The Canada Revenue Agency continues to crack-down on gifting tax shelter schemes

On Tuesday, October 30^th, 2012 the Canada Revenue Agency (‘CRA') announced new measures intended to protect Canadians from tax shelter gifting schemes.  These measures are to be effective beginning with the 2012 tax year.

As we approach the end of the year, we can expect to see increased marketing from tax shelter promoters who typically promise Canadians tax benefits that will far outweigh the cost. In many instances promoters offer a tax receipt for an amount greater than the actual donation or payment.  In most, if not all cases, these schemes are considered abusive and the CRA is advising that you adhere to the old adage, ‘If it sounds too good to be true, then it probably is', warning that the donation receipt you receive may not be valid.

According to the CRA, they have denied more than $5.5 billion in donation claims and reassessed over 167,000 taxpayers to date. The CRA has also noted that audits of these tax shelter schemes, their promoters and tax preparers have resulted in the revocation of the charitable status of 44 organizations and in the levying of more than $63.5 million in penalties. In recent years the CRA has worked hard to target and shut down these tax shelter schemes but it still estimates that participation in these arrangements is costing the federal government about $85 million annually.

To that end the CRA has announced that it will put on hold the assessment of an individual's tax return where a credit is being claimed which was derived from participation in a gifting tax shelter scheme. The announcement comes as a follow up to Budget 2012 which introduced changes to encourage tax shelter promoters to meet their reporting requirements, thereby further allowing the CRA visibility into their activities. Beginning in 2012, individuals who participate in these shelter arrangements and claim a credit on their tax return will not be issued refunds or assessments until the CRA completes an audit of the tax shelter to which the individual contributed. These audits may take up to two years to complete and thus far, the CRA has not found any of the gifting tax shelter schemes under audit to be in compliance with Canadian tax law. The CRA notes that an individual whose return is on hold will be able to obtain an assessment if they remove the claim for the gifting tax shelter receipt under review. The new measures are designed to discourage taxpayers from participating in abusive tax shelter arrangements and prevent the issuance of invalid refunds.

We urge individuals considering entering into such arrangements to obtain independent advice from their Collins Barrow tax advisor.

Stephen Rupnarain, CA is a Tax Manager in the Toronto office of Collins Barrow.