Budget 2012: government moves to further expand the tax shelter rules 

publication 

March 2012

Tax Bulletin

Budget 2012 proposes a number of changes to the rules governing the taxation of "tax shelters". The latest tax shelter proposals are aimed at (i) better motivating the registration of tax shelters and more accurate and timely reporting by "promoters" of tax shelters, and (ii) easing the administrative burden on the Canada Revenue Agency (the "CRA") associated with ensuring compliance with the tax shelter registration and reporting obligations imposed under the Income Tax Act (Canada) (the "Tax Act"). The changes to the tax shelter rules proposed by Budget 2012 underscore the importance of tax shelter registration and reporting to the CRA in identifying potentially abusive tax planning arrangements.

general description of "tax shelters" and "promoters"

The Tax Act contains a complex and expansive definition of what constitutes a "tax shelter". From a conceptual perspective, a "tax shelter" will generally include, among other things, a gifting arrangement or property in respect of which it can reasonably be considered, having regard to statements or representations made in connection with the offering, that if a person were to enter into the arrangement or acquire an interest in the property, amounts represented to be deductible within four taxation years will equal or exceed the true cost to the taxpayer of acquiring property under the arrangement or an interest in the subject property. Taxpayers may be surprised to learn that certain investment funds are considered tax shelters under the Tax Act.

Budget 2012 specifically refers to "charitable donation tax shelters", which, in highly simplified terms, captures tax shelters where a person enters into an arrangement involving a gift to a "qualified donee"1 or certain monetary contributions.

Persons who are considered a "promoter" in respect of a tax shelter are subject to certain reporting obligations under the Tax Act. A "promoter" in respect of a tax shelter is broadly defined to include a person who, in the course of business, (i) sells or issues, or promotes the sale, issuance or acquisition of, the tax shelter, (ii) acts as an agent or advisor in respect of the activities listed in (i), or (iii) accepts, whether as principal or agent, consideration in respect of the tax shelter.

Additional information in respect of what constitutes a "tax shelter" and a "promoter" can be found on the CRA's website at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/txshltrs/menu-eng.html.

proposed changes

tax shelter identification number valid for one year

A promoter is required to apply for an identification number in respect of a tax shelter, which the promoter must, among other things, make reasonable efforts to provide to all persons purchasing the tax shelter. The issuance of an identification number is of particular importance to purchasers of a tax shelter because such purchasers are required under the Tax Act to file a prescribed form containing certain information, including the tax shelter identification number. Failure by a purchaser to file the prescribed form will preclude the purchaser from being permitted to deduct or claim an amount in respect of the tax shelter.

Tax shelter identification numbers currently do not have expiration dates, which allows promoters to market a tax shelter that has been issued an identification number for an indefinite period of time. The Government has indicated that CRA resources are being allocated to identifying whether failures to make certain filings in respect of tax shelters are a result of non-compliance or merely a consequence of no interests in the tax shelter having been sold during a particular year.

Budget 2012 proposes to amend the Tax Act to provide that persons may only sell, issue or accept consideration in respect of a tax shelter during the single calendar year designated by the Minister of National Revenue (the "Minister") as being applicable to the identification number issued in respect of the tax shelter. Promoters will therefore be required to reapply for identification numbers in respect of tax shelters sold over multiple calendar years. This proposed change will apply to applications for tax shelter identification numbers made on or after the date of the Budget (i.e., March 29, 2012); identification numbers issued before the date of the Budget will only be valid until the end of 2013. 

increased penalty in respect of charitable donation tax shelters

Under subsection 237.1(7.4) of the Tax Act, a person may be subject to penalties where (i) they file false or misleading information in respect of an application for a tax shelter identification number, or (ii) whether as principal or agent, they sell, issue or accept consideration in respect of a tax shelter before an identification number has been issued by the Minister. In such instances, the person is liable to a penalty equal to the greater of (a) $500, and (b) 25% of the aggregate consideration received or receivable in respect of the tax shelter before the correct information is filed or an identification number is issued.

