CRA discusses Third-Party Civil Penalties in letter to Society of Trust and Estate Practitioners
Posted under News | Canadian Charity Law | Avoiding 'Charity' Scams
CRA in a letter discusses certain issues that were posed at the 2008 STEP National Conference. Question 12 dealt with Third-Party Civil Penalties and it noted that as of April 21, 2008 12 such cases existed of which “2 relate to an offensive donation arrangement”. Since then there have been other Third-Party Civil Penalties against those involved with abusive charity donation schemes.
The CRA letter provides:
“Question 12 - Third-Party Civil Penalties
Can you provide an update on whether any assessments have been issued under section 163.2 for third-party civil penalties?
As of April 21, 2008, the CRA has assessed third party penalties in respect of 12 cases. While six of these have filed notice of objections in respect of the penalty, none of these cases has proceeded to the Tax Court of Canada as of yet. Of the 12 cases, two penalties were imposed for misrepresentation in tax planning arrangements and ten were imposed for participating in a misrepresentation. Also, of the 12 cases, 2 relate to an offensive donation arrangement, 6 relate to unsupported or fictitious expenses, 3 relate to deceptive or fictitious journal entries and 1 relates to offensive tax planning.
We are aware that tax professionals are concerned that the CRA might apply the penalties to honest mistakes, oversights or differences of interpretations where there is bona fide uncertainty as to the status of the law. Information Circular 01-1, Third-Party Civil Penalties, outlines the CRA’s guidelines and processes for applying the third-party civil penalties and includes examples of situations where the CRA believes the penalty should not be applied as well examples of where the penalties should be applied. The auditor must complete a penalty report in every case where the penalty is proposed. The report sets out the criteria being considered in each case recommending a penalty, including any information or explanations from the third party that may mitigate or counter imposition of the penalty. The penalty report will be available on request at the objection stage.
The CRA strictly controls the application of the penalties. To this end, the CRA established the Third-Party Penalty Review Committee. The Committee is comprised of senior representatives from the CRA and from the departments of Finance and Justice.”
As an aside, and not relating to charities, CRA also dealt with RRSP related fraud and imposing Third-Party Penalties on “promoters and accommodators (lawyers, accountants, valuators)”:
“2008 STEP National Conference
Question 13 - RRSP Frauds and Strips
Can you provide an update on CRA’s assessment policy on RRSP frauds and strips? What relief is available for individuals who have lost their RRSPs to fraudulent promoters but who are still being assessed under subsection 146? Is it appropriate for such individuals to be penalized twice - once on the loss of their savings, and subsequently on a cash tax bill on phantom value?
Our reassessment policy has always been to reassess the annuitants who partake in these schemes. Where a non-qualified investment has been acquired by a trust, the fair market value of the non-qualified investment at the time it was acquired shall be included in the annuitant’s income pursuant to subsection 146(10). In situations where a trust governed by an RRSP acquires property for consideration that is greater than the fair market value of the property at time of acquisition, the difference between the fair market value and the consideration is included in the annuitant’s income under subsection 146(9).
Furthermore, CRA is now taking an aggressive stance against the promoters and accommodators (lawyers, accountants, valuators) whose actions and documents give legitimacy to the schemes in the eyes of the taxpayers. We are now considering applying third party civil penalties, as defined in section 163.2 against these parties who facilitate the RRSP Strip schemes.
If the RRSP subsequently disposes of a property that was a non-qualified investment when it was acquired, subsection 146(6) allows as a deduction in computing the income of the annuitant for the year of disposition an amount equal to the lesser of the amount previously included in income at the time the property was acquired pursuant to subsection 146(10), and the proceeds of its disposition.
To the extent there is a loss on the disposition of the property by the trust, such loss is a loss of the RRSP trust and not the annuitant.
CRA has been proactive in exposing the potential downfalls of these schemes to the general public. Tax alerts have been prepared warning taxpayers of the consequences they face by participating in these schemes, including the loss of retirement savings and the reassessment action by the CRA. The CRA has also met with Trustees to have them increase their diligence and adopt policies that will guard against these RRSP strip arrangements.”