Tax shelters are referred to as the method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international tax laws. In North America, a tax shelter is generally defined as any method that recovers more than $1 in tax for every $1 spent.

This article identifies and explains the concept of tax shelters in Canada, the Tax Shelter Identification Number and possible complications regarding Tax Shelters.

What is the Concept of Tax Shelters in Canada?

The Canada Revenue Agency states that 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. Generally a limited recourse debt is one where the borrower is not at risk for the repayment.

What is the Tax Shelter Identification Number?

A tax shelter identification number does not automatically entitle participants to tax benefits. It is meant to monitor 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."
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.

What are possible complications regarding Tax Shelters?

To protect the Canadian culture from American influence, tax incentives were given to companies that produced Canadian television programmes. In general, a tax shelter is any organized programme in which many individuals, rich or poor participate to reduce their taxes due. However, a few individuals stretch the limits of legal interpretation of the income tax laws. While these actions may be within the boundary of legally accepted practice in physical form, these actions could be deemed to be conducted in bad faith. Tax shelters were intended to induce good behaviours from the masses, but at the same time caused a handful to act in the opposite manner. Tax shelters have therefore often shared an unsavoury association with fraud.

Precautionary Measures

It is important for people, who go into a tax shelter arrangement, to acquire independent professional advice from a tax advisor before signing any documents. 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 revenue agency.


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