Tag: CRA

Receipt fraud by tax preparers

CRA wins and warns on gifting tax shelters

The adage “if it’s too good to be true …” does not appear to be a sufficient warning for some taxpayers to resist participating in fraudulent donation tax schemes.

Indeed, it seems to have become a regular part of the Canada Revenue Agency’s communications efforts to warn against tax schemes masquerading as legitimate charitable operations.  Unfortunately, the message does not appear to be getting to everyone, or at least it is not being heeded as much as may be hoped.

This past November, rulings were handed down denying nine appeals of reassessments originating out of the same tax preparation firm.  But that’s just the tip of the iceberg.

Mehfuz Trust and the Raza brothers

According to the judgments, Mashud Miah’s son survived a premature birth in Vancouver, motivating the father to establish a charity in the child’s name in 2000-2001.  In its early years, the Mehfuz Trust may have properly served its purpose of funding a children’s medical clinic in Mr. Miah’s homeland Bangladesh.  By 2009, tax controversy led to the closure of both charity and clinic.

Mr. Miah served as chairman of the trust, which was established with the assistance of a Fareed Raza, a tax preparer.  Mr. Miah’s other occupation was in janitorial services, including cleaning for Mr. Raza’s office.

Anatomy of a tax investigation

At a CRA internal training session in 2008, an investigator from the Vancouver enforcement office learned how her Toronto colleagues had been uncovering false charitable receipt schemes perpetrated by some tax preparers.

Upon returning to her home office, the investigator began looking into significant donations going to the Mehfuz Trust through the tax preparation offices run by Fareed and Saheem Raza.  Not only were the donations out of character with past giving patterns, many taxpayers appeared to be donating a very significant portion of their net income.

A criminal investigation of the tax preparation office led to the seizure of files and records.  The evidence showed that the actual amounts donated were as little as 10% or less than the amount claimed by the taxpayer.  As well, the form used for the inflated receipts differed from the official receipts issued by the Mehfuz Trust.

It was Mr. Miah who had reported the Raza brothers to the CRA in the spring of 2008, having come across the impugned receipts in the hands of Saheem Raza.  Even so, the judge was critical of Mr. Miah who had signed the charity’s annual returns each year, which clearly showed the inflated receipt amounts well in excess of the known actual donations.

The seizure of the office records gave the CRA a roadmap of which taxpayers to audit and eventually reassess as far back as 2003, well beyond the normal reassessment period (being generally three years from original assessment).

Of course these court rulings were only with respect to those taxpayers who appealed their reassessments.  The Vancouver CRA investigator estimated that the total forged receipts through this operation amounted to approximately $12,000,000, resulting in initial lost tax revenue of about $4,700,000.

Latest warnings from CRA

Unrelated but roughly coinciding in time with the release of these judgments, in late November the CRA posted yet another Alert on its website about gifting tax sheltering schemes.

The posting is a reminder that taxpayers who claim credits based on such tax shelters will have their assessments (and potential refunds) withheld until the corresponding tax shelter has been audited.  And if a claimed amount is in dispute, 50% of the assessed tax must be paid pending resolution of the dispute.

That said, the cases above were not registered tax shelters, but simply the sale of fraudulent charitable receipts.  Perhaps “buyer beware” should be added to “too good to be true”.

The seasonal wishlist – A selection of pre-budget submissions

It’s that time of year when the wish lists come out – and no, I’m not talking about kids and their letters to Santa.  Rather, I’m referring to the pre-Budget submissions made to the House of Commons Standing Committee on Finance.

In reality, these were actually due back in August, but with the handful of goodies announced in the Fall Economic Statement in November, it seems like a good time to look at the suggestions the government had to work from.  Given the razor-thin remaining surplus, there may not be much more in the Budget, but it’s fun to speculate.

I won’t pretend that I went through all the 400+ submissions, but I did scope out a broad array of those focused on individual tax and income issues.  And though I share a particular point, premise or perspective of a few organizations below, almost all of these items were offered by multiple organizations or individuals.

Doubling TFSA room – More than a few asked for the follow-through of the Conservative party’s 2011 election promise to double TFSA room.  Whether that means $10,000 (based on the $5,000 level in 2011) or $11,000, this is probably the most certain item to make it into the Budget.  Some even suggest that an increase in RRSP room would be a fitting complement.

Latest RRSP contribution age – Owing to seniors continuing participation in the workforce and ongoing improvements to life expectancy, a number of submissions are looking for the RRSP contribution age limit to be lifted, perhaps to age 75.

RRIF minimums – In concert with increased RRSP contribution age, a recurring theme over the last half decade or so has been to urge for an increase in the mandatory minimum withdrawal age beyond the current age 71, again perhaps to 75.

Pension income splitting – The age 65 requirement for RRIF income should be eliminated in order to put senior spouse couples on an equal footing, whether receiving RRIF or RPP income.

Vulnerable seniors – Numerous contributors noted the plight of low income seniors, especially women. Canadian Association of Retired Persons suggests creating an ‘equivalent to spousal allowance’ for single seniors in need, and making the Caregiver Tax Credit refundable.

Payroll taxes and group RRSPs – Against the backdrop of the implementation of Pooled Registered Pension Plans (PRPPs), the Investment Funds Institute of Canada requests that Group RRSPs be placed on a level footing with other workplace savings plans.  Specifically, employer contributions should be exempt from payroll tax, CPP and EI.

Increase the CPP death benefit – The maximum Canada Pension Plan death benefit was reduced from $3,580 to $2,500 in 1998, and remains there today.  Based on this being designed for end of life needs, the Funeral Services Association of Canada asks that the amount be reset to $3,440 based on interim inflation, and be annually indexed hereafter.

