Legitimate Donation or Fool’s Gold? The Current State of the Global Learning and Gifting Initiative (GLGI)

Tens of thousands of Canadian taxpayers bought into the GLGI tax shelter and unfortunately for them, this had led to thousands of tax audits, objections and, in many cases, tax court appeals.

After several years of audits, objections and now appeals before the Tax Court, the CRA has recently begun sending out offers of settlement to those GLGI participants who filed notices of objection.

The big question right now is: should you accept the CRA’s current offer of settlement?

What is the CRA’s offer?

• allow a donation tax credit equal to your initial cash outlay
• cancel all interest related to the cash portion of the donation tax credit
• cancel all interest related to the gift portion of the donation from the period of the audit reassessment through to the date of the  new reassessment related to your acceptance of the offer
• you waive your right to any further objection or appeal in respect to these reassessments

Let’s review your options and the possible outcomes:

1. You accept the offer.  

You will be reassessed based on the terms outlined above.   Very generally speaking, this will result in a reduction to your tax debt in the 20% to 25% range.  The exact reduction will depend on various factors such as the amounts you contributed and how long ago you donated.   Your objections will be finalized and any outstanding balance will now have to be paid.  

2. You do not accept the offer.

The CRA will continue to hold your objection in abeyance pending the outcome of various test cases related to GLGI.  If GLGI wins in court, you will benefit from that ruling.  If GLGI loses in court, you will be subject to that decision as well.  Depending on how “badly” GLGI loses in court, you may be in a much worse position than if you would have accepted the CRA’s current offer (see my analysis on GLGI’s chances in court below).

Will GLGI win their court cases?

No one can say with 100% certainty however in my opinion it is highly unlikely.  These are the possible outcomes:

1. The court finds the donations should have been allowed and you end up not owing CRA one red cent – crossing your fingers!
2. The court finds that part of the previously claimed donation amount (i.e. the cash portion) should have been allowed and while your tax debt is reduced somewhat, the larger, disallowed donation amount along with the additional interest that has accumulated during this lengthy process (retroactively to the tax year when you received a refund associated to the donation) will ensure you can expect a big fat tax bill.
3. The court finds in favour of CRA, disallowing the entire donation and you owe the full debt as well as penalties and interest retroactively.  

Of course every case is different and tried on its own merits however based upon the rulings in other cases such as Lockie (2010 TCC 142), Berg (2012 TCC 406), Kossow (2012 TCC 325) and Bandi (2013 TCC 230), the Courts have clearly signalled their general agreement with the CRA’s position that the cash portion of the donation is – at best - the only legitimate donation amount.   

However, and even more troubling case – Maréchaux (2010 DTC 5174) had the court find that no amount of the original donation was legitimate – even the cash portion!  Essentially the court found that the cash portion of the “donation” was simply part of a tax reduction scheme and lacked the required donative intent. If the judge in the upcoming GLGI test cases agrees that they are similar enough to the Maréchaux case, then you will be in the unfortunate position of not even receiving credit for the cash you contributed to this tax shelter.

Given the above, you have to ask yourself which outcome is the most likely for the GLGI test cases?   My view is that the best case scenario is that you will be allowed a donation in the amount of your cash outlay. However the court cannot rule that interest relief also be granted, so this outcome would represent less than what you are currently being offered by the CRA.  

If you wait until the GLGI cases go to court, there is absolutely no guarantee that the CRA’s current offer of settlement will be made available to you again.  On the contrary, it is highly unlikely the CRA will make another offer of settlement if the most likely scenario unfolds and the CRA wins their case in whole or in part.  Why would they? Their position would only be enhanced by a court victory making them less likely to negotiate a settlement with you.

Some of these GLGI cases have been outstanding for many years. This will mean that penalties and interest (compounded daily) are staggering and the tax debt will have quickly doubled or even tripled in size. Whether you accept the offer now or wait until the court cases are decided, CRA will proceed to take aggressive enforcement action sooner or later. Remember, CRA is under immense pressure from the government to collect all revenue it can if a budget deficit crisis is to be avoided.

