receipts of considerably higher value than the amount the taxpayer had paid.
The CRA notes that all such schemes are audited and, to date, not one has been found to comply with the Income Tax Act.
The CRA has denied more than $5.5 billion in donation claims and reassessed more than 167,000 taxpayers who have taken part in tax-sheltered gifting schemes. The CRA also has revoked the charitable status of 44 charitable organizations that have participated in these gifting tax shelter schemes. As well, the CRA has targeted those behind the heavily advertised schemes, assessing $63.5 million in third-party penalties against promoters and tax preparers since 2000.
“This is a major story – what the CRA is doing,” says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce’s private wealth-management division in Toronto, who has been following these schemes for the past decade. “In my opinion, it is a brilliant move.”
The question, Golombek says, is whether this CRA action will hold up to legal challenges from organizers of such tax shelters. He expects that at least one of the shelter organizers will challenge the CRA in court to determine whether the agency has the authority to withhold tax refunds of Canadians.
The message for taxpayers and their financial advisors should be clear, Golombek says: “Here is yet another reason to steer clients clear of these donation tax shelters, because the benefits that are uncertain are now potentially deferred indefinitely until the tax-shelter scheme is audited and approved by the CRA.”
So, a client participating in a gifting tax program all but guarantees a CRA audit.
The timing of the CRA’s latest effort to shut down such schemes was carefully chosen. The shelters are most heavily promoted in the final few months of each year, targeting taxpayers by promising tax savings for the coming filing season – as long as they buy in before Dec. 31.
Organizers of tax-sheltered gifting strategies promise participants tax relief far in excess of what they hand over in donations. A recent case from the Tax Court of Canada (TCC) “may be enough to send a chill down any potential tax-shelter investor’s spine,” writes Golombek on his website (www.jamiegolombek.com).
That case involved a leveraged charitable donation arrangement called the Berkshire Program, which promised donation receipts valued far higher than the cash outlays.
Under that program, 20% of the donations were funded by cash, with the rest being funded by a 25-year, non-interest-bearing loan provided to each participant by one of the promoters.
The participant in the TCC case learned of the Berkshire Program from her advisor and participated in 2000, 2001 and 2002. The taxpayer invested $17,000, $20,400 and $17,000 of her own money in those three years, respectively. She received donation receipts for $50,000, $60,000 and $50,000, respectively. Prior to 2000, the TCC judge noted, the taxpayer’s donation history over the previous 11 years ranged from a low of $201 to a high of $1,360.
The CRA initially reassessed this taxpayer’s claims, denying only the 80% portion of the donation funded by the loan. Subsequently, however, the CRA disallowed 100% of the donation tax credits. The TCC judge ultimately sided with the CRA.
The CRA urges taxpayers who are considering a tax-shelter arrangement to obtain independent, professional advice before signing any documents with a tax-avoidance agenda. The CRA stresses that independent advice must come from a tax professional who is not connected to the tax shelter or to the promoter.
“The whole idea of charitable giving,” says David Ablett, director of tax and estate planning with Investors Group Inc. in Winnipeg, “is that you voluntarily give something up to somebody else and the government in effect saying, ‘We are willing to provide some measure of tax relief [in return]’.”
When a client participates in a gifting tax shelter, which might promise $40 in tax savings for every $10 invested, Ablett adds, CRA auditors “don’t consider that to be charitable at all.”
What sets off alarm bells in Ottawa when it comes to tax returns, Ablett says, should be no mystery: “[The CRA has] said specifically that gifting tax shelters include schemes in which taxpayers receive a charitable donation receipt with a higher value than the amount they donated. So, that [type of tax credit] immediately is going to raise the red flag with the CRA.”
Ablett’s advice for financial advisors and their clients is to stay away from tax-sheltered gifting strategies and focus on proven strategies.
“Take advantage of all legitimate tax credits that are available,” Ablett says. “Use RRSP deductions and use things such as tax-free savings accounts to minimize future investment income.
“Also,” he adds, “look at more tax-advantaged types of investments, such as dividends, capital gains, and use things such as corporate-class funds to reduce the immediate tax liability.”IE
© 2012 Investment Executive. All rights reserved.