What is CRA saying about Canadian abusive charity gifting tax shelters?

If you are wondering what CRA thinks about abusive charity gifting tax shelters we have reproduced below a CRA Tax Alert Warning which is pretty clear.

We should just point out one important point. Section 241 of the Income Tax Act provides confidentiality for individuals, corporations and registered with respect to tax matters. Consequently, except in cases of a registered charity being revoked, and only after the revocation, CRA is forbidden from saying anything about any individual, corporation or registered charity. What this practically means is that if CRA is aware of a 500 million dollar scheme that is not legally permissable they are not allowed to say anything about it until after the charity has been revoked. Consequently CRA puts out generic warnings without any reference to specific schemes as you can see below.

http://www.cra-arc.gc.ca/nwsrm/lrts/2010/l101223-eng.html **
Tax Alert Warning: If you donate to a gifting tax shelter, expect to be audited **

Each year, Canadian taxpayers participate in gifting arrangements that result in donation receipts worth three or four times the actual amount donated by the taxpayer. The Canada Revenue Agency (CRA) continues to warn Canadians against these gifting arrangements and audits those who participate.

To date, the CRA has denied over $4.5 billion in tax shelter gifting arrangement donations and reassessed over 130,000 taxpayers who have made donation claims through a gifting scheme.

For most claims, the CRA has denied the gift entirely. The CRA audits gifting arrangement tax shelters that provide donation receipts three or four times the out-of-pocket cost.

Decisions in recent court cases have concluded that the “donation” made by the taxpayer was not a gift or, where it was a gift, the amount did not exceed the out-of-pocket cost to the taxpayer. In the Maréchaux case, the Federal Court of Appeal upheld the Tax Court of Canada (TCC) decision that there was no gift given as a result of the defendant’s participation in a leveraged cash donation scheme. In the Lockie case, the TCC concluded that the gift in a buy-low-donate-high scheme was the amount paid by the taxpayer. **
Tax shelter identification numbers**
The CRA reminds taxpayers that tax shelter numbers are used for identification purposes only. Just because a tax shelter has an identification number does not mean that donations made to it will result in tax benefits.

Independent professional advice

Anyone thinking of investing in a tax shelter gifting arrangement should get independent legal and tax advice from a tax professional who is not connected to the arrangement or the promoter.

Packages from promoters will often claim to have legal or tax opinions from a law firm. You may find that these opinions contain very general comments and do not provide unconditional support for the scheme. Ask to see the opinions, and have them reviewed by an independent professional.

If the CRA has reassessed you for participating in a tax shelter donation scheme in the past, you may also wish to obtain independent tax advice to determine your best options.

Current promotions
Some promoters of gifting arrangements are acknowledging that you, the taxpayer, will be audited and reassessed as a result of participating in these arrangements, but they contend that they have a defence fund to challenge a CRA reassessment.

As well, some promoters claim that even if you lose when you challenge the CRA, you can consider your tax refund a low interest loan from the CRA. In fact, any cash paid to the promoter or charity is gone for good and, when the entire donation claim is denied, you will have to repay the full tax refund plus interest. These cases can take years to get to court.

Previous tax alerts
For more information on previous tax alerts, go to http://www.cra.gc.ca/alert on the CRA Web site.

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In this recent press release from CRA they noted that “Promoters and other third‑party representatives are penalized when they make false statements involving schemes that are against the law. Currently, there are 71 audits involving promoters. Recent examples include a scheme involving RRSPs, for which the promoter was assessed a penalty of $1.8 million, and a tax shelter gifting arrangement case where the Canada Revenue Agency (CRA) proposed two penalties of $24 million against the promoters involved.” (http://www.cra-arc.gc.ca/nwsrm/rlss/2010/m03/nr100316-eng.html)