Nov

Tax refunds from charitable tax shelters being withheld by CRA

Posted By: Jonathan Crangle on November 12, 2012 at 10:28:25 in All , Articles

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By: Jonathan N. Garbutt & Jonathan Crangle

The Canada Revenue Agency (CRA) is resorting to a new tactic in its fight against tax abuse via charitable tax shelters—withholding taxpayers’ tax refunds until the tax shelter itself is audited. Taxpayers are warned that “if it seems too good to be true, it probably is.”  We heartily concur!

The typical “charitable donation tax shelter” involves a taxpayer making a donation to a registered charity, and then receiving a charitable receipt from the entity for an amount that is greater than the donation.  These structures have taken many forms over the years. Some of our favourite examples of such bogus schemes include:

  • religious schools issuing receipts to the parents of their students, who are then given ”scholarships” (which does not work because there is quid pro quo for the donation, so it is not charitable).
  • “art flips” where the taxpayer buys a number of works of art in bulk, then immediately donates them individually at “retail” prices and receives a receipt for a multiple of the “cash cost” of the donations, less the promoter’s fees (which doesn’t work as the valuation of the asset for donation purposes is the fair market value, i.e. what the taxpayer paid for them, regardless of what the promoter’s valuator says).
  • “pass-throughs” in which a charity with non-Canadian connections accepts donations and issues a receipt to the Canadian taxpayer. The Canadian charity then transfers the donations to their affiliate overseas, which then transfers the contribution to the Canadian taxpayer’s relatives, less a “reasonable fee” (which does not work because it is fraudulent).

The CRA has consistently taken the position, and in our opinion quite rightly, that it is highly unlikely that any charitable donation tax shelter complies with Canadian tax laws.

The announcement also stated that “The CRA urges taxpayers who are considering entering into a tax shelter arrangement to obtain independent, professional advice before signing any documents. Independent advice means advice from a tax professional who is not connected to the tax shelter or to the promoter.”  We could not agree more!

We once heard a tax shelter promoter say that no-one would need a second legal or tax opinion because “it is registered with the CRA, and they would not let it be registered if it were not OK, right?” This is utter hogwash, but apparently people buy this nonsense all the time. Moreover, promoters love providing an opinion from some famous law firm. The promoter then implies, without ever actually saying so, that the opinion “covers you.”

Just because it is a legal opinion does not mean it affirms the promoter’s position. We have seen tax shelter opinions that clearly state, more or less word for word “there is a considerable risk of adverse tax consequences attached to this structure and it is unlikely the CRA would allow this structure to go unchallenged.” Promoters get away with implying that the opinion makes everything OK because the opinion goes unread. Furthermore, in every single case, the opinion itself will expressly state that no one other than the promoter may rely on it. If someone is selling you a tax shelter; caveat emptor (buyer beware).

While there have been some tax shelters over the years that have worked, such as the famous Canada Trustco case, that went all the way to the Supreme Court of Canada, the vast majority of tax shelters are just “get rich quick” schemes for the promoters. By the time the CRA comes around to audit you, the promoter is long gone and you are left paying the tax, interest and penalties. Not getting a second opinion on any tax shelter before you buy can be extremely hazardous to your wealth.

Jamie Golombek, in a National Post article about the CRA’s new tactic, points out that the audit process could delay refunds for up to two years. The article also points out that the new tactic is about to be challenged in the Federal Court.

In the meantime, we urge individuals to heed the CRA’s warnings; get a second opinion before entering into any “tax shelter” or “tax advantaged” structure.

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