Canadian taxpayers have been using donation tax shelters to both give back to those less fortunate and also reduce the high taxes that we pay in Canada. Many years after well-respected law firms and accounting firms endorsed specific plans and after CRA had assessed them as allowing the deductions and credits Canada Revenue Agency began to take a second look. One of the largest tax shelters that has fallen under CRA’s scrutiny is the Global Learning and Gifting Initiative (GLGI).
The GLGI is a registered tax shelter which issued donation receipts to those who participated. The Global Learning and Gifting Initiative was the subject of a CRA audit which led the CRA to identify it to be a “sham” and thus the claims of thousands of taxpayers have been denied. This has been extensively reported on including by the Financial Post.
Currently more than 25,000 taxpayers who objected to the denials of their receipts and subsequently took CRA to court remain in limbo until the there is a final ruling on the matter.
So what happens when one unwittingly finds themselves being audited by CRA and CRA denies their claims– particularly as it relates to tax shelters/charity opportunities?
Whether it’s through an audit or some other form of review which leads to a re-assessment, the amount owing is determined and based on that amount penalties and interest are applied retroactively. If CRA is of the opinion that you have been grossly negligent or have taken deliberate actions to evade taxes, you could be subject to additional gross negligence penalties of up to 50% of the tax debt. Criminal prosecution for tax evasion remains a weapon in the CRA arsenal of making examples of Canadians who do not follow the law the way CRA and its army of lawyers at the Department of Justice see it.
Once your returns are re-assessed, you have 90 days to “object” to the assessment. If for some reason you have not objected within the 90 day period, you have up to 1 year afterward to request an extension of time to file your objection. It is far better to get the objection filed within the initial 90 day period than have to ask your CRA opponent for permission to file late.
If your objection is rejected you still have the option to take the matter to Tax Court. This is the case with the more than 25,000 taxpayers who are currently awaiting a decision as it relates to the Global Loan and Gifting Initiative.
If you are not successful regarding the main issue of your objection (i.e. the donation) you may be successful with regard to the gross negligence penalty. The burden on CRA to prove gross negligence is extremely difficult for them and if you know the standards intimately there is a high success rate in having gross negligence penalties removed.
The court process is very long and so many who have filed objections after 2006 may have had their objections held in abeyance (put on hold) pending the outcome of the other cases that are similar in nature and before the courts.
Here are some considerations:
- If you are re-assessed and have had charitable donations disallowed by CRA, you must object within the timelines detailed above.
- Objections must be professionally prepared. There are two reasons. Firstly, the Objection needs to be drafted in a way that makes the CRA Objections Officer’s job easy – clear and logical laying out of your position that works consistently with how the Officer is trained to think and process. Secondly, The Objections Officer needs to have reasons to accept your objection. This is done by including the appropriate case law, references to legislative sections and other materials that support your position. Finally, you need to anticipate that a rejected Objection may lead to an appeal and there are needs to build the arguments in the appropriate way for a positive result.
- While an objection is in process, collection action is paused. However, if you are unsuccessful, CRA will, upon making a decision, apply the penalties and interest retroactively. This is one reason why it is very important, if you have grounds for taxpayer relief, that an application for taxpayer relief is filed at the time you make your objection.
- Through a taxpayer relief application, even if your objection is disallowed you may be able to get CRA to agree to cancel all or some of the penalties and interest. With that said, taxpayer relief can only be applied 10 years retroactively so recording that an application has been prepared and filed is critical. Here is an example: if you were re-assessed in 2006 for involvement in the GLGI in 2002, you filed your objection in 2006, and you filed your application for taxpayer relief in 2006, then your case was held in abeyance for 6 years – if a decision was made in 2014, CRA would have to consider your application for taxpayer relief backwards to 2002.
A good tax professional will look at both the grounds for the objection and taxpayer relief together. The grounds will likely be different and you do not want the grounds in one filing to damage your rights under the other option. This can be a complicated web to untangle.
If you have a GLGI case pending a court decision it is our view that you should lock in your rights by getting your taxpayer relief application on file as soon as possible.
For more about filing an objection or applying for taxpayer relief, call Tax Solutions Canada today at 1-888-868-1400.