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Tax Shelters & Charitable Donations

  1. What is a tax shelter?
  2. If a tax shelter identification number was issued by the CRA, does this mean that I am automatically eligible to receive the tax benefits associated with it?
  3. What is an art-donation scheme or “art flipping”?
  4. What are the possible penalties associated with an art-donation scheme?
  5. What should I consider if offered an art-donation tax arrangement?
  6. What are some tax tips I should consider for making donations “in-kind” to a charity?
  7. Where can I find a list of charities recognized by the Canada Revenue Agency?
  8. What is a registered charity information return?
  9. How can I find out if a charity is registered?
  10. What should I consider when thinking about taking part in a tax shelter arrangement?
  11. What are the potential consequences for participating in a tax shelter scheme that is finally established by the CRA to be invalid?
  12. What is the typical unregistered tax shelter scheme?
  13. Should I get professional tax advice when considering participating in a tax shelter?
  14. Do tax shelters get audited by the CRA? If so, how many?
  15. Can a tax shelter promoter undergo criminal prosecution?
  16. What is a gifting trust arrangement?
  17. What is a leveraged cash donation?
What is a tax shelter?

The Income Tax Act states that a tax shelter is an arrangement in which a person purchasing a property or giving a gift receives tax benefits or deductions that will equal or surpass the amount of the initial purchase or gift within four years.

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If a tax shelter identification number was issued by the CRA, does this mean that I am automatically eligible to receive the tax benefits associated with it?

The Canada Revenue Agency issues a tax shelter identification number to anyone participating in a tax shelter arrangement whether they are eligible to receive the benefits or not. It is important to note that the CRA uses these identification numbers in an administrative sense ONLY to identify participants and this number does not ensure tax benefits.

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What is an art-donation scheme or “art flipping”?

An art-donation scheme or .art flipping. consists of an investor purchasing works of art at a significantly lower price than their supposed market value with the help of a promoter. The promoter will then work with a Canadian registered charity in order for the investor to then donate the works of art and receive a tax receipt for a much higher price than the investor actually paid for the art. The tax credits or tax benefits the investor receives for their donation surpasses the original amount used to purchase the art.

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What are the possible penalties associated with an art-donation scheme?

There are a variety of penalties that can be applied by the Canada Revenue Agency when a taxpayer is involved with an art-donation scheme, and it depends on the role the individual played in the art donation scheme.

The investor purchasing the art and making the charitable donation can have their tax credit claim disallowed or readjusted depending on whether the CRA determines that the donation price is inflated or that it is not an actual gift but rather part of an art-donation scheme. Additional penalties may be assessed by the CRA in such cases.

Third parties involved in this scheme, like promoters and appraisers, also face penalties. As of the year 2000, the CRA has provisions in place to deter third parties from making false statements and claims, like artificially inflating the price of a work of art. Third Party Civil Penalties provide that the amount of these penalties is directly related to the tax amount the false statements allowed the investor to evade. If the charity was aware or could be reasonably expected to have known that false statements and inflated prices were involved, then they too may face these third party penalties, and in some cases may lose their status as a registered charity.

If you are currently suffering the consequences of participating in an art donation scheme, or fear you may be penalized for participating in an art donation or .art flipping. scheme, then call Barrett Tax Law for a free consultation with an experienced tax lawyer and have your questions and concerns addressed at 1-877-8-TAX-TAX or consultation@fightthecra.ca

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What should I consider if offered an art-donation tax arrangement?

When considering an art-donation tax arrangement, be wary of 1) any deal that does not allow you to actually see the art, 2) involves inflated prices, 3) promises extensive tax savings, and 4) if the charity which will receive the donation has already been pre-selected without your input.

Make sure the appraiser is an independent third party not involved in the tax arrangement. Also, carefully revise or have a tax lawyer review any documents that cover the income-tax consequences of such a scheme. Another option you can consider if being offered an art-donation tax arrangement is asking the promoter for a written statement assuring that the arrangement is entirely legal. Also, ask for any advanced ruling by the CRA and always consult an independent tax professional for advice before signing any arrangement. Barrett Tax Law is pleased to offer free legal consultations at 1-877-8-TAX-TAX or consultation@fightthecra.ca

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What are some tax tips I should consider for making donations “in-kind” to a charity?

Always beware of any items (art, books or technological products) that are priced way above market value and are advertised as a way to save money through charitable tax receipts. In any type of arrangement in which you do not see the actual items, or the charity is pre-selected, beware. You can contact the charity (on your own apart from the promoter) to assure they will value any gifts according to fair market price. Remember to always review any details that express possible income tax consequences that could result from the arrangement and always seek independent professional tax advice before signing. Barrett Tax Law offers free legal consultations to taxpayers living throughout Canada at toll-free 1-877-8-TAX-TAX. Make sure the appraiser is working independently from the promoter and review any appraisal documents before actually making the donation. Also, check to assure the tax arrangement has a registered tax shelter number from the Canada Revenue Agency. Ask for any advanced ruling from the CRA on any arrangement, although it is important to note that the Canada Revenue Agency is NOT responsible for making sure the arrangement complies with all aspects of the Income Tax Act and is similarly NOT required to accept the appraised value of items prepared by the promoter or appraiser.

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Where can I find a list of charities recognized by the Canada Revenue Agency?

The CRA has a list of registered charities which can be found at the following Canada Revenue Agency web page: http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html

This list allows you to determine if a charity is able to issue tax receipts, review a specific charity’s financial information and returns, learn more about their activities and obtain contact information. You can also see a list of revoked charities, penalized charities, suspended charities and annulled charities as well as a list of currently active charities without penalties.

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What is a registered charity information return?

