New Canada Revenue rules target charitable tax shelters

The Canada Revenue Agency has been given controversial new powers to go after Canadians who participate in tax shelters that involve donations to charity.

The CRA has been cracking down on these types of shelters in recent years, disallowing more than $5-billion in donations, penalizing more than 160,000 taxpayers and revoking the charitable status of dozens of organizations. Last month alone, the CRA revoked the charitable status of Marketplace Ministries International, a Toronto-based organization that the CRA alleged used a tax shelter to issue $23-million in improper tax receipts.

These shelters often arrange for the purchase of goods, such as artwork or medical supplies, which is then donated at an inflated value to a willing charity which issues tax receipts to participants in the shelter.

Such cases often take years to resolve because many involved in the shelters challenge the CRA's reassessments in various courts including the Tax Court of Canada, which has a significant backlog. To help the CRA in its efforts, last month's federal budget gave the agency the power to seize half of the disputed amount before the court cases have been completed. The measure is being introduced "to discourage participation in questionable charitable donation tax shelters and to reduce the risk that unpaid amounts will ultimately become uncollectable," the budget said.

However, some lawyers say the proposal goes too far and could be unconstitutional.

"If it were challenged [the CRA] might have a problem with it," said Terry Carter a lawyer with the Toronto firm Carters, which specializes in charities. "If you have an appeal mechanism for disputing the taxes that you owe, having the government being able to seize the monies that it thinks is owed before you have exhausted your appeals is not the normal way that you deal with tax disputes."

In a recent bulletin about the budget proposal, Mr. Carter noted that there "is no similar provision under the [Income Tax Act] for other potentially disputed taxes by CRA" and that the constitutionality of the proposal is questionable.

Mr. Carter said he understands the policy objective of the proposal and the intent of the government to discourage taxpayers from participating in illegal shelters. "The reality is that the charitable sector has been badly mauled by tax shelters and people continue to participate in these donation tax shelters and they are causing problems, not only for the CRA in relation to the taxes that otherwise are due to them, but it is also providing a negative impact on the sector," he said.

A spokesman for CRA did not comment on the proposal but said the agency will be announcing further details soon.

Mark Blumberg, a Toronto lawyer who also specializes in charities, said the measure is reasonable. He said such shelters have cost Canadians billions of dollars in lost tax revenue and many of the participants have been able to drag out the legal process for years.

"You can string out the court system because it is so slow and the Tax Court is backlogged, so you can string them along for five or 10 years," he said. Mr. Blumberg added that the provision is narrow and limited only to tax shelters, meaning other disputes will still go through all appeals before the CRA can collect.

"It's about fairness to other taxpayers," he said. "It's very unfair to average Canadian taxpayers that a group are essentially abusing the system."