Canada Revenue Agency (CRA) has denied almost every gifting tax shelter claimed in its audited tax returns due to inaccuracies in the claimed tax shelter. In fact, the CRA has decided to withhold owed taxes and refunds for all the tax returns that have claimed the gifting tax shelter and, having been granted to do so, take additional actions if required by the federal government.
The tax professionals at AG Tax have prepared an overview of the Canadian Gifting Tax Shelter Scheme, proving useful to taxpayers considering claiming and/or have already been claiming this tax shelter.
What is the Gifting Tax Shelter Scheme?
As per the CRA, taxpayers can gift properties or monetary contributions to certain qualified and registered parties and associations (such as charitable organizations) who, in return, will issue a tax shelter receipt to these taxpayers for the donated amount or value of the gift. It can then be used to reduce taxes by acting as a ‘tax shelter’ on the income tax return, thus, receiving the name, ‘gifting tax shelter scheme.’
If the gift is a property, which is not part of a tax shelter gifting arrangement, the taxpayer should be aware that the charitable donation/gift amount should be limited to either the fair market value or cost of the property, whichever is lesser (unless the gifting/contribution is made on behalf of a deceased taxpayer, not belonging to any tax shelter gifting arrangement, then the donation is considered to be made at fair market value), provided it fulfils ANY of the following:
- The property was acquired less than 3 years before the date on which it was donated, OR
- The property should be less than 10 years old before the date on which it is donated, provided that the taxpayer acquired the property with an objective to donate it in the future.
Example: If a 3 year old property was acquired by the donor at $5,000 and the current market value is $3,500 then the tax-sheltered amount will be the lesser of the two; i.e. $3,500.
CRA’s Approach to this Tax Shelter Concern
The CRA has been auditing all tax returns that include gifting tax shelter schemes, and has found none of them to be Canadian tax-law compliant. They have noticed that in most cases the issued receipts are of amounts higher than those actually gifted/donated. To address this situation, the CRA has taken various actions, such as:
- Denied donation claims totalling $5.9 billion, and reassessed over 182,000 taxpayers who participated in these gifting tax shelters.
- Revoked the charitable status of 47 charitable organizations that participated in gifting tax shelter scheme.
- Assessed $137 million in third-party penalties against involved promoters and tax preparers.
Going forward, the CRA will not be assessing taxes or providing refunds to any taxpayers claiming a gifting tax shelter credit until their tax return is audited. In the case that a taxpayer makes a claim under a gifting tax shelter scheme, the taxpayer can have his or her tax return assessed before the related tax shelter has been audited if they agree to remove the tax shelter claim from their return.
The new legislation, introduced in Economic Action Plan 2013, provides the CRA more power. It allows them to collect 50% of the disputable amount or from a receivable refund when these amounts are related to a gifting tax shelter. Even if the taxpayer had made the contribution to a valid organization, or has filed objection to the CRA’s decision to withhold refunds, or has made an appealed to a Canadian Tax Court.
Measures by Taxpayers
Taxpayers should refrain from practices where any promoter or charitable organization offers them donation receipts for amounts higher than the actual monetary contribution or value (cost or fair value) of the property, as these are likely to be void for tax purposes: Charitable donations should be made only to CRA recognized charities in order to qualify as tax-deductible charitable donations (verify your charitable organization). Additionally, the CRA advises Canadians considering entering into a tax shelter arrangement to obtain independent, professional advice before signing any documents.
Tax laws are complex, and it is always advisable to consult a tax professional regarding any tax matter, be it filing of tax returns, claiming any credits or deductions or any other tax situation since only a professional would be fully aware of the exact tax laws and their applications.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
