Charitable tax shelters

Well, ’tis the Season!  We are fast approaching December 31st, which is the end of the taxation year for all individuals and most trusts.  Accordingly, much last minute tax planning will occur in order to ensure effective tax management.  One of the most common tax planning techniques is to look at charitable donations (with gifts needing to be made on or prior to December 31, 2008 in order to be used as tax credits for individuals and most trusts for the 2008 taxation year).

Most taxpayers who are philanthropic give willingly to charities.  While the tax benefit is certainly welcome, it is my experience that the tax effect of a charitable donation is secondary as opposed to the primary objective of simply benefitting charities.  Unfortunately, there are many “tax products” that are marketed aggressively at this time of year that promote tax benefits in order to encourage donations to charities.  While beyond the scope of this blog, many recent examples of charitable tax shelters involve donations of products where the cost of acquiring such products is apparently less than the corresponding fair market value (with the charitable receipt being issued for the higher fair market value).  This example of a charitable tax shelter has been eliminated from technical effectiveness given some amendments to the Income Tax Act made approximately five years ago.  However, unfortunately, various versions of such plans still exist that attempt to circumvent the new rules.  One such example of a plan involves the utilization of a trust whereby the donor applies to become a beneficiary of a trust, and through various machinations of transactions ends up “donating” various assets to a registered charity.  The ultimate “tax benefit” as compared to the cash outlay by the donor is significant. Notwithstanding that this particular plan may have technical merit, it is extremely aggressive and one queries whether the general anti-avoidance rule (“GAAR”), or other technical attacks could be made.  The CRA certainly thinks so and has commented publicly many times that is is not impressed. For example, in a CRA News Release dated October 20, 2008 it stated:

“The CRA is reviewing all tax shelter-related donation arrangements (for example, schemes that typically promise donors tax receipts worth more than the actual amount of the donation), and it plans to audit every participating charity, promoter, and investor.”

The CRA also released a similar warning in its CRA Taxpayer Alert series of News Releases in August, 2007.  The old cliché “if it seems too good to be true, it likely is” certainly applies to charitable tax shelters.  At the very least, seek professional advice as to whether or not the marketed charitable tax shelter has technical merit (or would be considered aggressive).

For the philanthropic, there are many tax effective, yet conservative, charitable donation plans that can increase the after tax effect of each charitable tax dollar. For example, one may consider a donation of shares, or flow through shares (the subject of a future blog entry), that have a fair market value in excess of its adjusted cost base (the adjusted cost base of flow through shares is generally nil). The realized capital gain on a donation of shares to a charity is no longer taxable. We would be pleased to discuss charitable gift planning with you.