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What is a Tax Shelter?

According to the Canada Revenue Agency (CRA) a tax shelter, as defined by the Income Tax Act, is a property investment or gifting arrangement where “the buyer or donor will have losses, deductions, or credits equal to or greater than the net cost of the original investment or of the property acquired.”

Basically, a tax shelter is an arrangement made to minimize taxes and, often, a tax shelter exploits loopholes to get a person a tax deduction greater than the amount donated. For example, consider a situation where you donate $1000 to a group that is buying medication for an impoverished nation. You then might receive a tax receipt for $5000, for example. Why? The reason you are given will likely be pretty complicated and difficult to understand.

A promoter of a tax shelter must register the tax shelter and apply for a tax shelter identification number. It’s important to know that this identification is only intended to make it easier for the CRA to track the tax shelter arrangement and its participants. It does not automatically entitle participants to tax benefits.

In recent years, the CRA has been cracking down on tax shelter arrangements. Now, when anyone tries to claim a tax shelter benefit, the CRA withholds the refund until the shelter is audited. The CRA states that it has audited every mass-marketed tax shelter arrangement and no arrangement has been found to comply with the Income Tax Act.

In fact, many people who have donated to gifting tax shelters have found themselves with the unpleasant reality of a CRA tax audit. The CRA can also charge a penalty against an individual who claims a donation to a tax shelter, depending on the shelter. In recent years, the CRA has been “cracking down” on tax shelter arrangements.

Recognizing Potential Issues with Tax Shelter Arrangement

Remember that not all charitable donations are considered tax shelters. The majority of charitable donations provide you with a tax receipt for only the amount that was donated, not more. If you are better off after having made the donation than you were before it, chances are you may later have issues with the CRA.

It’s also important to remember that not everyone who donates to a tax shelter is doing so because they want to “scam” the government. Many people who donate do so because they want their money to go to a good cause. Unfortunately, the CRA does not provide specific information on any specific tax shelter, which can make it very difficult for a person to know whether or not they are contributing to a scam.

If you are thinking of participating in a tax shelter arrangement, the CRA lists several cautionary steps to follow:

  • Know who you’re dealing with
    • Get as much information as possible and carefully read any documents relating to the investment or donation
  • Learn about the potential income tax implications of the investment
    • You should seek legal advice if needed to understand the situation fully.
  • Get all statements from the tax shelter provider in writing, rather than verbally.
  • Ask the tax shelter promoter for any advance income tax ruling that may have been provided by the CRA.

It’s important to note that CRA tax shelter audits take time. It could take the CRA up to three years to reassess an income tax return. Just because your donation or investment was accepted by the CRA initially, don’t assume that the CRA has accepted the claim.

If you find yourself in a situation where the CRA is withholding your refund due to a tax shelter, or asking you to pay back a prior year refund (with interest) this isn’t a situation that you will likely be able to handle on your own. Tax policy and the entire CRA system is complex and often difficult to understand and navigate. Tax Solutions Canada today at 1-888-868-1400 to speak with our ex-CRA tax specialists about tax shelters.