Over the last couple of weeks I attended a seminar focused on paying less tax.
Nothing angers the average Canadian more than the idea of paying too much income tax. (Of course the room was full!)
Tax Shelters are legal in Canada and they aren’t new. These programs use loop holes in the tax code to put money in your pocket. The strategy of choice for many is the donation scheme.
Myth 1 – A program with a tax shelter number has been approved by CRA
Wrong. The tax shelter number does not mean CRA has approved the program, the provider or strategy. The number simply allows CRA to track all the participants for future reference. CRA never gives an approval of any kind, that is up to the courts.
Myth 2 – CRA can only go back 7 years to audit my return
Wrong. You as the tax payer must keep your paperwork, supporting documents, and returns for 7 years, but CRA can go back as far as it needs. So a tax shelter you participated in 15 years ago could come back to haunt you.
Myth 3 – If CRA disallows a shelter you only have to pay back your refund
Wrong. Once a deduction or tax credit is disallowed CRA will request a return of any refund, plus interest and even penalties. I have met people were the interest changes where far greater than the refund they received.
Myth 4 – If a tax shelter is not approved I can always go after the promoter
Good Luck. Many promoters and their companies are long gone by the time you have an issue with CRA. If you read the documents you probably signed a waiver of liability. They tell you the tax strategy could be disallowed. Unfortunately you can’t sue them for a decision made by CRA.
Myth 5 – They have a letter from law firm / politician, so it must be true
Unlikely. I have seen letters from a sitting Prime Minister, expert appraiser’s, even prestigious business firms confirming the authenticity of the program. If you look closer most of these letters don’t speak to the strategy, but rather the charity or benefactor. The charity maybe real but the strategy may not.
Myth 6 – You can always just ask for your money back
Sure if you want to pay the taxes. In practice this could work, just ask for your donation back, take possession of the art work or have them send you the software you donated. The problem is once you take back the donation … you now have a tax problem. That is why many people wait and hope for the best.
Myth 7 – If the strategy has been around than it must be ok
Untrue. Saving taxes using tax shelters is legal in Canada, but CRA does not usually go after promoters, they go after tax payers.
Unfortunately a tax payer only finds out if these strategies don’t work once CRA challenges it, 5 to 7 years later. By then the promoter is gone and you are the one facing an audit, having to pay back your refund and all the interest.
So how do you know if a strategy, shelter or program is a good one? Good question.
Here are few things to look out for
- The tax savings/tax credits larger than the money spent. If you donate 1000 dollars and get a refund/credit of 2000 …. this is unlikely to hold up.
- The program is complex. To increase the tax benefit many strategies involve leveraging/borrowing money. Why does something so simple like a donation have to be so difficult.
- The only real benefit is the tax savings. The tax savings are meant to be an incentive, but not the reason for the program.
It goes without saying … bring all your documents to your accountant/tax specialist BEFORE you sign any paperwork. Nothing is worse than having a audit today for something you did 10 years ago!
For more information on tax shelters go to the CRA web site at http://www.cra-arc.gc.ca/nwsrm/lrts/2009/l090402-eng.html