In an alert issued earlier this week, the Canada Revenue Agency once again warned taxpayers to be wary of so-called "tax shelter gifting arrangements," whereby the donor receives a donation tax receipt equal to three or four times what he or she actually donated.
The CRA is auditing all tax shelter gifting arrangements. So far, it has audited more than 26,000 individuals and has denied approximately $1.4-billion in claimed donations. The CRA is in the process of finalizing the audits of an-other 20,000 taxpayers, involving close to $550-million in donations, and will shortly begin auditing another 50,000 taxpayers involved in tax shelter gifting schemes.
Let's say you've invested in one of these tax shelters several years ago and, having had some doubts about the po-tential tax exposure that could arise from such a plan, decided to put all your assets, including your principal residence, into your spouse's name.
If the tax man can't collect from you, can he go after your spouse?
Yes, he can. Under the Income Tax Act, the CRA has the right to go after your spouse (or any other non-arm's-length person) since you gifted or transferred an asset for less than fair market value.
But the transfer was a decade ago. Surely the statute of limitations has expired?
That was the issue the Supreme Court of Canada recently had to determine. The case involved several shareholders of a company who in 1989 received payments, including dividends, before the corporation was reassessed for more than $3.2-million of taxes and penalties owing.
Eventually, the CRA concluded that it would never get any of the taxes owing from the company itself and in 2001 went after the shareholders, since they were non-arm's-length persons that received a "transfer" (dividends) from the corporation.
In 2005, the shareholders, who were assessed as personally liable for the tax debt of the company some 16 years earlier, went to court. They were not arguing the tax facts of the actual case, but wanted a judicial review on procedural grounds because "the long delay in issuing the assessment was abusive and prevented them from mounting a proper challenge."
The Supreme Court reviewed the wording of the Tax Act, which states that the CRA can reassess "at any time," since there is no limitation period for non-arm's-length transfer reassessments. As a result, the court found the assess-ments were still valid.
The absence of such a limitation leaves anyone who has received a non-arm's-length transfer of property on the hook for a tax debt, possibly forever.
-Jamie Golombek, CA, CPA, CFP, CLU, TEP, is vice-president, taxation and estate planning, at AIM Trimark In-vestments in Toronto.