Budget Expands CRA’s Collection and Enforcement Powers Related to Charitable Donation Tax Shelters

March 21, 2013

The Budget introduces two measures that
will significantly increase the power of the CRA to reassess and collect taxes
from donors who have participated in charitable donation tax shelters. Together with measures introduced in previous
Budgets
, which imposed increased penalties for tax shelter promoters and through administrative policies of CRA, these measures reflect
the Federal Government’s continuing efforts to discourage participation in such
tax shelters.

Extended
Reassessment Period for Participants in Donation Tax Shelters

The Budget extends the period in which CRA
is permitted to reassess taxpayers who have claimed donation tax credits in
respect of a tax shelter donation arrangement.
Normally, upon receiving a taxpayer’s filed tax return and after its
initial assessment of tax payable, CRA has three years to reassess the donor’s
tax liability. In the context of
donation tax shelters, such a reassessment would normally occur following an
audit of the tax shelter arrangement.
CRA requires that information returns must be filed by tax shelter
promoters so as to enable CRA to identify and audit tax shelters.

The Budget notes, however, that CRA’s
ability to reassess the donor may be delayed or prevented if the tax shelter
promoter fails to file the required information return or does not provide
documents necessary for a proper audit of the tax shelter. This may result in CRA being unable to
conclude its audit of the tax shelter until after the normal reassessment
period for the donor has expired. This
would prevent CRA from reassessing the donor in respect of tax credits or
deductions claimed in respect of the shelter.

The Budget proposes to extend the normal
reassessment period for participants in a tax shelter arrangement (but only
with respect to the tax shelter) where the promoter of the tax shelter fails to
file the required tax shelter information return on time. The reassessment period of the participant
will be extended for three years after the promoter files the required return.

A similar extension of the reassessment
period will apply in respect of participants in “reportable transactions”, as
set out in proposed amendments to the Tax Act, in respect of which promoters
must file information returns. Reportable
transactions consist essentially of tax avoidance arrangements (including
donation arrangements) in respect of which a promoter or advisor will receive a
fee, and in respect of which the promoter or advisor had confidential
protection or some form of contractual protection (e.g., insurance) in respect
of the arrangement.

This measure is proposed to apply to
taxation years that end on or after March 21, 2013. It is likely a sensible measure.

Budget Enables
Immediate Collection of 50% of Taxes in Dispute Arising from Charitable
Donation Tax Shelters

The Budget proposes new legislation that
would significantly increase CRA’s ability to collect taxes immediately from
donors to donation tax shelter arrangements, even where such taxes are in
dispute.

The Budget notes that CRA is generally
prohibited from taking collection action in respect of assessed income taxes
and related interest and penalties where a taxpayer has objected to the
assessment. However, it states that in the charitable donation tax shelter
context, notwithstanding CRA’s general success in tax shelter litigation,
donors may use such litigation as a means of delaying the payment of
taxes. Accordingly, the Budget
introduces a new measure that modifies the general prohibition on CRA
collection action. Proposed legislation
in the Budget would provide that where a taxpayer has objected to an assessment
of tax (including interest or penalties) that results from the denial of tax
credits or deductions claimed in respect of a charitable donation tax shelter
arrangement, CRA will be permitted, pending the ultimate determination of the
taxpayer’s liability, to collect immediately 50% of the disputed tax, interest
or penalties.

The Budget states that this measure is
taken in order to discourage participation in questionable charitable donation
tax shelters and to reduce the risk that unpaid amounts will ultimately become uncollectible.

This proposed measure will apply in respect
of amounts assessed for the 2013 and subsequent taxation years. While it will no doubt assist CRA in discouraging
donation tax shelter participation, it is troubling from a tax system fairness
perspective.

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