The Canada Revenue Agency has issued a “Tax Alert” entitled “Warning: If you donate to a gifting tax shelter, expect to be audited.” I know that the Tax Alert came out December 23, 2010 but if you are considering investing in one of these schemes consider that CRA’s warning is about the closest thing to a Christmas present you are ever going to get from CRA! After all they will have just saved you ten years of legal fees, emotional distress, and payment of the foregone taxes plus penalties and interest that can in the end be so staggering that you go bankrupt. That must be worth something. In case you did not understand the title I will try to translate it to my version of Canadian pig Latin: “Warningeh: Ifeh youeh donateh toeh giftingeh taxeh shelterey, expecteh toeh be’eh problemeh.” For those pig Latin purists, who I know will bombard me with comments along with the promoters of these schemes, here is the proper Pig Latin translation “Arningway ifway youway onateday otay away iftinggay axtay eltershay expectway otay ebay auditedway”. These schemes don’t make sense in any language!
Tax Alert Warning: If you donate to a gifting tax shelter, expect to be audited
Each year, Canadian taxpayers participate in gifting arrangements that result in donation receipts worth three or four times the actual amount donated by the taxpayer. The Canada Revenue Agency (CRA) continues to warn Canadians against these gifting arrangements and audits those who participate.
To date, the CRA has denied over $4.5 billion in tax shelter gifting arrangement donations and reassessed over 130,000 taxpayers who have made donation claims through a gifting scheme.
For most claims, the CRA has denied the gift entirely. The CRA audits gifting arrangement tax shelters that provide donation receipts three or four times the out-of-pocket cost.
Decisions in recent court cases have concluded that the “donation” made by the taxpayer was not a gift or, where it was a gift, the amount did not exceed the out-of-pocket cost to the taxpayer. In the Maréchaux case, the Federal Court of Appeal upheld the Tax Court of Canada (TCC) decision that there was no gift given as a result of the defendant’s participation in a leveraged cash donation scheme. In the Lockie case, the TCC concluded that the gift in a buy-low-donate-high scheme was the amount paid by the taxpayer.
Tax shelter identification numbers
The CRA reminds taxpayers that tax shelter numbers are used for identification purposes only. Just because a tax shelter has an identification number does not mean that donations made to it will result in tax benefits.
Independent professional advice
Anyone thinking of investing in a tax shelter gifting arrangement should get independent legal and tax advice from a tax professional who is not connected to the arrangement or the promoter.
Packages from promoters will often claim to have legal or tax opinions from a law firm. You may find that these opinions contain very general comments and do not provide unconditional support for the scheme. Ask to see the opinions, and have them reviewed by an independent professional.
If the CRA has reassessed you for participating in a tax shelter donation scheme in the past, you may also wish to obtain independent tax advice to determine your best options.
Some promoters of gifting arrangements are acknowledging that you, the taxpayer, will be audited and reassessed as a result of participating in these arrangements, but they contend that they have a defence fund to challenge a CRA reassessment.
As well, some promoters claim that even if you lose when you challenge the CRA, you can consider your tax refund a low interest loan from the CRA. In fact, any cash paid to the promoter or charity is gone for good and, when the entire donation claim is denied, you will have to repay the full tax refund plus interest. These cases can take years to get to court.
Previous tax alerts
For more information on previous tax alerts, go to http://www.cra.gc.ca/alert on the CRA Web site.
Here is the PDF of the Tax Alert Tax Alert Warning: If you donate to a gifting tax shelter, expect to be audited
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.