Fact sheet

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Tax shelter donation arrangements

November 2004

The Canada Revenue Agency (CRA) reminds investors that the proposed legislative changes announced by the Department of Finance on December 5, 2003, to limit the tax benefits of charitable donations made under tax shelter and other arrangements, are effective throughout the 2004 tax year.

Potential investors should be aware of the risks associated with participating in certain tax shelter donation arrangements, including gifting trust arrangements, leveraged cash donations, and buy-low, donate-high arrangements.

All tax shelter promoters are required by law to report all sales of their arrangements to the CRA.

The CRA will challenge any arrangement that does not comply with the Income Tax Act and will audit the tax returns of investors with respect to their participation in such an arrangement.

Recommendation

The CRA has previously issued alerts to investors about the risks associated with certain donation arrangements and advised investors to take a number of precautions to protect their interests. In addition to the comments in this Fact Sheet, and those in the attached November 2003 Fact Sheet (including the December Update), the CRA recommends that anyone considering participating in tax shelter donation arrangements obtain independent legal and tax advice.

Background

The CRA issued a Fact Sheet, in November 2003 warning investors about the risks associated with participating in certain tax shelter arrangements. An update to that Fact Sheet was issued in December 2003 to advise that the Department of Finance had announced proposed changes to the Income Tax Act , on December 5, 2003, to limit the tax benefits from these arrangements. While the Update referred to one type of arrangement as an example (the buy-low, donate-high arrangement), the proposed changes are applicable to all tax shelter donation arrangements.

Current promotions

The CRA is aware that some donation arrangements continue to be promoted. Two such arrangements are identified as gifting trust arrangements and leveraged cash donations. It is the CRA's position that the December 5, 2003 amendments apply to these arrangements and will reduce their associated tax benefits.

Gifting trust arrangements

In these arrangements, the investor becomes a beneficiary of a trust and receives property as a distribution from the trust. Often, but not always, the property has a lien attached. The investor then donates the property along with an amount of cash (to pay off the lien where applicable) to a registered charity and receives a donation receipt for the total of the cash and purported fair market value of the property. Typically, the total cash paid by the investor is about 30% of the amount on the donation receipt.

The December 5, 2003 amendments provide that the donation amount on which the tax credit is based will be reduced by any "advantage" that is in any way related to the gift. It is the CRA's position that the receipt of such property from the trust is such an advantage, and the donation amount will be reduced accordingly.

Leveraged cash donations

These arrangements involve an investor applying for and receiving a loan to facilitate a cash donation (comprising the investor's own funds and the proceeds from the loan) to a charity. Usually, the investor makes another cash payment to the promoter or another entity as an investment, and the investment will be used to repay the loan. Typically, the total cash paid by the investor is about 30% of the amount on the donation receipt.

As explained above, the December 5, 2003 amendments reduce the donation by the amount of any advantage. The definition of advantage for this purpose includes a limited-recourse debt in respect of the donation. A limited-recourse debt is broadly defined to include any unpaid amounts if there is a guarantee, security, or similar indemnity or covenant in respect of the debt. It is the CRA's position that debts incurred as part of a leveraged cash donation constitute limited-recourse debts if they are to be repaid under such arrangements structured as part of the donation arrangement. The donation amount will be reduced accordingly.

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Date modified:

2014-12-03