When It’s Not So Great to Donate

“The CRA will neither issue a refund nor assess the return.”

On October 30, 2012, the Canada Revenue Agency (CRA) issued a news release stating that it is implementing “additional steps to protect taxpayers by auditing all gifting tax shelter schemes before a donation claim will be allowed”. The CRA warns that it audits all shelter schemes and has not found any that comply with Canadian tax laws. The CRA states that it:

“has to date denied more than $5.5 billion in donation claims and reassessed over 167,000 taxpayers who participated in gifting tax shelter schemes. In addition, the CRA has revoked the charitable status of 44 charitable organizations that participated in these gifting tax shelter schemes. Since June 2000, the CRA has also assessed $63.5 million in third-party penalties against promoters and tax preparers”.

In a typical “aggressive donation tax shelter schemes” a taxpayer receives a donation receipt that is significantly greater than the amount the taxpayer has really paid to the charity. An example is a leveraged charitable donation arrangement, where the donor borrows most of the funds donated (usually through a pre-arranged limited-recourse loan) and pays a small portion in cash. The donor receives a charitable donation receipt for the full donation amount and, if the receipt is accepted by the CRA, will get tax savings much higher than the amount the taxpayer is actually “out of pocket”.

Starting with the 2012 tax year, the CRA will put on hold the initial assessment of returns for individuals where a taxpayer is claiming a credit by participating in a “donation tax shelter scheme”. The CRA will neither issue a refund nor assess the return until it has audited the tax shelter; essentially placing a hold on the taxpayer’s return. The CRA notes that the audit may take up to two years to complete, but that the taxpayer can have the hold on their return withdrawn by removing the tax credit claimed.

Some tax practitioners  question whether this protocol is legally valid given the requirement for the CRA to assess tax returns with “all due dispatch”. The answer to this question will have to be provided by the courts, if a taxpayer brings an application in Federal Court to force the CRA to assess a return.

In any event, the CRA has made its new assessing policy clear and there are significant risks to participating in these “schemes”. We suggest that anyone considering such a transaction speak with their TSG representative.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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