A registered charity information return includes contact information for the charity, general activities the charity performs as well as financial information like assets, liabilities, expenditures and income. The registered charity information return can shed light on how much of its financial resources are actually put towards its charitable works. Returns are available dating back to 2000.

It is important to note that the CRA has not necessarily reviewed or verified a charity’s return. The return is posted online as received from the charity. Additional questions should be directed to the charity.

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How can I find out if a charity is registered?

You can search the CRA’s list of registered charities (see Where can I find a list of charities recognized by the Canada Revenue Agency?) or you can contact the charity directly and ask for their registration number, then compare that to the CRA’s list. Additionally, you can call the Canada Revenue Agency at their toll-free telephone line, 1-800-267-2384, to verify a charity.s status.

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What should I consider when thinking about taking part in a tax shelter arrangement?

1. Always seek the advice of a tax professional like a tax lawyer before signing tax shelter documents.
2. Make sure you are familiar with all parties involved in the tax shelter and carefully review all documents regarding the arrangement. 4. Have everything in writing and do not go on verbal agreements alone.
5. Request a copy of any CRA advance ruling from the tax shelter promoter and cautiously review the CRA ruling.
In addition, be aware of the following when reviewing tax shelter options:
. Lack of actual commercial activity
. Exaggerated expenses
. Verbal agreements but lack of written details
. Business assets that are exaggerated
. Little expectation for real profits

To get your questions or concerns addressed by a qualified tax professional, contact Barrett Tax Law for a free consultation with a tax lawyer at toll-free 1-877-8-TAX-TAX throughout Canada.

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What are the potential consequences for participating in a tax shelter scheme that is finally established by the CRA to be invalid?

There are various potential consequences related to tax shelter schemes that are considered invalid by the Canada Revenue Agency. An individual that claims tax deductions based on an investment in a tax shelter scheme that is deemed invalid will have those tax deductions denied by the CRA. Likewise, the taxpayer will be obligated to pay back any monies already received by the Canadian government as a result of said tax shelter scheme. The possibility of additional penalties also exists if a taxpayer willingly participates in an unregistered tax shelter scheme. Penalties can be up to 50% of taxes owed after reassessment. These extra penalties often come into play when the tax payer willfully ignored inflated property value.

For more information on how to avoid unregistered and invalid tax shelter schemes, see .What should I consider when thinking about taking part in a tax shelter arrangement?.

If you are being unfairly penalized for participating in a tax shelter scheme, obtain a free legal consultation at Barrett Tax Law to find out your options: 1-877-8-TAX-TAX Canada-wide or consultation@fightthecra.ca

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What is the typical unregistered tax shelter scheme?

The most typical unregistered tax shelter scheme consists of purchasing a tax loss that is extensively higher than the cash investment. Keep in mind that simply purchasing a tax loss does not make one eligible for tax deductions. See .”What should I consider when thinking about taking part in a tax shelter arrangement?” for further information.

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Should I get professional tax advice when considering participating in a tax shelter?

The Canada Revenue Agency recommends getting independent, professional tax advice before deciding to participate in a tax shelter proposal. This means a tax professional who is not connected in any way to the tax shelter, which helps ensure an unbiased and honest recommendation. Barrett Tax Law, a Canadian tax law firm serving taxpayers throughout Canada, is pleased to offer free legal consultations at 1-877-8-TAX-TAX or consultation@fightthecra.ca

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Do tax shelters get audited by the CRA? If so, how many?

The Canada Revenue Agency reviews all tax shelters and audits tax shelters quite often, which can lead to reassessment and penalties imposed on the investors of said tax shelters.

Over the past five years, the CRA has audited and reassessed extra taxes owing in about 1,100 tax shelters, which lead to additional monies owed totaling about $335 million. In addition, the Canada Revenue Agency has about 5,000 current audits that are taking place to investigate and reassess participants in unapproved tax shelters.

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Can a tax shelter promoter undergo criminal prosecution?

Yes, the Canada Revenue Agency can and will criminally prosecute tax shelter promoters who abuse the law. Out of fourteen criminal convictions of tax shelter promoters, twelve have lead to jail time and about $10.6 million in total penalties and fines. If you are being criminally prosecuted for a tax shelter scheme, it is imperative that you contact a tax lawyer immediately. Confidential, free consultations with a tax lawyer are offered by Barrett Tax Law at 1-877-8-TAX-TAX or consulation@fightthecra.ca

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What is a gifting trust arrangement?

In a gifting trust arrangement, the investor does not purchase a property but rather receives the property as a beneficiary of a trust. Many times this property will have a lien attached, but that is not always the case. After receiving the property, the investor then donates the property as well as cash to a charity, paying off the lien as well if there is one attached to the property. The investor then has a donation receipt not only for the cash donated but also for fair market value of the property. The amount of cash donated usually represents only about 30% of the total donation value.

As of December 2003, the CRA amended the tax code to stipulate that the total amount of the donation by which tax benefits are based will be adjusted accordingly and reduced if any advantage comes from a gift (i.e. the property). The Canada Revenue Agency views the property gifted by the trust as an advantage and will lower the tax benefits accordingly.

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What is a leveraged cash donation?

Leveraged cash donations involve an investor specifically applying for a loan in order to make a cash donation to a charity. It is also common for the investor to make a similar cash payment to the promoter of the scheme in the form of an investment and then money earned from that investment is used to repay the original loan. It is common for the investor.s cash payment to be around 30% of the total donation. It is important to note that a scheme like this puts at risk not only the investors own money but the loan as well. The CRA’s 2003 amendments stipulate that any advantages gained by the investor will be deducted from the total donation amount, thereby reducing the tax benefits.

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