The Canada Revenue Agency is warning Canadians of the risks associated with participating in certain tax shelter gifting and donation arrangements, including gifting trust arrangements, leveraged cash donations, and buy-low, donate-high arrangements.

“Be wary of any ad that uses tax savings as a key selling point,” said CRA commissioner Michel Dorais. “The CRA reviews all tax shelters and challenges any arrangement that does not comply with the Income Tax Act. We will audit the tax returns of investors who participate in these tax shelters.”

The CRA reports that it is currently auditing many gifting arrangements and has completed a number of these audits. “The fact that investors in some of these tax shelter gifting arrangements have not been reassessed should not be interpreted as the CRA’s acceptance of the arrangement,” it cautions. “The CRA generally has three years from the date of assessment to reassess taxpayers and these audits can take over a year to complete.”

A new warning was posted on the CRA’s Taxpayer Alert Web page today. It notes that despite favourable court decisions for the CRA, and despite proposed amendments to the Income Tax Act announced by the Department of Finance on December 5, 2003, some donation arrangements continue to be promoted.

The CRA says that for donations made prior to 2002, it has reassessed about 6,700 taxpayers, disallowing about $490 million in donations. For the 2002 tax year, a further 5,700 taxpayers, with donations of $360 million, have just been audited and reassessments were issued in all arrangements. For the 2003 tax year, about 1,800 taxpayers have been audited to date with some $66 million in donations disallowed.

Some of the arrangements currently being marketed as donation programs and gifting initiatives are advertised and/or promoted as resulting in “unique” or “valuable” “tax saving opportunities”, the CRA explains. These are “gifting trust arrangements” and “leveraged cash donations.” It notes that proposed amendments to the Income Tax Act 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.

In a related Investor Watch issued earlier this month, the Canadian Securities Administrators are urging the public to investigate further when they encounter an investment opportunity advertised in the media, the CRA adds. “Tax savings can be used to draw attention to opportunities that may not be suitable. Investors should protect themselves by researching any investment opportunity before making a financial commitment,” it says.