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Tax shelters
What is a tax shelter?Tax shelters are defined in the Income Tax Act. In very general terms, a tax shelter includes either a gifting arrangement or the acquisition of property, where it is represented to the purchaser or donor that the tax benefits and deductions arising from the arrangement or acquisition will equal or exceed the net costs of entering into the arrangement or the property. Also, a gifting arrangement where the donor incurs a limited recourse debt related to the gift will be a tax shelter. Generally a limited recourse debt is one where the borrower is not at risk for the repayment. A tax shelter identification number does not automatically entitle the participants to tax benefitsA tax shelter identification number is intended only to track the schemes and participants and does not entitle the participants to any of the benefits related to the tax shelter. Every promoter of a tax shelter has to include on every written statement that refers to the identification number of the tax shelter the following statement: "The identification number issued for this tax shelter shall be included in any income tax return filed by the investor. Issuance of the identification number is for administrative purposes only and does not in any way confirm the entitlement of an investor to claim any tax benefits associated with the tax shelter." What is the purpose of the tax shelter identification number?A promoter of a tax shelter must acquire a tax shelter identification number before selling the tax shelter property. In addition, the promoter must provide the Canada Revenue Agency (CRA) with the list of investors or participants, including their names, social insurance numbers, and other prescribed information. The identification number allows the CRA to track these arrangements and the taxpayers who participate in them. All tax shelters are reviewed, and if they are considered potentially abusive, audits are carried out. Promoters who file false or misleading information in their application for a tax shelter number, or that sell, issue, or accept consideration in respect of a tax shelter before an identification number has been issued, are liable to a penalty. While this penalty or related interest is outstanding, no participant in the tax shelter can claim the tax benefits associated with the tax shelter. Cautionary steps for participating in tax shelter arrangementsAnyone considering entering into a tax shelter arrangement should obtain independent professional advice from a tax advisor before signing any documents. In addition, they should:
Individual taxpayers should be aware that the CRA could normally reassess returns up to three years after the date of assessment. The fact that tax shelter benefits were accepted on initial assessment should not be interpreted as acceptance of the claim by the CRA. It may take more than one year to complete a tax shelter audit. More informationFor more information, consult the following fact sheets:
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