This CRA Presentation on Registered Charities Compliance discusses CRA’s focus on abusive tax shelters and other inappropriate uses of registered charities and how CRA is going to focus on inappropriate use of foundations while working with other parts of CRA such as the High Net Worth Compliance Directorate.

Some points that CRA notes in this presentation:

  • The number of private foundations is growing while the other designations remain fairly static
  • The charities objection process is slightly different from the tax objection process in that objections skip the Tax Court and go straight to the Federal Court of Appeal (with the exception of objections to penalties, which then do go to Tax Court)
  • In the late 1990’s, there was a significant increase in tax shelter identification numbers for gifting tax shelters
  • Three main schemes were identified:
    • Buy low, donate high
    • Gifting trusts
    • Leveraged cash donations
  • The CRA was committed to preserving the integrity of Canada’s tax system, including protecting Canadians from abusive tax shelter gifting schemes, which included schemes where taxpayers received a charitable donation receipt with a much higher value than what they paid
  • Most gifting tax shelter schemes were created for the primary purpose of avoiding the payment of required taxes rather than raising funds for charities
  • The CRA continuously warned Canadians about non-compliant tax arrangements
  • As a result of its multi-year, multi-pronged effort in deterring this form of noncompliance, the CRA has effectively eliminated mass marketed gifting tax shelters
  • The CRA continues to use a risk-based approach to compliance to combat serious cases of non-compliance. In addition, the CRA educates taxpayers about the consequences of participating in abusive tax schemes, and works with the Department of Finance to close tax loopholes through legislative amendments
  • Assessed nearly $200 million in third party penalties against promoters and tax preparers who advised on participation in these schemes
  • Referrals made to criminal investigations
  • No tax shelter identification numbers have been issued for gifting tax shelters since 2014 – schemes effectively eliminated
  • Based on the Agency’s results, this strategy is working
  • Higher growth rate of private foundations when compared to growth rate of other registered charities
  • High incidence of private foundations observed in high net worth population
  • Strategic partnership between Charities Directorate and High Net Worth Compliance Directorate
  • T3 Task Force Committee; Stratify trust population to better assess risk; Efforts to increase audits in trusts, including foundations; Foundations are tax exempt and can issue receipts for tax purposes. Greater scrutiny
    will be placed on these entities; Strategic partnerships between Charities and Offshore to explore and address compliance concerns
  • Visions and Objectives of the T3 Task Force Committee: The vision of this strategy is to ensure that the CRA is well-positioned in the administration of the income tax legislation surrounding T3 trusts. With the
    implementation of this strategy, the CRA should be able to:
    • Effectively segment the trust population and develop risk-typologies
    • Capture accurate and complete T3 trust and beneficiary data
    • Reduce the administrative burden for low-risk T3 trusts
    • Accurately trace income allocated from a trust to the ultimate beneficiary
    • Effectively risk-assess the T3 trust population and allocate resources accordingly
    • Provide better service and effectively address the highest-risk taxpayers with a well-trained, technically competent workforce
    • Rely on a cross-branch corporate governance structure to coordinate and guide the administration of T3 trusts
    • Regularly engage key external stakeholders to play an active role in CRA’s administration of T3 trusts
  • The Committee followed these principles:
    • Reduce the administrative burden for low-risk taxpayers
    • Enhance targeted compliance of high-risk taxpayers
    • Make it easier for all taxpayers to comply
  • For the T3 Task Force Committee, a report will come out and be presented to the AC and all DG’s soon
  • One of the recommendations of the committee is to stratify the trust population based on their nature to better assess risks and to re-design the instructions customized for each category. For example, testamentary trusts represent a much lower risk than mutual funds trusts. 16(1 )(c)
  • Most foundations can issue charitable donation receipts, for tax purposes. This can lead the erosion of the Canadian tax base to different schemes that would take advantage of a foundation’s ability to issue tax receipts. Offshore and Charities are collaborating to ensure that compliance concerns surrounding foundations are explored and addressed
  • What indicators would help distinguish legitimate foundations from those created for tax avoidance purposes?