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Smart Saving or Scam? The Real Deal on Tax Shelters

Financial Umbrellas

Tax shelters are like financial umbrellas that people or businesses use to protect some of their money from taxes. Think of them as strategies to keep more of your earnings in your pocket, legally. Some typical examples of well-known tax strategies to keep more of your earnings in your pocket include vehicles like RRSPs (Registered Retirement Savings Plans) and TFSAs (Tax-Free Savings Accounts). But watch out – while many of these shelters are perfectly legal, some are not, and can actually be scams.

The government has rules about what counts as a tax shelter. Sometimes, tax shelters are set up so that when you give money to certain causes or charities, you can get a break on your taxes either in the form of a deduction from income or tax credits. But there are some tax shelters out there that promise big tax breaks for your ‘charitable’ donations, which are really just a way to avoid paying taxes and don’t actually help the charities much, if at all.

In Canada, there have been several of these tax shelter arrangements. A couple of common tax shelters include:

  • Destiny Health and Wellness Foundation;
  • Vintage Iconic Archives;
  • Relief Lending Group;
  • Mission Life Financial Inc.;
  • PharmaGifts International Inc.;
  • Canadian Humanitarian Trust; and
  • Canadian Organization for International Philanthropy.

These tax shelters may sound good, but the Canada Revenue Agency (CRA) has been cracking down on them, oftentimes revoking the Canadian registered charities’ charitable status for their use as tax shelters rather than for their charity work. Courts have looked at tax shelter programs and found that many of these tax shelter structures do not really count as giving in the true sense of the word. For example, the Canadian Humanitarian Trust (CHT) tax shelter has been specifically addressed in the Tax Court of Canada decision, Morrison v the Queen, 2018 TCC 220, where CHT claimed it was giving away pharmaceuticals as a gift, but the Court found there was not enough to establish that the ‘gifting’ was really happening – either in the manner it was said to have happened, or for the value of the gift claimed. Thus, the donors to the CHT (the individuals participating in the CHT tax shelter and claiming the tax credits for the donation) could not claim a tax credit as the ‘gifts’ were not given with the donative intent needed to be proven under the Income Tax Act (amongst other reasons).

There have been quite a few court cases where the Tax Court of Canada has said ‘no’ to tax breaks from similar setups. It is important to know that the CRA can come back and reassess your taxes up to three years later. So, just because they didn’t question your tax shelter at first doesn’t mean the CRA agrees with it. These reviews can take a while, sometimes over a year.

If you get a notice that the CRA is reassessing your taxes because of a tax shelter you used, it’s probably a good time to talk to a lawyer to figure out what to do next. The lawyers at Legal Focus LLP can help.

Disclaimer: The foregoing provides commentary and is not legal advice. Readers are cautioned against making any decisions based on this material alone. Consult a lawyer.

Article Written by
Krystal Taylor
Lawyer

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