As defined in Canada’s Income Tax Act, a tax shelter is an arrangement whereby an individual or entity invests funds or gifts a donation under the representation that they will receive tax deductions, credits, or other tax benefits whose total amount of value at least equal that of their expenditure. As tax shelter arrangements by their nature are susceptible to abuse, the Canada Revenue Agency (CRA) monitors any tax shelter promotion closely, as well as warning tax planners against tax shelter schemes that aim to skirt the law; however, not all tax shelter schemes are inherently illegitimate. By judiciously examining the opportunities presented by tax shelters and carefully considering the promises offered by any particular tax shelter scheme, Canadian corporations may in some instances be able to reduce their tax burdens while properly adhering to the terms of Canadian tax law. To learn more about evaluating tax shelters and the advantages they provide, entrepreneurs may choose to consult with experienced tax lawyers in Canada. Call Jeremy Scott Law today (902) 403-7201 to begin this important discussion.
What Are Tax Shelters in Canada?
- Strategies involving gifting arrangements
- Strategies involving the acquisition of property
In both cases, these strategies offer tax benefits that outweigh the costs of engaging in them. In other words, corporations save more than they spend or lose. The CRA also points out that corporations may technically go into “limited recourse debt” in order to experience these tax benefits – an arrangement that offers virtually zero risk to the borrower.
Rather than attempting to eradicate tax shelters entirely, the CRA monitors these operations for their compliance with applicable tax laws. An important element in the CRA’s tax shelter monitoring program consists in tax shelter identification numbers, which the agency uses to track tax shelter schemes. Anyone who promotes a tax shelter must include these identification numbers on various statements.
These promoters must also provide the CRA with a list of investors or participants of the tax shelter schemes, along with other information, upon request. After reviewing this information, the CRA decides whether or not the schemes are “potentially abusive.”
The CRA also highlights the fact that after auditing every mass-marketed tax shelter arrangement, the agency has yet to find a single one that has complied with the Income Tax Act. A mass-marketed tax shelter is a scheme in which taxpayers receive charitable donation receipts that are higher than what they actually donated. Corporations interested in exploring the advantages of tax shelters may wish to exercise particular skepticism regarding shelters of the mass-marketed variety
Finally, the CRA advises any corporation or individual considering a tax shelter arrangement to seek guidance from a professional. A dedicated Canadian tax attorney with Jeremy Scott Law may be able to explain the potential income tax consequences of individual tax shelter arrangements in more detail. In addition, a Canada tax lawyer may be able to highlight specific rulings by the CRA to show how certain strategies may comply with the Income Tax Act.
Canada is a popular choice for corporations searching for potential tax havens. While tax haven and tax shelter may sound similar, a tax haven refers to an actual location – generally a jurisdiction in which the local tax rules offer foreign individuals and entities very low tax rates, thus encouraging internationals to store money in that location – whereas a tax shelter is any scheme for reducing tax burden as described above, regardless of location. Before going beyond investing in tax shelter schemes to move assets offshore to one or more of the international tax havens, Canadian corporations may wish to consider that the nation’s corporate tax laws already make it an attractive option, for several reasons.
At a very basic level, the corporate structure itself serves as an effective tax shelter in Canada. Entrepreneurs who establish corporations can in some cases shield their income from personal income tax rates, which can be quite high in Canada. This strategy is particularly effective for high-income individuals – usually with earnings of over $100,000 per year. In contrast, personal income tax can reach as high as 33%. For income received as dividends through a business formed under a corporation business structure , meanwhile, Canadians may be able to take advantage of the Federal Dividend Tax Credit.
The total tax incurred by a corporation in Canada depends on the activities of the business and the provincial jurisdiction in which it has been established. For example in 2023 a company engaged in zero-emission technology manufacturing in Saskatchewan today would expect to pay a total tax rate of 4.5%. In contrast, the average corporation in Ontario can expect to pay a total tax rate of 12.2% in 2023. The federal corporate tax rate always applies, but depending on the size and type of business this may be as low as 9%, according to the CRA.
Although internet research can provide a basic understanding of tax shelters in Canadian corporate law, the subject is too complex to cover in a single sitting. In addition, certain tax shelter opportunities may be more suitable to certain corporations – and it may be difficult for those outside the professions of accounting or tax law to accurately evaluate all of the factors that serve to make a tax shelter both legally compliant and financially advantageous. A consultation with a Canadian tax lawyer may provide more targeted guidance based on the unique needs and priorities of each corporation. Choose Jeremy Scott Law and begin the discussion today by calling (902) 403-7201.