The
Budget proposes various new rules and penalties related to tax shelters
generally, as well as some changes specific to charitable donation tax
shelters.
Current
rules
The Income Tax Act requires that all tax
shelters be registered and obtain a tax shelter identification number. The Income
Tax Act imposes a penalty on any person (normally the tax shelter promoter)
who sells an interest in, or accepts consideration in respect of, a tax shelter
that is not registered with CRA, or who files false information in an
application to register a tax shelter. Correspondingly, a participant in the
tax shelter is denied any related claim or deduction until the tax shelter is
registered and the penalty is paid.
The
penalty is currently the greater of $500 and 25% of the consideration received
or receivable in respect of the tax shelter. The Budget materials use the
following example; if a participant were to pay $12,000 to acquire from a
promoter a property that is an unregistered tax shelter, the penalty to the
promoter would equal $3,000.
Proposed
changes
The
Budget states that, in the context of some charitable donation tax shelters,
the cost to participants of the property acquired is relatively small in
relation to the tax savings that the promoter asserts are available to
participants. The result therefore is that the penalty may be less effective in
encouraging compliance by the promoter.
The
Budget proposes that in the case of a charitable donation tax
shelter, this penalty will be the greater of 25% of the amount asserted by the
promoter to be the value of property that participants in the tax shelter can
transfer to a donee, or the amount determined under the existing rules. Thus, to take the example above, if a
participant in a donation tax shelter pays $12,000 and is advised by the
promoter that he or she will be able to claim that donated property has a value
of $100,000, the penalty for the promoter if the tax shelter is not registered
will be $25,000.
This
measure will generally apply on Royal Assent to the enacting legislation.
Additional
Measures
A
promoter is required to file an annual information return if he or she accepts
consideration, or acts as a principal or agent, in respect of a tax
shelter. This return must include the
amount paid by each participant who has acquired an interest in the tax
shelter. Failure to file results in a penalty equal to the greater of $100 and
$25 multiplied by the number of days that the return is outstanding, to a
maximum of $2,500.
The
Budget proposes that an additional penalty be imposed if a promoter fails either:
- to file an annual information return in response to a demand by CRA;
or - to report in the return an amount paid by a participant in respect of
the tax shelter.
The new
penalty will be equal to 25% of the consideration received or receivable by a
promoter in respect of all interests in the tax shelter that should have been,
but were not, reported in an annual information return. In the case of a charitable donation tax
shelter for which amounts paid by the participants are not reported, the
penalty will be the greater of 25% of the consideration received or receivable
by the promoter and the amount asserted by the promoter to be the value of the
property that those participants can transfer to a donee.
This
measure will apply to demands to file made by the CRA after Royal Assent to the
enacting legislation, and to returns filed after Royal Assent to the enacting
legislation.
The
Budget also proposes to make tax shelter identification numbers valid only for
the calendar year identified in the application for the number filed with the CRA. This is in contrast to the current approach
in which tax shelter identification numbers are valid indefinitely.
This
measure will apply to applications made on or after Budget Day. Tax shelter
identification numbers issued as a result of applications made before Budget
Day will be valid until the end of 2013.
Commentary
While it may be difficult to be critical of measures designed to hold accountable promoters of abusive tax shelters, the definitions of tax shelters and promoter are broad and it is certainly possible that they could catch relatively innocent but mistaken charities and their staff.
