The CRA knows that most taxpayers, given the proper tools and information, will voluntarily meet their tax obligations.
The following contains information that will help taxpayers understand how to protect themselves against tax schemes, and understand the consequences they might face.
For example, some taxpayers don’t realize the financial and personal risks they are exposed to by paying cash for home renovations. And some taxpayers don’t know that participating in certain tax shelter schemes to avoid paying taxes could mean not only a loss of their principal, the repayment of taxes owed, and penalties and interest – it could also lead to fines and imprisonment.
Information is the key! Select a link below to find out more.
If you donate to a gifting tax shelter, expect to be audited
Each year, Canadian taxpayers participate in gifting arrangements that result in donation receipts worth three or four times the actual amount donated by the taxpayer. The Canada Revenue Agency (CRA) continues to warn Canadians against these gifting arrangements and audits those who participate.
To date, the CRA has denied over $4.5 billion in tax shelter gifting arrangement donations and reassessed over 130,000 taxpayers who have made donation claims through a gifting scheme.
For most claims, the CRA has denied the gift entirely. The CRA audits gifting arrangement tax shelters that provide donation receipts three or four times the out-of-pocket cost.
Decisions in recent court cases have concluded that the “donation” made by the taxpayer was not a gift or, where it was a gift, the amount did not exceed the out-of-pocket cost to the taxpayer. In the Maréchaux case, the Federal Court of Appeal upheld the Tax Court of Canada (TCC) decision that there was no gift given as a result of the defendant’s participation in a leveraged cash donation scheme. In the Lockie case, the TCC concluded that the gift in a buy-low-donate-high scheme was the amount paid by the taxpayer.
Tax shelter identification numbers
The CRA reminds taxpayers that tax shelter numbers are used for identification purposes only. Just because a tax shelter has an identification number does not mean that donations made to it will result in tax benefits.
Independent professional advice
Anyone thinking of investing in a tax shelter gifting arrangement should get independent legal and tax advice from a tax professional who is not connected to the arrangement or the promoter.
Packages from promoters will often claim to have legal or tax opinions from a law firm. You may find that these opinions contain very general comments and do not provide unconditional support for the scheme. Ask to see the opinions, and have them reviewed by an independent professional.
If the CRA has reassessed you for participating in a tax shelter donation scheme in the past, you may also wish to obtain independent tax advice to determine your best options.
Some promoters of gifting arrangements are acknowledging that you, the taxpayer, will be audited and reassessed as a result of participating in these arrangements, but they contend that they have a defence fund to challenge a CRA reassessment.
As well, some promoters claim that even if you lose when you challenge the CRA, you can consider your tax refund a low interest loan from the CRA. In fact, any cash paid to the promoter or charity is gone for good and, when the entire donation claim is denied, you will have to repay the full tax refund plus interest. These cases can take years to get to court.
For more information, please go to:http://www.cra-arc.gc.ca/nwsrm/lrts/2010/l101223-eng.html
Abuse of source deductions and GST/HST amounts held in trust
The Canada Revenue Agency (CRA) is warning businesses about the consequences of failing to report and remit source deductions and goods and services tax/harmonized sales tax (GST/HST) they hold in trust for the Government of Canada.
Trust funds and your obligations
TheIncome Tax Act and the Excise Tax Act require businesses to hold source deductions and GST/HST amounts in trust for the government. Employers are required to remit these source deductions—amounts withheld from employee salaries and wages to pay income tax, Canada Pension Plan/Quebec Pension Plan, and employment insurance premiums—to the federal government by certain dates. Businesses that collect GST/HST must also remit these amounts to the government by specified dates.
Funds held in trust must not be used as an alternate means of cash for a business. The CRA will use its legislated powers of recovery to make sure that amounts considered to be held in trust are paid to the government in full and on time.
There are consequences
Businesses that do not fulfill their obligations or comply with payroll requirements may be assessed penalties or interest or incur other consequences.
Businesses have to file their GST/HST returns and make payments on time. Failure to do so may result in penalties and interest on any returns or amounts the business has not remitted to the government by the filing due date.
TheIncome Tax Act and the Excise Tax Act allow for the recovery of source deductions and GST/HST amounts by:
enhanced garnishments to collect amounts considered to be held in trust for the government;
assessment of the directors of a corporation for the corporation’s failure to remit either source deductions or GST/HST amounts;
seizure and sale of assets of a debtor corporation, an assessed director or a sole proprietor; and
any other means of recovery allowed under federal legislation.
Come to us before we come to you
If you have collected source deductions or GST/HST amounts and have not remitted them on time, please contact the CRA as soon as possible to make arrangements to pay the outstanding amounts.
Employers or businesses that have failed to file returns, remit source deductions or GST/HST amounts for current or previous years can voluntarily correct their tax affairs by participating in the Voluntary Disclosures Program. The Voluntary Disclosures Program allows taxpayers to come forward to correct inaccurate or incomplete tax information and disclose information they have not reported to the CRA. Taxpayers will not be penalized or prosecuted if they make valid disclosures before they become aware of any CRA compliance action against them. These taxpayers may only have to pay the taxes owing, plus interest. For more information, please go to:http://www.cra-arc.gc.ca/nwsrm/lrts/2010/l100521-eng.html
Warning: Making false claims could result in serious consequences.
The Canada Revenue Agency (CRA) has uncovered a new scheme involving false claims on personal income tax and benefit returns. Although taxpayers participating in this scheme report their income, they include claims for large business losses from fictitious businesses. These false claims often lead to large refunds. Taxpayers should be aware that making these kinds of false claims is illegal and could result in serious consequences. If you were thinking about participating in such a scheme, don’t be fooled! Chances are you will get caught and it’s not worth the risk.
Serious consequencesTaxpayers who fail to follow tax laws could face serious consequences. The CRA has the authority under the Income Tax Act and the Excise Tax Act to use a number of tools to address non-compliance. When taxpayers are convicted of tax evasion or tax fraud, they have to repay the full amount of taxes owing and any amounts fraudulently obtained, plus interest, as well as any civil penalties that may be assessed by the CRA. If they are convicted, the courts may fine them up to 200% of the federal tax evaded or false refunds claimed, and sentence them to a jail term of up to two years.
The CRA publicizes court convictions to maintain confidence in the integrity of the self-assessment tax system and to deter non-compliance with the law. More information on these convictions is available on the CRA Web site at www.cra.gc.ca/convictions.
Come to us before we go to you
The CRA is always on the lookout for tax schemes. Have you reported illegitimate business losses? If so, you may want to come forward and correct your tax affairs through the CRA’s Voluntary Disclosures Program (VDP). If you make a valid disclosure before you become aware of any compliance action being initiated by the CRA, you may only have to pay the taxes owing plus interest, and you will not have to pay penalties or face prosecution in the courts. More information on the VDP is available at www.cra.gc.ca/voluntarydisclosures.
Remember, if it sounds too good to be true, it probably is.