Tax-shelter season may be months away, but a series of ongoing battles are surfacing based on prior years’ tax shelters gone awry.
In April, the Canada Revenue Agency again warned Canadians about the dangers of investing in schemes that provide “inflated or unsubstantiated” tax losses or deductions.
The CRA warned investors that participating in these shelters puts taxpayers at risk of losing their entire investment. In addition, investors could be forced to repay any related tax refunds they may have received, plus possibly interest and penalties, which can amount to 50% of the taxes payable.
Meanwhile, the CRA continues to audit all tax shelter gifting arrangements. As of last fall, more than 65,000 taxpayers who participated in these donation deals have been, or will be, reassessed, to the tune of $2.5-billion in total denied donation claims. In most of these cases the CRA is denying the donation completely.
In June, the CRA de-registered more charities associated with tax shelters, revoking the charitable status of Ottawa-based Healing and Assistance Not Dependence Canada, as well as London, Ont.-based Living Waters Ministry Trust. Living Waters issued more than $41-million in donation receipts for cash received through a tax-shelter arrangement.
As the CRA cautions, it’s very important to get independent financial, tax and legal advice before investing in a tax shelter – and not from someone connected to the scheme or to the promoter.
In separate cases now before the courts, two Canadian law firms are being sued over tax opinions given on two donation tax shelters. Investors in these shelters are now facing tax reassessments from the CRA.
The first lawsuit, a proposed class-action claim for $55-million in damages, was over a tax opinion in connection with the Banyan Tree Foundation tax shelter. The foundation was de-registered by the CRA last October.
Motions seeking class-action certification were heard before a judge over three days in late June. The judge reserved her decision, which could take weeks or even months, due to the complexity of the case.
The other proposed class- action lawsuit, also for $55-million, is over a tax opinion it gave in connection with the Athletic Trust of Canada’s tax-shelter program, involving the donation of timeshare units to charity.
Lawsuits are also surfacing south of the border. Last month, the courts upheld a U.S. lawyer’s liability to an investor for an opinion given in connection with an investment in a U.S. tax shelter designed to generate artificial losses.
Jamie Golombek, CA, CPA, CFP, CLU, TEP is the managing director, tax and estate planning, with CIBC Private Wealth Management in Toronto.
Jamie Golombek, Tax Expert, Financial Post
Published: Friday, July 03, 2009