Our good friends at the Canada Revenue Agency issued a news release Oct. 30, announcing they were "taking steps to better inform and protect taxpayers from gifting tax-shelter schemes."
These are tax-shelter creations in which the taxpayer is promised a donation receipt for far more than the cash he or she has gifted. The higher amount is variously made up by higher market value assessments on gifted goods, forgivable loans, or other clever means.
For example, a person might commit $10,000 cash to such a program and get to claim a donation receipt for $30,000, resulting in a promised tax reduction of about $13,500. That's a good return on $10,000.
This sounds enticing but it's not worth anything if the CRA denies the donation claim. In that situation, you're out $10,000.
I've warned taxpayers about this before. So far, the CRA says they have denied $5.5 billion in donation claims and reassessed 167,000 tax returns, denying the entire claim made for any of these schemes. Each year at this time, they issue a warning.
This year is different. This year, CRA says they "...will put on hold the assessment of returns for individuals where a taxpayer is claiming a credit by participating in a gifting tax shelter scheme."
They say this will avoid issuing refunds that will later be clawed back. They also state this measure will "discourage participation in these abusive schemes."
Let me stress this does not affect the charitable gifts you make each year, where you give money to a recognized charity and get a receipt for the amount you actually donated. I encourage you to make these donations, as you always have, before year-end, to claim your credit in 2012.
CRA is targeting programs that offer you something for nothing.
Here's what the CRA says about these: "Assessments and refunds will not proceed until completion of the audit of the tax shelter, which may take up to two years. All gifting tax-shelter schemes are audited, and the CRA has not found any that comply with Canadian tax law."
That's a strong statement, and this is a very strong measure.
It's also very impractical. If a tax return is not assessed, there are a variety of consequences. RRSP room will not be granted. TFSA room will not be granted. The CRA will be prohibited from taking collection actions against taxpayers for unpaid taxes. (Such actions can only start 90 days after an assessment is issued.)
Taxpayers will not know if the CRA has disagreed with other filing positions. Tax could be owing and interest and penalties will accrue, but the taxpayer will not know the CRA wants more money. (Tax liability exists whether or not the assessment has been issued.)
The solution for most of us is to avoid any donation scheme that promises us a bigger donation receipt than the actual money paid into the scheme. Avoid that, and none of this affects you.
For people who participate in such schemes -- and for CRA, which has a legal obligation to assess returns "with all due dispatch" -- there are big problems. We would expect some of these to end up in court and taxpayers claiming an exemption from tax because their return was not assessed on a timely basis.
It's a mess the rest of us are wise to avoid.
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner.