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tax matters

Being a tax specialist comes with certain drawbacks. For starters, people generally recognize that tax specialists have absolutely no personality or sense of humour. There's a joke book that's been written specifically for tax specialists, to help us fit in with the general population. It's basically a book of knock-knock jokes that hasn't really worked for me.

And so people, in general, avoid talking to tax specialists - until Dec. 1 each year. On Wednesday, my phone starting ringing off the hook with people looking for last-minute ideas to shelter income for this year. Once again, I have a sense of purpose. Life has meaning.

What about you? I'm wondering what you're doing to shelter income from taxes this year.

Recent trends

Over the past 20 years, clever tax specialists have designed all types of tax shelters to help Canadians minimize tax. In the 1990s, it was film and software tax shelters, or mutual fund limited partnerships. These things have all gone the way of the Dodo bird.

In the 2000s, tax shelters evolved and donation tax shelters became the rage. Many were buy-low-donate-high schemes where you'd purchase something for one price then donate it to charity and receive a donation receipt for a much higher value. The Canada Revenue Agency isn't exactly thrilled about these.

Interestingly, not all donation tax shelters should be painted with the same brush. Some are different. Some legitimately help charities.

Recent structure

There's a donation tax strategy, designed by EquiGenesis Corp. and their legal team, that is worthy of some mention. Over the past seven years since it was first introduced, it has distributed $14.7-million to charities in Canada, with significantly more expected over the next decade.

Now, before I go on, I want to emphasize that this strategy does come with tax risk. There's the likelihood that the CRA will audit the 2010 version of this strategy, and the risk that taxpayers could be reassessed.

Having said this, I like the fact that the total cash to be distributed to charities over the life of this tax structure will be greater than the donation receipts issued to the taxpayers who participate. This gives the strategy more legitimacy than many. It also helps that this strategy is fully on the taxman's radar already. It was audited by the CRA for 2005 and 2006, and was given a clean bill of health subsequent to those audits.

How it works

There are basically two phases to this tax structure. The first is that the taxpayer will make an investment in a limited partnership. The second involves a donation to charity. It's a 10-year program so that, at the end of 10 years, your investment is wound-up and you are expected to receive a cash distribution (although not guaranteed).

Specifically, the investor will borrow money to invest in a limited partnership. This will provide the investor with annual deductions on his tax return for interest costs on the debt and financing charges.

Once the investor acquires the limited partnership units, he uses those units as collateral on a second loan, and he donates those loan proceeds to charity. There is no deduction available for the interest on this second loan, but the individual investor will receive a sizable donation receipt. So the tax savings in the first year can be significant.

Part of the funds that are invested in the limited partnership are set aside and invested in a portfolio that is designed to grow over the 10-year program. At the end of 10 years, the funds in the portfolio are expected to be sufficient to pay off the loans. This is part of the risk of the structure. If that portfolio does not grow sufficiently, the investor may have to make up the difference to pay off the loans. The fact that there is some risk to the structure makes it more palatable to the taxman.

At the end of the day, the net cash in the investor's pocket from the tax savings and cash distributed in year 10 is expected to be higher than the cash outlay, with most of the tax savings coming up front in the first year.

If you can help charities and save more tax at the same time, it's worth a look. But before jumping into any tax-structured program, be sure to have a tax specialist review the program on your behalf.

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