What is a tax shelter

The Income Tax Act defines "tax shelter" and "gifting arrangement" in subsection 237.1(1).

Generally, a tax shelter is:

• an investment in property (other than a flow-through share or a prescribed property); or
• a gifting arrangement under which a person entering into the arrangement:
  • makes a gift to a qualified donee or makes a monetary contribution to a registered party, a provincial division of a registered party, a registered association, or a candidate as those terms are defined in the Canada Elections Act; or
  • incurs a limited-recourse debt that can reasonably be considered to relate to a gift to a qualified donee or to a monetary contribution.

When do we consider the investment in property or a gifting arrangement to be a tax shelter?

Generally, the investment in property or the gifting arrangement is a tax shelter:

• if it is promoted as offering income tax savings, and
• if it is reasonable to consider, based on statements or representations made or proposed to be made, that within the first four years of buying an investment in the property or entering into the gifting arrangement, the buyer or donor will have losses, deductions, or credits.

Further, it has to be reasonable to consider that the losses, deductions, or credits would be equal to or more than the net cost of the original investment or of the property acquired under the gifting arrangement. "Net cost" is net of any prescribed benefits expected to be received or enjoyed, directly or indirectly, by the person or another person with whom the person does not deal at arm's length.

For more information, see limited-recourse debt in respect of a gift or monetary contribution.

Forms and publications

• IC89-4, Tax Shelter Reporting