CRA settling audits over iffy tax shelters
As we get closer to year end, you may be approached by someone trying to sell you a tax shelter. In the past, such shelters were often based on questionable donation schemes in which you made a cash payment and acquired some property in return.
These were then gifted to a charity with the result that you received a donation receipt that was much higher than the amount of cash you actually "donated."
Some of these "gifting tax shelter arrangements" involved the issuance of promissory notes while others involved donation of "in-kind" property.
In all such cases, however, the Canada Revenue Agency has reassessed all participants and denied the donation tax credits claimed.
These cases have also gone to court, with three of them reaching the Federal Court of Appeal.
In each of these cases, the tax shelter arrangements promised a "profit" to participants in return for a payment and in each case, the cash benefit for the taxpayer exceeded the cash outlay.
While each taxpayer tried to argue in court that their specific arrangement was legal, in each case, the Appeal Court concluded that the taxpayer's donation tax credit be denied entirely and it was reduced by the Court to zero. Earlier this month, the CRA issued a statement warning Canadians who may have participated in these gifting tax shelter arrangements that such gifts "do not necessarily result in a donation tax credit."
As a result of this, the CRA has issued reassessments to numerous taxpayers denying their donation tax credits. The CRA also reminded us that it audits every gifting tax shelter arrangement.
If you've previously participated in one of these arrangements and had your donation claim denied, you may have filed a notice of objection. Recently, the CRA has been sending letters to affected taxpayer offering to resolve your objection.
If you accept the offer made by the CRA, your objection(s) will be resolved and your return will be reassessed, concluding the dispute process. You would then avoid costs associated with going to court. The CRA stated that it "is not considering changes to the terms it has offered and will not make another offer containing more favourable terms. Any suggestion to the contrary is false."
If, on the other hand you refuse the CRA's offer, the CRA warns that it will maintain its position that you aren't entitled to the donation tax credit you claimed and that it will take "further action on your objection without advance notice," meaning that you will likely end up in Tax Court.
If you've filed an objection but still haven't heard from the CRA, be patient, as the CRA is continuing to issue these resolution letters in the months ahead and may still contact you to resolve your objection.
If you participated in one of these shelters, you should have your own, independent legal and tax advice before deciding to either accept the CRA's offer or reject it and try your luck in court.