Don’t put all your eggs in one basket, assuming that the outcomes of these court cases are going to go in your favour. Being prepared and having plans in place for all outcomes can greatly reduce financial impacts to you later.

What should you do now?

Call Tax Solutions Canada at 1.888.868.1400 and make an appointment to speak with one of our tax specialists who will guide you through your options.  We can assist you with the challenges you will face in deciding whether to accept the offer and how to deal with the CRA regarding that large tax bill you will have to deal with once if you sign the offer.

Avoiding a Frozen Bank Account from CRA Over the Holidays

If you have been engaged in a dance with CRA then you may be feeling concerned with the holidays coming up.  A lot of people really feel the financial pressure over the holidays – expectations to buy gifts, celebrate, travel to be with family, etc. When a tax debt is present, these feelings become intensified because CRA does not stop taking enforcement action against taxpayers simply because it is the holiday season.

The top 3 forms of collection action taken by the CRA are property liens, wage garnishments and frozen bank accounts (including RRSP). CRA is also taking enforcement actions on tax debts sooner than ever before; just this past year we saw a client whose account was frozen based on a tax return, filed on time for 2012, where the account had run out of post-dated cheques and had missed only 2 monthly installment payments.

While a property lien is a HUGE problem and has to be addressed, a frozen bank account or wage garnishment can cause instant financial devastation, if this happens over the holidays it can destroy people.

Why more so at this time of year?  The people you need to help you fix the problem – bankers, mortgage brokers and lenders, family members and the CRA collectors themselves (or their managers who they need approval from) are often travelling, busy and generally not as available.

The biggest way to avoid a frozen bank account or wage garnishment is to not disclose the information to CRA. The most common way that CRA learns of a taxpayer’s assets is from the taxpayer. Here is the common trick:

1. You contact CRA because as a responsible person you want to make payment arrangements you also want to avoid them coming after you. Maybe you cannot pay in full but you could offer a monthly payment – that should work, right? Wrong!
2. CRA will say that they are willing to consider (note the subtle way they do not really commit) a payment arrangement only if you complete a financial disclosure form (which provides your CRA “Enemy” with all the ammunition they need to shoot you with: your employment information, current address, income, expenses, a list of everything you own and where it is, debts, etc.)
3. You complete this document openly and honestly and return it to CRA.  Usually the taxpayer feels they are “lucky, I got a really understanding CRA agent and look my honesty is paying off they are working with me, wow I must be an even better negotiator than I had thought”.  How wrong you are.  Read on ….
4. Next, CRA does one of two things:
1. Accepts a monthly payment arrangement – but only temporarily. Which means it does not cover the whole debt and there is no commitment (and usually no discussion with CRA) from CRA about how the balance will be dealt with.  These are usually affordable payments that you will think set a precedent for how the entire problem will be resolved over time.  CRA demands post-dated cheques to do so. You provide them in good faith.
1. Now CRA knows: where you live (and run a public search to see if you own your home so they can place a lien on your house without telling you), where you work (wage garnishment and major embarrassment) and where you bank (frozen bank account so you incur NSF fees, late payment charges and cannot make mortgage, rent or car payments).
2. Then when this temporary arrangement has been properly paid by you, CRA will often refuse to renew it and demand a significantly higher payment.  If you cannot meet these new demands you will face all the consequences of CRA collection action that we discussed above.

2. Review your disclosure and decide what they think you can afford to pay them. Which will of course be a monthly payment amount significantly higher than what you had in mind (or can actually afford). If you cannot meet these new demands you will face all the consequences of CRA collection action that we discussed above.

Once your file lands in CRA’s collection department it is dangerous idea to try negotiating with them directly.  CRA have a very experienced and carefully constructed collection teams who do this all day every day. The CRA techniques include tricking you into divulging information that will result in placing you at risk for serious legal action.

The best way to avoid a frozen bank account over the holiday season is to consult a professional with the experience of resolving tax problems to get a plan in place to deal with your tax debt.

For more about how to deal with a frozen bank account, please contact Tax Solutions Canada today by calling 1.888.868.1400.

