The Canada Revenue Agency (CRA) advises against gifting Tax Shelters

Now years later, and now that the horses are out and thousands of Canadians are getting devastated with huge tax bills. CRA is moving to clamp down on those charities that were listed on the CRA web sites, for donor to check out in deciding to gift or not. This has been a huge source of 50% penalties and interest for the Tax Man.

CRA is advising that Canadian citizens refrain from using gifting tax shelter schemes. Around fall time, marketers often promote such schemes to Canadians as a means of reducing the amount of tax they pay. Yet, as with many marketed deals involving money, either saving it from the taxman or increasing it exponentially, it usually is too good to be true. This is why the CRA is advising people not to fall for such talk. Indeed, the CRA has gone as far as to say “all gifting tax-shelter schemes are audited, and the CRA has not found any that comply with Canadian tax law.” That is pretty strong stuff.

Gifting Tax Shelter Schemes

A gifting tax shelter scheme works by a payment for investment or some other such scheme being rewarded with a charitable donation receipt. It benefits the investor because the receipt is worth more than the value of the investment or “donation.” The Winnipeg Free Press’ David Christianson gives an example of gifting $10,000 Canadian dollars to one such scheme. This is rewarded with a donation receipt worth three times that or $30,000. This will lead to a tax reduction or $13,500 or a net profit of $3,500.

This only works, however, if the CRA accepts the donation receipt at face value and accept the legitimacy of the charity in question. If it does not, then the investment of $10,000 remains as it is, but is not realized as there is no money coming back from the charity scheme. This means the person investing the money has to take a $10,000 hit on their personal finances. As noted above in the introduction, the CRA have not found that any of these tax schemes comply with the law. Already it claims to have denied $5.5 billion in such donation receipts from a total of 167,000 tax returns. That is a lot of wealthy or semi-wealthy Canadians losing money just to avoid paying their fair share of tax. As a result, the CRA are naturally advising Canadians not to fall for such schemes as they lose money and put themselves under further scrutiny as people avoiding taxes.

The Latitude Foundation

An example of how charities can be set up for personal gain rather than for helping the disadvantaged, animals or the environment is the Latitude Foundation. In November, the Toronto Star reported that the foundation run by Vito and Don Ierullo was set up for the “sole purpose of avoiding Canadian tax” according to the CRA. People may not have heard of the Ierullo brothers, but they may know their company Entertainment One, which grew out of Records on Wheels and used the charity as a $14 million life insurance scheme. The scheme worked by the brothers donating this amount of money over a four year period from 2004 to 2008. That money was then invested by the charity into a life insurance scheme.

In order to appear charitable, the money was sent to the University of the West Indies-Mona in Jamaica’s endowment fund. The money was then sent to the Bahamas to purchase life insurance policies through Hampton Insurance, a British Virgin Islands based insurance broker. When the deal was examined by the CRA, it found that just 3 percent of the money sent to the university’s endowment fund was kept, the rest was passed on to the policies via the Bahamas. The CRA’s actions show that tax avoidance through charitable groups is being examined and punished.

General Advice to All Canadians

The general advice for all Canadians in this regard is similar to normal guidelines on taxation. It is important to be careful whenever you are dealing with tax matters in the country. The simplest way to tackle the situation is to follow tax laws and regulations and to pay a fair amount. Charitable giving should be philanthropic and altruistic in nature and not part of some scheme to save money by contributing less to the government’s coffers. Read the guidelines when making charitable donations, examine all investment schemes carefully, hire a good accountant to thoroughly examine your finances and avoid late payments. If you are in doubt, contact Tax Audit Solutions if you have any questions or doubts. It is always better to be safe than sorry when it comes to dealing with taxes and the CRA.

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