CRA compelled to assess tax return claiming credit in alleged gifting tax shelter

By Doug Carroll | August 18 2015 08:22AM
At issue

A person who owes tax may be pleased if the Canada Revenue Agency (CRA) delays assessing a tax return. On the other hand, such delay can obviously be costly to someone who is anticipating a significant refund.

This is the tactic employed by the CRA in recent years in the ongoing cat and mouse game over gifting tax shelters. But it will need to be revisited in light of a Federal Court ruling last month.

Section 152(1) of the Income Tax Act (ITA)

The ITA specifically empowers and obliges the Minister National Revenue (MNR), through the CRA, to assess tax returns:

  1. (1) The Minister shall, with all due dispatch, examine a taxpayer’s return … and determine … (a) the amount of refund … ; or (b) the amount of tax[emphasis added – See McNally below]
CRA on “Tax Shelters”

The CRA maintains a page on its website warning of the dangers of investing in tax shelters. In addition to outlining the nature of tax shelters and potential implications for taxpayers participating in them, there is a brief history of CRA’s efforts to curtail them and an inventory of Tax Alerts from as far back as 1998.

Not mentioned on the page is the audit policy the agency began applying around 2010. Where a taxpayer claims a credit through an organization that is (or is to be) audited as a potential gifting tax shelter, the return will not be assessed until after the audit is completed. Audits of this nature may take a year or more to complete.

McNally v. MNR, 2015 FC 767

Mr. McNally filed his 2012 tax return on time in April, 2013, in it claiming a donation to EquiGenesis. In June 2013 he received a letter from the CRA advising him that his return would not be assessed until an audit of EquiGenesis could be completed, which “can take up to two years to complete.” He was given the option to withdraw the claim (for the time being), in which case CRA would assess the return without further delay.

Mr. McNally instead initiated the present application seeking an order of mandamus requiring the Minister to assess his return.

EquiGenesis had been audited and had charitable tax credits denied in 2003, 2004 and 2009, but allowed in 2005 and 2006. The 2010, 2011 and 2012 programs are currently under audit.

Interestingly, Mr. McNally conceded that the “outcome of his assessment is a forgone conclusion [that] his credit will be disallowed.” Still, he sought the current order so that he could proceed with his appeal rights under the ITA.

With regard to the audit policy, the MNR stated that the “purposes in implementing this change were to deter participation in such tax shelters.”

With such a clear statement of the policy purpose, the judge concluded that “it is plain and obvious that Mr. McNally’s rights have been trampled upon for extraneous purposes.” While there may be circumstances when an assessment may legitimately need to await an audit of a third party, the stated purpose of discouraging gifting tax shelters leads to the conclusion here “that the audit is an excuse for delay, not a reason for delay.”

On the central issue of the MNR’s statutory duty to assess a return “with all due dispatch”, the judge sided with Mr. McNally. His return was to be examined and a Notice of Assessment issued within 30 days of the judgment.

Practice points
  1. Though McNally may be appealed, participants in gifting tax shelters may try to use this ruling to press CRA to assess presently-delayed returns.
  2. Bear in mind that this is a procedural issue, having no impact on the legitimacy of a given gifting tax shelter, nor on the ultimate validity of any claimed credits.
  3. Along a related line of litigation, in McNally it was mentioned that the 2009 EquiGenesis program is before the Tax Court in October this year.