Happy Holidays from the Team at Tax Solutions Canada

The team at Tax Solutions Canada wants to wish you and your family a happy and healthy holiday season. We hope that 2015 brings you all that you are hoping for!

Protect Your Home From CRA – Transferring Your Home to Someone Else’s Name

The stress you feel when you owe money to the Canada Revenue Agency is for good reason.  Similar stress exists even if CRA have not yet assessed you but you have outstanding returns to file or undisclosed income. Especially when you have assets, it is natural to go into damage control mode and start trying to protect what you have.

The pressure to “do something” intensifies when an individual owns a home (and even more so when the home is jointly owned with a spouse).

The only time it is 100% safe to transfer or gift your assets is when you have no debts of any kind.  But if the debt is a tax debt you need to be extra careful as CRA have automatic powers that no other creditor has.

CRA have the right to place a lien on your home. Effectively, this is the same as a mortgage that CRA places on your interest in the home without having to give you any warning or hold a hearing.  Many people do not find out until they try and refinance or sell the home.  

What are the consequences of a tax lien related to a tax debt?

• CRA can force the sale of your home
• Your bank can refuse to renew your mortgage
• Your financing options become fewer and more expensive because not all lenders will finance a person who has a tax problem – even if the refinancing is to pay off the entire amount of the tax lien.
• Interest will continue to compound daily
• Additional CRA liens can be added as additional tax debt is identified by CRA
• CRA will become far more difficult to negotiate with (see refer to our other blog or website it is possible to reduce what CRA thinks you owe) because they are now secured.
• If the lien is most or all of your equity in the house you essentially become a renter because as long as you owe CRA money you will not be able to do much with your home except sell it.  Every dollar you pay down on your mortgage and every dollar of increase in your home’s value are for CRA’s benefit not yours.

The first idea most people have when trying to protect their home from CRA, is to transfer ownership to a family member, such as a spouse or parent.  The lawyers they ask to process this transaction generally do not ask “why”.  Of course it is possible to make this transfer when there is no lien or similar restriction on the title. CRA has seen every move that taxpayers have ever tried and have together with the Federal government closed off these loopholes. . Section 160 of the Income Tax Act (similar sections exist in the Excise Tax Act to catch HST lien avoidance) is the loophole closing law that catches you here.

Under section 160 if, at a time you owe CRA money, you transfer the asset (house or other) to someone and do not receive full market value back in return the non-third party person CRA can and will assess that recipient for the taxes you owed (to the value of the asset transferred).  This recipient is now open to all the levels of attack you were against any of their assets – not just the property you transferred. Do you really want to give a loved one a tax debt “gift”?

So what can you legitimately do?  The strategy depends on the exact status of your dealings (or non-dealings!) with CRA.  Some of the most common items are:

1. CRA has not yet contacted you and is not yet aware of your tax compliance problems – You are actually very well positioned if CRA has not contacted you about late filing or undisclosed income to make an application under the Voluntary Disclosure Program. If you are accepted into this “one shot to get it right program”, you will have eliminated the penalties, interest and prosecution. Because this should significantly reduce what you will owe overall, the next step will be to negotiate repayment arrangements that CRA will accept and that you can live with.
2. CRA is aware of your tax compliance problem/back tax debt, has initiated contact but has not yet placed a lien on your home.
3. CRA is aware of your tax compliance problem/back tax debt and is coming after you – no lien yet.

In the above 3 situations you are still able to use the equity in your home to pay back CRA.  Generally speaking the mortgage lenders charge lower rates if the refinance is not to eliminate a tax lien.  Of course there are other options to repay the CRA including payments over time.  However, these require full knowledge of CRA negotiation restrictions and process.  Consult an expert as a broken repayment plan has significant adverse consequences.  

4. CRA is aware of your tax compliance problem/back tax debt a lien has been placed on the home – You have fewer options and aggressive negotiation, specialized resources and possible Federal government programs will need to be leveraged to overcome this challenge.

All of the above require in-depth knowledge of CRA processes and procedures and when there are assets involved we never recommend contacting CRA directly.

