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Tax Shelter Donations

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Personal Income Tax -> Tax Shelter Donations

Beware of gifting tax shelter donation arrangements, and gifts of property

Canada Revenue Agency (CRA) indicated that starting with the 2012 tax year, taxpayers who participate in gifting tax shelter schemes will have the assessment of their tax return put on hold.  CRA is referring to gifting tax shelters where the donor gets a tax receipt for a much larger amount than the donation, in which case they say it is likely not a valid donation.  Assessments and refunds will not proceed until the completion of the audit of the gifting tax shelter, which may take up to 2 years.  All gifting tax shelters are audited, and CRA has apparently not found any that comply with Canadian tax laws.  There are, of course, tax shelters which do comply with Canadian laws.

Update: Despite the ruling in Federal Court May 14, 2013 Ficek v. Canada, where the court found that the Minister (CRA) failed to comply with the duty to assess with all due dispatch as per s. 152(1) of the Income Tax Act, CRA announced on January 10, 2014 that it will not assess taxes owed or provide a refund to taxpayers who claim a tax credit under a gifting tax shelter scheme until CRA has audited the tax shelter.  However, the taxpayer can have his or her tax return assed before the related tax shelter has been audited if they agree to remove the claim from their return.

If you participated in one of these arrangements, you could file your tax return without the donation claim.  Once your tax return has been assessed, and any refund has been received or balance owing has been paid, you can then request a change to your tax return for the donation claim.  This will avoid paying interest and possibly penalties related to the denial of the donation claim.

As of October 30, 2012, over 167,000 taxpayers had been reassessed, and denied about $5.5 billion in donations claimed.  44 organizations had their charitable status revoked.

Anyone considering participating in these types of arrangements should get independent professional tax advice, from someone not associated with the "arrangement".

If you have been reassessed by CRA and owe them money, if you pay the tax bill you will avoid expensive interest charges which are not tax-deductible.  You can still appeal the assessment.  If you win, you will get your tax money refunded with interest.  For more information about appealing an assessment, see the CRA web page Complaints and Disputes.

If a tax shelter donation arrangement has a tax shelter number, this does not mean that the tax shelter is approved by CRA.  This number is for identification purposes only.

Under proposed changes to the Income Tax Act (s. 248(35)), where a donation is made, after 6pm EST on December 5, 2003, by way of a gift of property as part of a tax shelter gifting arrangement,  the allowable charitable donation amount will be limited to the lesser of the fair market value or the taxpayer's cost of the property.  Thus, if the property donated was acquired by the taxpayer for $100, then $100 will be the maximum allowable charitable donation amount.

For other non-cash donations which are not part of a tax shelter gifting arrangement, the allowable charitable donation amount will be limited to the lesser of the fair market value or the taxpayer's cost of the property, if:

bullet the taxpayer acquired the property less than 3 years before the date the property was donated, or
bullet the taxpayer acquired the property less than 10 years before the date the property was donated, and it is reasonable to conclude that, at the time that the taxpayer acquired the property, he/she expected to donate the property.

If the non-cash donation was made as a result of a taxpayer's death, and was not part of a tax shelter gifting arrangement, then the donation is considered to be made at fair market value.

Deemed fair market value from Income Tax Act s. 248(35):

(35) For the purposes of subsection (31), paragraph 69(1)(b) and subsections 110.1(2.1) and (3) and 118.1(5.4), (6) and (13.2) , the fair market value of a property that is the subject of a gift made by a taxpayer to a qualified donee is deemed to be the lesser of the fair market value of the property otherwise determined and the cost or, in the case of capital property, the adjusted cost base or, in the case of a life insurance policy in respect of which the taxpayer is a policyholder, the adjusted cost basis (as defined in subsection 148(9)), of the property to the taxpayer immediately before the gift is made if

(a) the taxpayer acquired the property under a gifting arrangement that is a tax shelter as defined in subsection 237.1(1); or

(b) except where the gift is made as a consequence of the taxpayer's death,

(i) the taxpayer acquired the property less than three years before the day that the gift is made, or

(ii) the taxpayer acquired the property less than 10 years before the day that the gift is made and it is reasonable to conclude that, at the time the taxpayer acquired the property, one of the main reasons for the acquisition was to make a gift of the property to a qualified donee.

S. 248(36) of the Income Tax Act specifies that if the property was acquired from a non-arm's length person or partnership within the 3-year or 10-year time period noted above, the deemed cost of the property will be the lower of the cost to the taxpayer or the cost to the non-arm's length person or partnership.

 

S. 248(37) of the Income Tax Act indicates that the above changes do not apply to donations of:

bullet inventory
bullet real property situated within Canada
bullet cultural property, the value of which has been certified by the Cultural Property Export Review Board
bullet publicly traded securities
bullet ecological gifts

Legislation Dates of Application

The above provisions of the Income Tax Act were included in Bill C-48 Technical Tax Amendments Act, 2012 which received Royal Assent on June 26, 2013.  The following excerpt from Bill C-48 discusses dates of application:

(c) subsections 248(35), (37) and (38) of the Act, as enacted by subsection (30), apply only in respect of gifts made on or after 6:00 p.m. (Eastern Standard Time) on December 5, 2003 but

(i) in respect of gifts made after that time but before March 18, 2007, paragraph 248(37)(d) of the Act, as enacted by subsection (30), is to be read as follows:

(d) of property to which paragraph 38(a.1) or (a.2) would apply, if those paragraphs were read without reference to “other than a private foundation”;

(ii) in respect of gifts made after that time but before July 18, 2005, subsection 248(38) of the Act, as enacted by subsection (30), is to be read as follows:

(38) If it can reasonably be concluded that one of the reasons for a series of transactions, that includes a disposition or acquisition of a property of a taxpayer that is the subject of a gift by the taxpayer, is to increase the amount that would be deemed by subsection (35) to be the fair market value of the property, the cost of the property for the purpose of that subsection is deemed to be the lowest cost to the taxpayer to acquire that property or an identical property at any time.

(d) subsection 248(36) of the Act, as enacted by subsection (30), does not apply in respect of gifts or monetary contributions made before July 18, 2005.

 

See the article on the donations tax credit on our Filing Your Return page.

Only donations to registered charities can be claimed as charitable donations.  CRA has a web page, Charities and Giving where you can search charities listings to see if a particular charity is a registered charity.

CRA Resources:

bulletTax Shelters
bulletTax Alert re Tax Shelters

 

Tax Tip:  If it seems too good to be true, you should probably avoid it!!!

 

Revised: May 23, 2014

 

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