New rules to plug gaps in tax regime

The 2013 Budget introduced a slew of changes to tax rules in an attempt to plug loopholes.

Read: Federal Budget 2013: Closing Loopholes

One such amendment proposes to extend the reassessment period for tax shelters.

Currently, promoters of tax shelters must registered them with CRA, and file an information return.

Read: 2013 Budget: Not much good tax news

“A lot of Canadians invest in these tax shelters; to determine whether or not these investments are legitimate, the CRA has to investigate the promoters,” says Frank Bilotta, tax partner, Richter LLP, a tax and accounting firm in Toronto. “[It used to be that] by the time they finished investigating, the investors had already taken advantage of the preferential tax credits.”

Under previous legislation, when the three-year assessment period in the statute had lapsed, CRA could no longer reassess investors’ returns, he adds.

Under the new rule, the three years won’t start until after CRA’s done investigating the shelter’s promoter. This will help the authorities identify and audit inappropriate claims, says Bilotta.

Read: Party’s over for tax-advantaged investing

The new rule, which came into effect March 21, will potentially impact high-income earners.

“The investment in these shelters is rather high, so it wouldn’t be for your average Canadian with a T4-type income,” says Bilotta. “You’re typically looking at people earning over $400,000 to $500,000 who are investing $100,000 and more in these shelters.”

Most are CRA-approved charitable trusts where investors are given receipts for cash donations.

Trust residency rule changes

The 2013 Budget also tightened the deemed residency rule in an attempt to remove ambiguity around non-resident trusts.

The current rules are designed to prevent taxpayers from using offshore trusts to avoid Canadian tax.

Read: The final word on offshore trusts

Previous rules allowed beneficiaries to sell property to non-resident trusts and have the property come back to them, but not the taxable income that comes with it, says Bilotta.

“The new CRA rule says if as a Canadian resident you’re a beneficiary and are going to sell that property at fair market value, but retain some form of ownership of the property, the agency’s going to deem the non-resident trust to be a Canadian trust,” he adds. “So you are now going to get caught by [Canadian] tax rules.”