If you are in trouble with CRA (and definitely where you own a home), speak with a tax professional as soon as possible to put you in a position to protect your home and resolve your tax problem.

Don’t assume that transferring your home to avoid paying a tax debt will solve your problem! It won’t – it will just create even larger problems. For more about how to avoid a tax lien being placed on your home, please contact Tax Solutions Canada today by calling 1.888.868.1400.

CRA Whistleblower Program: Who Does it and How it Could Happen to You

The CRA Whistleblower Program, also known as the Informant Leads Program, is one where anyone can report an individual or corporation for not complying with tax laws. The mandate of the Informant Leads Program is to co-ordinate all leads received from whistleblowers and to ensure that the appropriate departments receive those leads for enforcement action.

What information does CRA want to learn? Names and contact information of suspects, SIN numbers, dates of birth, spouse names, business names, names of shareholders, names of related companies, the type of tax fraud you suspect, details of observations, any copies of documents, information on documents you have seen and what they indicated, location of documents, information about individuals and businesses dealing in cash, information on assets, liabilities, expenses or suspects and more. The list goes on.

Providing your own contact information is optional, but as announced in the 2013 Economic Action Plan, there may be financial incentives to providing your information when snitching. Specifically CRA launched the Offshore Tax Informant Program (OTIP) as part of the 2013 Economic Action Plan, which offers financial awards to individuals who report to CRA on non-compliance of taxes that result in over $100,000 in additional federal tax being assessed and collected.

It seems that CRA is paying for information from the USA. The National Post reported that a Utah man has collected a bounty after turning in a suspected Canadian fraudster living in that state. The Utah Securities Commission awarded its first ever whistleblower $15,000.00 USD, to a financial advisor who reported on activities that led to criminal charges being laid against “a Canadian national” living in the state. Read the full article here.

CRA has made it easier than ever for someone to blow the whistle on you. They can do this by phone or anonymously through the CRA website. How long do you think it will take for Canada to issue its first financial rewards under OTIP?

Who is likely to blow the whistle on you? It is usually those with a motive, like ex-spouses, business partners and employees - but in the case of the UTAH man it was actually a financial advisor. It makes it very difficult to know who to trust, so if you are someone who suspects that someone may blow the whistle on you, it pays to consult a tax firm that specializes in these cases.

You need to have an expert guide you through the one-shot programs at CRA for bringing your tax records up to date – and you must act before CRA contact you in any way in respect of such tax information.

There are a number of things that you can do to ensure that a past indiscretion as it relates to your taxes is resolved before CRA gets to you. Also, in the event that you do not come under investigation by CRA and they start sniffing around asking questions you will want to learn how to handle this without exposing yourself to unnecessary attacks, excessive penalties and interest and, worst of all, risk criminal prosecution.

For more about the CRA Whistleblower Program and how to avoid unnecessary hassles and penalties, please contact Tax Solutions Canada today at 1-888-868-1400.

Tax Evasion Tip: Working for Cash? Get to CRA Before They Get to You

Working for cash and thinking because it’s cash and there is no paperwork you’re all good? Think again - particularly as it relates to sub-contractors, people in the construction trades, waiters and waitresses, or any industry where cash businesses is common (repairmen, auto body shops, service industry).  Often these individuals and business owners think that because they deal in cash, they are safe as far as taxes and CRA is concerned.

Anytime you are receiving income which you are not reporting you are playing with fire.

Canada Revenue Agency is always adding technology and other techniques to respond to the demands of Government to collect taxes from the underground economy. 

CRA has an arsenal of tools and techniques that they use to catch tax cheats.  

If you have undeclared income anywhere in the world you are more and more likely to find yourself in serious trouble with the tax authorities.  We are seeing more cases like this than ever before.  And that is because CRA are getting better at their job. 

Here are some typical examples of how people get caught.

You may assume that because you were paid cash that the other person will not declare what they paid you as an expense on their tax returns. They may have directly said this to you. You may think that because no invoice was exchanged, there is no record and so no proof. Often individuals who pay in cash will still declare the amount paid as an expense on their returns. This is the person who was trying to enter into an illegal transaction with you – so we know they cannot be fully trusted.  If CRA comes knocking they may not have a receipt but in an effort to prove the expense, they may furnish CRA with your information.