The Government asserts that, in the context of certain charitable donation tax shelters, the amount of consideration paid by a participant in respect of the tax shelter may be significantly less than the tax advantage represented to be enjoyed by the participant, thereby significantly limiting the maximum penalty that may be imposed under current subsection 237.1(7.4) of the Tax Act. To further motivate the accurate filing of applications for identification numbers in respect of charitable donation tax shelters, Budget 2012 proposes to amend the operative penalty provision such that the amount of the penalty would, in general terms, be 25% of the greater of (i) the aggregate consideration received or receivable in respect of the tax shelter before the correct information is filed with the Minister or a tax shelter identification number is issued, and (ii) the aggregate of all amounts stated or represented to be the value of property that a particular person who participates in the charitable donation tax shelter could donate to a "qualified donee", if the tax shelter is a gifting arrangement and consideration has been received or is receivable from the particular person in respect of the tax shelter before the correct information is filed with the Minister or the tax shelter identification number is issued. This proposed change will generally apply upon the proposed amendment being fully enacted into law.

While it may appear, at first glance, that the newly proposed penalty provision will primarily affect promoters, it is noteworthy that tax shelter purchasers may also be negatively impacted because the Tax Act generally precludes any person from deducting or claiming an amount in respect of a tax shelter at a time when a tax shelter compliance penalty imposed under subsection 237.1(7.4) of the Tax Act remains outstanding.

new penalty for filing failures

A promoter who accepts consideration in respect of a tax shelter or who acts as an agent or principal in respect of the tax shelter in a calendar year has an obligation under the Tax Act to file a prescribed information return containing, among other things, information identifying the purchasers of the tax shelter and the amounts paid by such persons in respect of the tax shelter. Failure to file the prescribed information return in a timely manner may result in the imposition of a penalty in an amount equal to the greater of (a) $100, and (b) $25 multiplied by the number of days the return is outstanding, to a maximum penalty of $2,500.2

In order to further motivate the timely and accurate provision of information in respect of tax shelters to the CRA, Budget 2012 proposes the addition of a new penalty provision that would apply where a promoter has an obligation to file the aforementioned information return and fails to (i) comply with a demand by the Minister to file the information return, or (ii) provide the required information identifying purchasers of the tax shelter and the amounts paid by such persons in respect of the tax shelter. The amount of the proposed penalty will be equal to 25% of the greater of (i) the aggregate consideration received or receivable in respect of the tax shelter from the persons whose information had not been reported at or before the time a demand was issued or the return was filed, and (ii) in the case of a charitable donation tax shelter, the total of all amounts stated or represented by the promoter to be the value of the property that those participants whose information has not been reported could donate to a "qualified donee".

This proposed additional penalty will apply in respect of demands to file an information return that are made, and failures to report an amount in an information return filed, after the new proposed penalty provision has been fully enacted into law.

Unlike the penalty levied under subsection 237.1(7.4) of the Tax Act, Budget 2012 does not appear to propose that purchasers of a tax shelter will be precluded from deducting or claiming amounts in respect of the tax shelter where the new proposed penalty is applied and remains unpaid.

                                ***

The proposals contained in Budget 2012, including the proposed amendments to the tax shelter provisions in the Tax Act, stand as further evidence of the Government's concern over the manner in which certain tax-focused transactions may affect the Canadian fiscal base. The tax shelter proposals in Budget 2012 reaffirm the Government's desire to carefully examine tax-motivated transactions and will place additional burdens on those that promote tax shelters. 

by Peter Botz and Michael Friedman

1 A "qualified done" generally includes registered charities and other entities to which a taxpayer can make a donation that is eligible for the donation tax credit.

2 Such penalty is imposed under a "catch all" penalty provision that generally applies in respect of (i) any failure to file an information return as and when required, and (ii) any failure to comply with a duty or obligation imposed under the Tax Act or the regulations thereunder, except where another provision sets out a penalty for the failure.

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2012