Advisors left looking for new tax shelters

(December 12, 2003) The federal government’s abrupt move to outlaw “buy low, donate high” charitable tax shelters has left advisors who were selling the investment high and dry. Some are angry with the CCRA, but there’s also concern over finding new kinds of shelters Ottawa will permit in the future.

Earlier this week, the finance department announced that effective December 5, 2003, “the value of a gift of property for charitable donation purposes will be limited to a donor’s cost of the property.” That moves shuts down a number of charitable donation schemes related to various products, such as art, software and medicine.

Advisor.ca contacted several advisors who recommended one or more of the charitable donation schemes to clients. Because of the negative publicity some of the programs have received, they asked to remain anonymous.

One advisor accused the CCRA of “playing games” with Canadian taxpayers, noting this is not the first time donation shelters have been shut down. “The same thing happened last year with a loan donation program, it was shut down last December because CCRA wanted to change the plan.”

“The CCRA referred to it as a scheme and said investors should be beware,” the advisor added. “But if it doesn’t deserve a foundation or donation tax number, they shouldn’t give one out. You have to stand by what you do.”

Another advisor who participated in one of the programs says clients were very interested, and he still gets calls on a daily basis. “A lot of people can’t get excited about the investment industry, but we all like to save on taxes, so it’s an interesting story to tell people. But I don’t know of a tax shelter I feel comfortable with, so that’s what I have to try to find.”

It may not be easy. Dave Clarke, manager of taxation services at Collins Barrow in Ottawa, says the feds appear to be cracking down on tax shelters for high net worth individuals. “If you think about advisors who are selling these, the government has impacted them twice this year,” he says. “They’ve taken away their regular tax shelter and now they’ve taken away the donation one so I don’t know what’s left for those guys.”

Despite Ottawa’s move, there is little concern that the CCRA will attempt to apply the new rules to donations given before December 5. “They don’t like to go retroactive because it ends up going to court and there are rules that they just can’t overturn,” explains Clarke. “So there’s limited point in going back.”

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The only real risk concerns valuation, which the CCRA can question at any time. One advisor said he spent a couple of weeks doing due diligence on a program offered by Initiatives Canada Corporation before deciding to recommend it to clients.

“They’ve been around for a few years and they were more forthcoming with specific information. The costs seemed defensible to me, it was easy to say, ‘Yes that’s a fair price.’ I felt very comfortable with it and a number of clients took advantage of it. From a business point of view, it was a good referral.

“But it’s gone too because it has the same methodology, even though it wasn’t the one that created the problem,” the advisor added.

Still, there’s little concern that tax shelters will disappear entirely. “Some pretty smart accountants and lawyers found a good opportunity for a lot of people,” an advisor says. “It’s a perpetual cat-and-mouse thing. They’re always cracking down and there’s always new ones being created.”

And that’s the way it should be, another advisor believes. “If your accountant doesn’t try to take you to the highest level of tax avoidance, you should find another accountant.”

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Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(12/12/03)

Doug Watt