This will inevitably lead to CRA coming and knocking on your door. CRA then can proceed to audit you… so you may think – go ahead because there are no records. Well, CRA has a number of methods they will deploy to determine that you earned more than was declared. Here are some examples:

·        They can audit your bank account and assume that every cash deposit is in fact income – it will be your burden to prove otherwise (such as the money was a gift).

·        They can perform an indirect determination of income by expenses. They can look at your current lifestyle and expenses and estimate a minimum you must be earning in order to pay for the lifestyle that you maintain.

·        They can do a net worth assessment – see what you own and conclude that earned the money to pay for it.  If there is not enough money on the tax returns you filed – watch out.  You are getting an aggressive assessment plus penalties plus interest.  Proving your innocence is very difficult to do. 

It only takes one individual or transaction to get you onto CRA’s radar resulting in a world of pain. Consequences you could face due to CRA determining you have undisclosed income can include retroactive penalties and interest and even prosecution. This past year alone over 40 business owners and individuals have been convicted of some form of tax evasion.

These convictions are to deter other tax cheats.

Stop looking over your shoulder (or your spouse’s shoulder if they are tax cheat).  With snitch lines and technology more people are being caught and while the number of convictions seem low thousands more are paying huge administrative penalties.

The undeclared income problem is a huge headache for the Canadian Government.  Our system relies on everyone paying their fair share.  CRA is putting increasing resources to find this income and tax it.

Tax agreements to share information with other countries – that bank account, business or property you inherited and rent out overseas are now getting focussed. 

I will share one simple example.  A man had inherited a small commercial building in Lisbon, Portugal.  For twenty years he accumulated the profits in a bank account in Portugal intending to leave it to his children.  He never spent one cent of this money.  His Toronto construction business ran into problems and he needed c ash flow to complete the project.  He brought $30,000 from Portugal.  He got caught in a CRA audit (one of his employees had failed to declare his income properly and CRA audited him and then widened the net to include this employer).  CRA saw the $30,000 increase in cash flow, asked questions and found the Portuguese bank account.  This hard working, otherwise man who was already struggling to keep his business afloat now had a tax bill that included penalties and interest that tripled the amount he had to pay.  A lien went onto his house.  His bank account was frozen and he went bankrupt.  The $30,000 had led to uncovering undisclosed income of almost $1,000,000.  The CRA auditor was a hero and this otherwise good man saw a lifetime of hard work blow up in his face.

CRA want you to come clean and if you do so they have a program that if handled correctly allows you to just pay the tax and reduced interest but no gross negligence penalties.

We always recommend getting to CRA before they get to you. Correctly use the Voluntary Disclosure Program and save yourself. This is a one shot opportunity.  We recommend that you do not risk it as an amateur or use an accountant who does this maybe one time a year.  There are professionals who are experts in this area.  What price can you put on your freedom and peace of mind?

If your tax debt will involve a penalty, is more than one year old and CRA has not yet approached you about the tax year in question, you may qualify to make a VDP application. Once a VDP application has been accepted, CRA essentially agrees to accept your income declaration and will not charge you penalties, interest that would have accrued on the penalties or prosecute you for failing to declare income.

If CRA is already asking questions, you still have options.  These options are more complicated and you likely need the help of someone who has deep experience dealing with CRA and difficult tax problems to get guidance.  Do so long before you consider having a direct conversation with CRA. CRA agents are going to try and trick you so it is usually better to put someone between yourself and CRA.CRA put up a webpage on this topic which outlines their position on not declaring cash income and consequences if caught. You can access it here: http://www.cra-arc.gc.ca/nwsrm/txtps/2014/tt140707-eng.html?utm_source=mediaroom&utm_medium=eml.

If you know that you have earned cashed that has not been declared and want advice feel welcome to reach out to us and our experienced. Call Tax Solutions Canada today at 1-888-868-1400.