TAX SHELTERS RELATED ISSUES – SALIENT POINTS TO LOOK OUT FOR
Tax Shelters are the stuff of legend. Often times these instruments are publicized in the media for providing tax evasion strategies to the extraordinarily rich. On the other hand, illegitimate tax shelters use of tax law, inevitably earn the wrath of GAAR (General Anti Avoidance Tax Rules designed to ferret this behavior out) from CRA and the public at large.
GAAR:General Anti Avoidance revisited
General Anti Avoidance Rule was enacted in 1987 to combat abusive tax avoidance transactions and arrangements which technically complied with Income Tax Act. GAAR is meant to stop these abusive practices which reduce the CRA’s amount of tax revenue. GAAR’s discussion can assume reams of pages. Suffice it to say that one can comply with GAAR by conducting bona fide transactions with a legitimate business objective in mind. If one’s primary objective is just avoidance of tax, and transactions do not make any commercial business sense, then the road to GAAR violation opens up. For tax shelters, these are general principles to keep in mind, as GAAR can easily apply its claws to tax shelters.
It is important to note that tax shelters are actually in various governmental taxation systems worldwide. This is because despite the various negative connotations associated with them, tax shelters serve a particularly important function, to minimize tax liabilities effectively legally, often so that the recipient can use these funds for productive, income earning business ventures, or to support a noble social cause. Case in point is the RRSP Registered Retirement Savings Programs. Effective utilization of RRSP enables millions of Canadians to defer higher marginal tax rates during their prime earning years, while using the invested funds to save for their golden retirement years. RRSP serves as an important retirement payment plan for Canadians and is a valid use of a tax shelter.
Mass Market Tax Shelter Schemes do not work!
Tax shelters when done legally, can be quite effective. A crucial issue is to demystify tax shelters. Often times, dodgy promoters mass market tax shelters to unsuspecting customers, with novel ideas such as giving greater amount contribution receipt, when the consideration donated amounted to a pittance. According to CRA’s own website, every one of these nebulous schemes has been found wanting in regard to compliance with the Income Tax Act. Inevitably, its unsuspecting clients suffer the worst of the fallout, with the taxes due plus interest and penalties paid painfully.
Example: Person A goes to a marketer of a lucrative tax scheme. Marketer promises Person A that they can issue a $10,000 tax receipt to A if A gives a donation in kind amounting to $200 dollars. The marketer can assess the donated in kind product’s value at $10,000, and the person can claim this as a charitable contribution tax credit on their tax return. Person A is assured by the marketer that the tax scheme is registered, and the marketer may even have a business number, and head office location. The marketer also informs Person A that many clients have utilized this service to receive large tax refunds, and if CRA contests the claim, then the marketer will back up Person A through litigation.
This is a fairly typical story, and the end is nigh. At the finale, Person A is the one who gets assessed taxes plus penalties plus interest. Cost is greater than the benefit. Do not fall for this scheme!