Some Tax Shelters Can Bite
While the cooler weather and changing colours are a sure sign that fall has arrived, for some of us, it also means that tax shelter season is upon us.
Tax shelters are most heavily marketed during the last few months of the year as taxpayers scramble to reap the purported tax savings in 2012, which often entails buying the shelter before Dec. 31. While you may have not been approached about this year's crop of tax shelters yet, a recent decision of the Tax Court may be enough to send a chill down any potential tax shelter investor's spine.
The case involved a leveraged charitable donation arrangement, known as the Berkshire Program, which allowed participants to receive donation receipts far in excess of the out-of-pocket cash outlays. Under the program, the donations were funded by 20% cash while the other 80% was funded by a 25-year, non-interest bearing loan provided to the participant by one of the promoters.
The participant in the recent case learned of the Berkshire Program in October 2000 from her investment advisor, and participated in 2000, 2001 and 2002. She testified that she was attracted to the program because, according to its promotional material, it "donated to several arts-related organizations and the program would allow her to make a larger donation than she could otherwise make to support the arts." According to her testimony, "the tax savings was a secondary consideration."
Consequently, she invested $17,000, $20,400 and $17,000 of her own money in the years 2000, 2001 and 2002 and received donation receipts for $50,000, $60,000 and $50,000 respectively. Prior to 2000, the judge noted her donation history over the previous eleven years ranged from a low of $201 to a high of $1,360.
The Canada Revenue Agency initially reassessed her, denying only the 80% portion of the donation funded by the loan but then came back and subsequently disallowed 100% of the donation tax credits.
Under the Income Tax Act, you can claim a donation tax credit for gifts to a registered charity. The issue in the case was whether the donations made by the participant were actually "gifts." Prior jurisprudence has concluded that "... a gift is a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor."
The judge concluded that there could be no "gift" because in return for making her cash donation, the participant received 25-year interest-free loans the judge called "significant benefits" given that she did not have to pay interest on a commercial loan for the difference between the cash donated and the value of the donation receipts received.
While the participant's lawyers argued she should at least be entitled to a tax credit for the cash portion of her donation, the judge disagreed saying that there was "only one interconnected transaction here .... No part of the Donation was given as a gift without expectation of a return."