Late last month, the Canada Revenue Agency, in yet another attempt to shut down questionable charitable tax shelter arrangements, announced a new, as yet untested, tactic - withholding your tax refund until the tax shelter itself is audited, a process that could delay your refund for up to two years.
In a press release, the CRA reminded Canadians that "if it seems too good to be true, it probably is. If a tax shelter promoter offers a tax receipt for a larger amount than the donation or payment, it is very likely not a valid donation."
A gifting tax shelter is a gifting arrangement where you get a donation receipt that is more than the amount you donated and, according to the CRA, is typically four or five times the amount donated.
The CRA audits all gifting tax shelters and has yet to find one that complies with the tax rules. To date, it has denied more than $5.5billion in donation claims and reassessed more than 167,000 taxpayers who participated in gifting tax shelter schemes. The CRA has also revoked the charitable status of 44 charitable organizations that participated in these gifting tax shelter schemes.
The CRA's crackdown seems to be working as the number of individuals who participated in gifting tax shelters has been steadily declining, from a high of 50,000 in 2006 to only 10,000 in recent years.
Yet, these 10,000 participants still account for an estimated $300-million in "donations" and $85-million in federal tax refunds annually.
To deter some of those who may still be considering participating for the 2012 year, the CRA announced that it will put on hold the assessment of any tax return in which the individual is claiming a donation credit by participating in a gifting tax shelter scheme.
According to the CRA, "This will avoid the issuance of invalid refunds and discourage participation in these abusive schemes. Assessments and refunds will not proceed until the completion of the audit of the tax shelter, which may take up to two years."
The thinking is that having to wait two years to get your tax refund could put a real dent in the spending plans of potential tax shelter participants who may have been looking forward to a juicy refund this spring, once their 2012 returns have been filed.
But can the CRA legally withhold your refund and delay assessing your return for up to two years?
We may soon find out. The Global Learning Gifting Initiative (GLGI), a registered tax shelter, considers these new delay tactics to be "an improper, and possibly illegal, use of CRA's assessing practices."
To this end, GLGI has sponsored an action in the Federal Court of Canada challenging this new CRA practice, and according to a GLGI press release, "a court date for the trial of this matter is expected shortly."
Jamie Golombek is the managing director, tax & estate planning at CIBC Private Wealth Management in Toronto.