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.

Restaurant Owners with Point-of-Sale Terminals (P.O.S.) Look Out!

The restaurant business has long been an industry that the Canada Revenue Agency monitors for possible tax evasion schemes. As all restaurant owners and their advisors know, it can be an incredibly difficult industry to compete in and underreporting of sales is very common.  More recently, many restaurants have had unreported income discovered by CRA through investigations of their Point-of-Sale terminal providers. You can't be a successful operator in the restaurant business without using POS terminals; however the use of these systems is leading to audits as POS terminal providers are being audited and those audits are identifying differing degrees of information about the customers (you the restaurant owner) which, when CRA compare to the records you have/have not filed, leads to you being audited (or worse – an investigation for criminal tax evasion). 

What does this mean? If the company that provides your Point-of-Sale system gets audited, Canada Revenue Agents are going to go through all of their information with a fine-toothed comb. This will inevitably lead to an audit of your company. If CRA finds income that you have not reported, you will be liable for not only the tax debt, but also the interest and penalties that accompany it. Worse still, tax evasion in Canada can carry a jail sentence. 

If you are a restaurateur who has failed to report income, you need to be very concerned about the fact that the CRA is no longer uninformed about the existence of those electronic devices designed to help you evade paying taxes, nor are they weak in their auditing or prosecuting ability. 

Owing money to the government is not a crime - but failing to declare income and/or filing false returns are. If you know that you have made false claims it is best to come clean before the CRA catches on and audits you. A CRA audit can lead to consequences, both for you as an individual and as a business owner. Don't wait until you are audited. Let an experienced tax solutions professional help you get on your way to complete tax compliance. 

If you have failed to report income and the CRA has caught on, you need to be extra careful so as to protect yourself as best you can. Simply making full disclosure to the CRA can be harmful (though not as harmful as not coming forward and getting caught). Instead of just giving CRA agents whatever they ask for in the hope that this will seem compliant, make sure that you seek representation from a tax company. Don't think that just because you are now being compliant that the CRA will go easy on you - they won't.  They can and do use this evidence to assess penalties and/or to prosecute criminally.  

For more information about tax audits and what to do if you are being audited by the CRA, please contact Tax Solutions Canada by calling 1-888-868-1400.

How a Single Business Tax Audit Causes a Chain Reaction

Tax audits are very common in Canada and many wonder how they get triggered. Well, the CBC looked into it last year and reported some very interesting information. 

According to Canada’s top auditor, Michael Ferguson, the CRA tends to investigate those files which have a higher probability of a return for the government (that is, tax recovery + interest + penalties). “In the two fiscal years the auditor general examined, the sleuthing of those 700 employees uncovered $2.8 billion in additional taxes, interest and penalties each year.” That's an average of $4 million in tax revenue for each CRA auditor every year. 

The CRA has a department with 700 auditors charged with the task of finding you, forcing you to file and then either forcing you to pay or go bankrupt. However, there is one thing this CBC article left out and that is that the Auditor General for Canada measures the CRA’s success based on files closed - not dollars collected. For the $2.8 billion in additional taxes the CRA collection team uncovered, probably close to as much was lost because of the CRA demanding payment in full on tax debts and deploying heavy handed tactics to get the money or force you into bankruptcy. Bad things happen to good people. Many taxpayers want to pay their tax debt and could honour a monthly repayment plan based on all or some of their tax debt – if the CRA would be fair. If you have a professional familiar with CRA negotiation tactics, policies and procedures working on your side, it becomes even easier. Sadly, your good intentions and naivety will likely get overrun by the CRA giant bureaucracy. 

The tax audit chain re-action can occur if one of your suppliers or clients was audited. If the CRA sees something in their books that causes the CRA to question you or to follow the money trail through your company– they can decide to take a look at your company’s books next. The same is true if the CRA audits you and sees something in your books as it relates to another company that may not be tax compliant - the CRA may take a look at them.

The CBC article revealed that filing late and filing improperly can trigger a tax audit. A tax audit is a detailed investigation into your tax returns. If they find any discrepancies between your return and the information they review during the audit then can penalize you severely! Penalties for late filing for first time offenders is 5% of the amount of the tax debt, plus 1% per month for each month that the return remains unfiled to a maximum of 60%, plus daily compound interest. Penalties for failing to declare income or not being able to support expenses the way CRA likes (which generally occurs during a tax audit) will usually involve even larger penalties.

In addition, if a tax audit results in a tax debt that you don’t pay, the article re-iterates what we tell our clients all the time – there are consequences. Consequences of a tax debt can include: 

·         Criminal convictions for tax offences are posted online which can have devastating effects to your business and reputation.

·         You can have your receivables garnisheed – again very embarrassing.

·         You can have your bank account frozen which is extremely disruptive to cash flow and may cause your bank to panic.

·         If successfully prosecuted for tax evasion you could face jail time. A tax audit can lead to a charge of tax evasion. http://www.cra-arc.gc.ca/nwsrm/cnvctns/bc/bc121017-eng.html  

According to a Toronto law firm, during the 2008/2009 tax year, 164 cases were sent to the Public Prosecution Service of Canada and 58 GST audits to the Ministere de la Justice du Quebec for criminal prosecution. A total of 257 cases resulted in criminal convictions for tax evasion or tax fraud, as a result of previous years. 

The smart approach to avoiding a CRA audit is, if you think that there is something wrong in your books or the CRA has started asking you questions or for information about a particular tax year – do not stick your head in the sand. Have a professional review of your books performed and tackle the problem head-on because with the CRA the best offence is a good defense.

For more information about tax audits, or if you think that you are about to be audited or have been notified of an upcoming tax audit, contact Tax Solutions Canada for help. Call 888-868-1400 or visit www.taxsolutionscanada.com.