A:

Most tax shelters are legal in Canada. However, there have been illegal tax shelter scams that the Canada Revenue Agency (CRA) has prosecuted to the full extent of the law. These scams come in the form of gifting tax shelter arrangements, where any profit made off of this specific tax shelter is unlawful.

Illegal Gifting Tax Shelter Arrangements

An illegal gifting tax shelter arrangement is a tax shelter strategy where a person makes a cash payment to receive a piece of property. The property is then gifted to a charity, and in return, the charity sends a charitable donation receipt that is much higher than the cash value that was actually donated. This makes it so the gifting tax shelter results in a profit to the participants. The profit is the difference between the amount that was actually paid for the property and the value of the donation receipt.

Legality Issues With the CRA

Almost all illegal gifting tax shelter arrangements have gone to court, with three cases being heard by the Canadian Federal Court of Appeal. The courts decided the taxpayers' tax credits should be denied and reduced to zero.

As a result of these three court cases, the CRA has reassessed numerous gifting tax shelters, denying many donation credits to taxpayers. The CRA also audits every gifting tax shelter, scrutinizing them to ensure they are legal.

If a taxpayer believes he took part in a legal gifting tax shelter and has had his donation tax credit denied, a notice of objection may be filed. These notices are heard in court, where a final decision on the legality of the tax shelter is made.

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