Do you want to help your accounting clients save on taxes? Of course — that’s why it’s good to stay updated on potential deductions and credits throughout the fiscal year. If you’re considering advising clients to take advantage of tax loopholes or exploit tax laws to avoid paying taxes, however, it might be time to think twice. The Canada Revenue Agency (CRA) calls this strategy “aggressive tax planning,” and while it isn’t a criminal offense, it can get your business in trouble. By avoiding aggressive strategies, you can keep the CRA happy and prevent CRA officials from challenging your clients’ claims.
Tax Planning and Tax Avoidance
According to the CRA, tax avoidance happens when your clients avoid paying their taxes by using legal means. This might mean that they take advantage of tax loopholes that come about when laws lack clarity or don’t cover specific subjects. Technically, your clients can use tax avoidance strategies, but if you want to stay on the CRA’s good side, it’s a good idea to steer clear. After all, this type of aggressive tax planning goes against the intent of the law.
Many different legitimate ways to avoid paying taxes exist. They all require you to submit detailed records on your clients’ behalf and disclose financial information when you file taxes. The CRA intends to crack down on these tax-avoidance strategies using the General Anti-Avoidance Rule (GAAR). In particular, officials are looking closely at tax shelters and tax havens. If the CRA finds your clients avoiding taxes, they can use this rule to force payment. Both you and the client might also be subject to expensive fines and penalties. Fortunately, you can avoid these extra costs easily by taking loopholes out of your tax-planning strategy.
International Tax Havens
You create an international tax haven when you set up offshore accounts or trusts for clients in a country that has lower income tax rates than Canada. When those accounts make money, the Canadian government can’t tax it. You might see extremely wealthy people using this type of tax haven to avoid taxes. Keep in mind that as long as you disclose them fully when you file a client’s income taxes, these international tax havens remain legal.
But to comply with CRA requirements, you still need to disclose the money the client makes from international accounts by using Form T1135, the Foreign Income Verification Statement. It’s extremely important to report all foreign properties. Why? In 2017, the CRA started examining all the electronic funds transfers (EFT) from Canada to popular tax havens. If the CRA examines a client’s EFT history, it should match up with the money you reported on Form T1135. That way, you can stay safe and avoid penalties.
Canadian Tax Shelters
Have your clients ever brought property or made a donation just for the tax benefits? Were the benefits more than the amount of money the client donated or paid? If so, they created a tax shelter. Tax shelters can be legal — after all, they don’t technically involve any evasive techniques or dishonesty — but the CRA frowns upon them. When the CRA finds a type of tax shelter, they usually try to change the laws to make it illegal.
What happens if your client invests with a tax shelter and the CRA decides to challenge it? To start, they could lose any deductions, and they may even face penalties. This is especially true when it comes to mass-marketed tax shelters, where businesses make a purchase and the shelter gives them a charitable donation receipt worth several times the amount they actually paid. The CRA considers this aggressive tax planning.
In one mass-market tax shelter scheme, companies bought works of art at a low price. Then, they had the art valued with illegitimate techniques and donated it to charity. The charity then gave them donation receipts for the supposed value of the art, which reflected considerably higher prices than the company paid in the first place.
If your clients want to invest in legal tax shelters, you can help by finding options that have a tax shelter identification number. The CRA requires all legal tax shelters to register with the agency so it can keep track of the operation. Keep in mind that if your clients invest in a legal shelter, the CRA still has the right to deny tax benefits if they find it doesn’t work with the Income Tax Act. As of 2018, the CRA has audited a variety of mass-marketed tax shelters and found every one to violate the Income Tax Act. As a result, companies that invested in those shelters haven’t been able to claim tax credits.
As an accountant, you can protect your clients by advising them of the potential risks and looking for above-board shelters. It’s also a good idea to stay up to date on the CRA’s latest tax-shelter rulings and other changes to the law that might affect the shelter in question. If you’re uncertain, it’s best to stay away. That way, you can avoid third-party fines if the CRA has problems with a client’s tax shelter.
Avoiding Third-Party Penalties for Accountants and Tax Advisers
By educating your clients about aggressive tax planning and what can happen if they submit a false claim, you can help assure them their investments are safe from CRA penalties and additional taxes. This diligence likewise serves your accounting practice well, as it also helps protect you from penalties.
It’s a good idea to read the Income Tax Act and understand the CRA’s intent for each rule. You can also read up on the latest changes and advance rulings. That way, you have the up-to-date information you need to ensure you and your clients are in compliance.
By advising your clients against aggressive tax planning and tax avoidance, you can keep them — and your business — safe. When it comes to corporate and individual tax returns, it’s always best to stick with legitimate strategies. Ready to put those strategies into action? Accelerate your year-end adjustment process and start saving time on corporate returns with QuickBooks Online Accountant. Sign up for free.