The government is planning to take a harder line on its assessments of tax shelters, and proposes cutting the tax deduction for safety deposit boxes in its efforts to improve tax compliance.
In Thursday’s federal budget, the government proposes that the Canada Revenue Agency (CRA) take a tougher stance on tax shelters by empowering it to collect half of the tax that may be owing in disputes over tax shelter claims for charitable donations. It’s also planning to extend the reassessment period for reportable tax avoidance transactions and tax shelters when their information returns are not filed on time.
Under the current rules, the CRA can’t try to collect income taxes, or related interest and penalties, when an assessment is under dispute by a taxpayer. Now, the government is planning to allow the CRA to collect half of what it thinks it is owed in situations that involve charitable tax shelters.
In cases where a taxpayer objects to an assessment of tax, interest or penalties involving a charitable tax shelter claim, the CRA would be able to collect 50% of the disputed amount, pending the dispute’s ultimate resolution. The new approach is to begin with the 2013 tax year.
The government indicates that the move is intended to discourage taxpayers from participating in shady donation shelters, and to ensure that it is able to collect if it is vindicated in a dispute. The CRA has been successful in challenging charitable donation tax shelter cases in the Tax Court, and at the Federal Court of Appeal, the budget notes, “but some taxpayers continue to participate in these questionable tax shelters,” it says. Prolonged litigation of these disputes, it adds, delays collection.
Separately, the budget also proposes to extend the possible reassessment period for taxpayers who participate in tax shelters in cases where the shelter promoter is late in filing its information return, which the CRA uses to help it find and audit improper claims.
Under the current rules, the CRA has three years to reassess a return, regardless of whether it has received the required information from a tax shelter promoter. Late filing of this information reduces the time it has to properly audit a tax shelter. Now, it will have three years from the time at which the tax shelter promoter complies with its filing requirements.
The government is taking the same approach with “reportable” tax avoidance transactions. The budget notes that, as with tax shelter reporting, filing late, or failing to file, an information return for a reportable transaction does not extend the normal reassessment period. That, again, limits the CRA’s ability to scrutinize such transactions.
So, the budget proposes to extend the reassessment period to three years from the time the information return is filed. This measure will apply to tax years that end on, or after, budget day.
Finally, the government is proposing to do away with the tax deduction for safety deposit box fees — a measure that’s expected to save $155 million over five years. The budget notes that this deduction was allowed for taxpayers who were keeping their investment portfolio documents safe. However, this is less important now that electronic recordkeeping has become the norm. Safety deposit boxes are more likely to be used for storing valuables, not for an income-earning purpose, such as investing, it says. As a result, the government is proposing to put an end to that deduction, for tax years that begin on or after budget day.