CRA: What to Expect
BEFORE
REDUCING YOUR TAXES (TAX AVOIDANCE) – IS IT LEGAL?!
IRC v.s Duke of Westminister in 1935 decided in court that “Any man, if he can, can reduce his tax burden to less than it otherwise would be”.
The Income Tax Act of Canada defines a Tax Shelter as: “Any investment where the tax credits received is equal to or exceeds the out-of-pocket expense within a 4 year period.” It does not say that you cannot participate in a tax shelter.
We know the law recognizes & allows tax sheltering as long as it follows the rules in the Income Tax Act of Canada.
Note: Tax Avoidance is very different from Tax Evasion, which is fraudulently not reporting income, etc. A typical RRSP is an example of compliant Tax Avoidance.
WHY NOT LET THE CRA DECIDE IF A PROGRAM MEETS THE LETTER & SPIRIT OF THE LAW?
Why don’t tax shelter companies simply go to the CRA and ask for an “Advanced Ruling” on the structure to ensure that it meets all the requirements of the Income Tax Act of Canada? This way, if the CRA feels there is a problem, it won’t be marketed. On the other hand, if the program follows the law, then it will be allowed.
Although this makes sense, the CRA unfortunately, will not provide advance rulings, but it is understandable:
Imagine if a program did follow all the laws and the CRA put their “stamp of approval” on the program – potentially every person in Canada could participate and pay no tax. The CRA, however, cannot tell you that you can’t do a registered tax shelter, so where does that leave us?
Since the laws allow people to participate in tax shelters, logic dictates that the only thing that can be done is to ask the tax experts to find a problem. A good tax shelter will not have a provision in the Income Tax Act, not one policy, nor one precedent in court that would serve to disentitle the donor from the tax credits they receive in the shelter.
In order to market a tax shelter to the public, a company must register with the CRA and receive a tax shelter ID number.
Although the CRA does not make the tax laws, they do interpret and enforce the laws. It is preferable if the CRA does not “warn” against your tax shelter, but it is not necessary. Warnings do not mean you can’t participate – but do check into a program thoroughly before proceeding.
Taxpayer Bill of Rights #14: You have the right to expect us (CRA) to warn you about questionable tax schemes in a timely manner.
DURING
At the same time, the “Taxpayers Bill of Rights” clearly states that taxpayers can “Expect the CRA to warn of any questionable tax schemes in a timely manner”. Several programs have been in operation for years with no warnings from the CRA.
THERE IS A 100% CHANCE YOU WILL BE AUDITED!
Do not be overly concerned with the above statement. It is not a full audit, but rather a “canned” audit of your participation in the tax shelter only.
The CRA has been stating publicly for years that they will audit every person’s participation to ensure compliance with the Income Tax Act of Canada.
They will ask a number of questions, request a copy of your tax shelter paperwork, receipt(s), & proof of payment. A good tax shelter company will provide full support in completing the standard CRA questionnaire (audit).
Note: An audit and subsequent reassessment is the next best thing to an advanced ruling as the CRA is actually forced to take a position on the tax shelter arrangement. Once the audit is completed, everybody will know where they stand and legal actions can be taken.
CAN THE CRA EVER AFFORD TO SAY THAT A PROGRAM WORKS?
After the audit, can the CRA afford to say that a program is okay even if it works?
Unlikely. This poses the same issues as an advanced ruling.
We know that a reassessment is guaranteed regardless whether a program follows the law, so be sure the tax shelter company has an adequate defense fund in place to handle any challenge the CRA may pose.
DO YOUR OWN POLL – CRA IS PROVEN WRONG MORE THAN THEY ARE RIGHT
Here’s an interesting exercise that never ceases to amaze. Ask a few of your friends if they have ever been audited. Of the ones who have been audited, ask them who decided to challenge the audit (Yes, the results of an audit are only the CRA’s opinion and may not be correct according to the law). Of those that decided to challenge CRA, ask them who won. Now keep in mind that we are not talking about a full audit in this case. This could be something as little as a reassessment for $100 on their tax return that the CRA decided not to pay based on something they disagreed with. Here are the results you will get:
100 Canadian taxpayers:
• 90 “audited” (reassessed for a lower amount, etc.)
• 10 people fight back
• 9 people win the challenge
The 90/10/90 rule ALWAYS applies, so what does this tell you?
1. The CRA is proven wrong more than right.
2. Those who fight back will likely prevail.
AFTER
LEGAL DEFENSE FUND
Because we know the CRA will use “the process” to deter people and we know that the main reason people don’t fight the CRA is due to cost, aggravation, lack of expertise, fear, etc., many tax shelter companies create “defense funds” to assist their donors.
A good company will have a minimum of $1 Million legal defense fund in place to retain top accountants & lawyers to assist program participants.
THE DREADED “REASSESSMENT”
When a program is “reassessed” by the CRA, does that mean you have to pay back your tax refund? No. All participants (with the help of the tax shelter company) will file a “Notice of Objection” and then according to #7 of The Taxpayers Bill of Rights, “you have the right not to pay income tax amounts in dispute until you have had a full & impartial review”.
Unfortunately, this will probably not stop the CRA from asking you for the money and even threatening penalties & interest.
Taxpayer Bill of Rights #7: You have the right, as an individual, not to pay income tax amounts in dispute before you have had an impartial review.