Stretch charitable tax credit – The Association of Fundraising Professionals supports the augmentation of the charitable tax credit by 10% for donations that exceed a donor’s previous highest annual giving level.   In order to maintain focus on the middle income population, the eligible donation amount would be capped at $10,000.

Credit card fees and charities – Imagine Canada advocates for federal regulatory action to limit or eliminate fees on donations made by credit card.  In support, it cites precedents from Australia and the European Union, and the current Senate study of Bill S-202 that proposes to regulate and eliminate such fees for registered charities.

Donations by Will – Recent amendments provide flexibility for estate-based charitable donations, but impose a rigid deadline of 36 months after death to qualify.  The Canadian Association of Gift Planners recommends that tax authorities be given administrative latitude to extend the time period in appropriate circumstances, such as illiquid assets or litigation.

Extend the deemed disposition rule for trusts – Law firm Davies Ward Phillips & Vineberg LLP points out that the 21-year deemed disposition rule introduced in 1971 was arbitrary, and is otherwise outdated anyway.  It is suggested that the period be extended to 50 years, counting from the death of the settlor or contributor.

Capital gains rollover – The Investment Industry Association of Canada proposes a rollover provision for capital gains, contingent on reinvestment of sale proceeds into common shares of small listed Canadian companies within six months.

Adjust personal income tax thresholds – As a means to attract talented immigrants, Deloitte suggests increasing the threshold at which top tax rates apply, implemented in stages over 5-10 years once the Budget is balanced.

Simplified tax system – The Chartered Professional Accountants Canada would like to see a thorough review of the tax system, perhaps on the scale of the Carter Commission in 1966.  In the meanwhile, it advocates a reduction in personal tax rates once economic conditions allow, to be replaced with consumption taxes that better align us with the tax systems of our major trading partners.

Financial literacy – Finally, like motherhood and apple pie, past and continuing efforts to improve financial literacy were lauded from all corners.  Still, the general prevailing sentiment is that this is in the early stages, and requires continued focus and resources.

Federal Finance Update, Fall 2014 – Family Tax Cut and beyond

With an election on the horizon for next year, there was much anticipation for November’s release of the 2014 Fall Economic Update, the first from Finance Minister Joe Oliver since taking over from the late Jim Flaherty. As it turned out – at least at the general individual taxpayer level – the update mainly pulled together the carefully orchestrated announcements from the preceding few weeks.

The expected surplus was used to dole out a variety of tax breaks, as summarized below, though conspicuously absent was the promised doubling of TFSA room. Of course, there is still the 2015 Federal Budget to be tabled in the spring, and few should be surprised if the surplus is a bit larger at that time, together with a few more goodies.

In the meanwhile, here are the key items from the Fall Economic Update.

Family Tax Cut

Rather than being an actual income split of $50,000, the follow-through on this Conservative Party promise (from the 2011 election campaign) has been converted into a federal non-refundable tax credit. This simplifies matters for the provinces, as they can effectively ignore this, rather than having to take active steps to keep it from affecting respective provincial tax revenues.

To qualify, there must be at least one child under the age of 18 residing with the parents/spouses. The spouses calculate their tax due (including the main non-refundable credits) and compare that to the notional net tax due based on transferring (up to) $50,000 income from one spouse to the other. The resulting “savings” may be claimed as a tax credit, to a maximum of $2,000, even if the formula yields a larger tax difference.

Generally, it would only be worth splitting a sufficient amount that would bring the spouses into the same federal tax bracket, though movements within the same bracket may bring some small benefit where clawback of non-refundable federal credits is reduced.

Federal tax brackets, 2014
To $43,953          15.0%
From $43,953      22.0%
From $87,907      26.0%
From $136,270    29.0%

Increasing the Universal Child Care Benefit (UCCB) for children under the age of six

The UCCB pays $100 per month to a parent for each child under the age of six. The monthly amount will be increased by $60 for a total of $160, effective January 2015, though it will not begin being paid until July when there will be a six-month catch-up payment. The UCCB is a taxable amount to the recipient parent, generally the lower-income one. The total additional amount of UCCB would be worth $720 pre-tax annually.

Expanding the UCCB to children aged six through 17

The UCCB program will also be expanded to provide $60 per month for children aged six through 17. Again, this will be effective January 2015 (with the same catch-up in July as mentioned above), and will be a taxable payment to a parent, up to $720 pre-tax annually. (In the year the child turns 18 it will only be paid to the birthday month.)

Repeal the Child Tax Credit (CTC)

Together with these two preceding UCCB proposals, the CTC (Line 367 – Amount for children born in 1997 or later) will be repealed. The value of that credit in 2014 is $338 per child, an after-tax figure that is in the form of a tax credit.

The net effect of the pre-tax UCCB revisions and after-tax CTC elimination depends on the relative marginal tax rates of the parents/spouses, though it appears that, generally, this should be a positive result.

Increasing the Child Care Expense Deduction dollar limits by $1,000

As its name makes clear, this provision is an enhancement to an existing deduction, which generally must be claimed by the lower-income spouse. The additional $1,000 deduction could yield as much as $290 in after-tax value based on the individual’s federal marginal tax bracket rate, applying on a per-child basis.

Doubling the Children’s Fitness Tax Credit (CFTC)

Another of the Conservative Party’s 2011 election campaign promises, the CFTC reference amount is doubled for 2014, from $500 to $1,000. This increases the total potential value of the credit from $75 to $150 after-tax. This is presently a non-refundable tax credit, but will be made refundable for 2015 and later. No mention was made of the related campaign promise to extend the fitness credit to adults.