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.