Tax Shelters are generally investments that have as a main or secondary purpose the reduction of taxes, and are often challenged by CRA. The Canadian tax department has been warning about charity tax shelters for years, and has tried various approaches to shutting down the charity tax shelter industry. As a further attack on the industry, CRA announced that they have launched criminal investigations into a number of tax shelter promoters. Prior to investing in any tax shelter it is important to seek independent advice from a Canadian tax lawyer. We have experience in both structuring tax shelters for promoters and in providing tax assistance to Canadian taxpayers who have their tax shelter investments challenged by CRA.
Frequently Asked Questions
A tax shelter is defined as an arrangement that has been set up to help participants to avoid paying as much tax as possible. Many of them are not legal and some of them are a part of a scam. It is important that you speak to a properly qualified tax specialist before entering into any arrangement that could be viewed by the CRA as a tax shelter. The penalties for using an illegal tax shelter are substantial.
The best way to shelter your income from taxes is to speak to an experienced and qualified tax advisor. They will explain the various options. Including, maximizing your use of Registered Retirement Savings Plans (RRSPs) and using Tax-free savings accounts (TFSAs). As well as utilizing less commonly used options, such as income splitting, permanent life insurance and incorporating a business.
An illegal tax shelter is one where the structure is fraudulent and the advertised tax deductions are not legitimate. These tax shelters will always result in a successful challenge by CRA and all taxes that have been refunded will have to be repaid with interest and sometimes penalties. There are plenty of ways to legitimately reduce the amount of tax you owe without resorting to using illegal tax shelters. A qualified tax professional will identify which approaches you can use.
A tax shelter identification number is essential as it permits the Canada Revenue Agency (CRA) to track and monitor tax shelter arrangements.
Before issuing a tax shelter idenfication number, it is a must for a promoter to provide the right information such as a copy of an offering memorandum and a statement that the records and books will only stay in Canada.
Aside from complying with the T5001 Form, the applicant should prepare mandatory statement and statement of earnings.
Pro Tax Tip
Tax Audits in Ontario
There are over 350,000 tax audit and review actions conducted by the Canada Revenue Agency on a yearly basis. Around 15,000 of these tax audits deal with “cash only” businesses (i.e. the underground economy). Additionally, an estimated 35,000 are tax shelter audits.