While it may seem like ancient history, some donors involved in the now notorious set of art-flips in the late 1990s are still dealing with the resolution of their income tax disputes.  Their experience carries a lesson for those now dealing with Canada Revenue Agency's disallowance of long-ago donations, such as disallowed donations through tax shelters.

In some cases, the interest (compounded daily retroactive to the year which has been reassessed) is greater than the amount of tax originally assessed. And it is on this front that there has been an interesting development.

While the CRA generally does not have the jurisdiction to change willy-nilly the amount of interest that has accumulated on a tax assessment, it does retain the discretion to reduce the amount of interest that has accumulated in certain circumstances. One situation exists where interest has accumulated because of an undue delay (through no fault of the taxpayer) in resolving the matter under dispute.

Process drags on through decade or more

However, until recently, the CRA's position on interpreting the provision that allows this kind of a variance was that it could only grant interest relief if a request was made within ten years of the taxation year assessed.  For some people, say late filers, that ten-year timeline was so impractical that it was impossible to meet. In other cases, ten years would often elapse between the taxation year and a realization that the matter will not be solved speedily.

In some cases we have even been advised to expect a reassessment of a taxation year more than ten years past, putting us in the position of applying for interest relief before ever receiving the reassessment! (Granted it is an odd situation indeed in which the CRA could issue a reassessment more than ten years after the taxation year in question).

Regardless of the merits of the request for interest relief, the CRA would refuse even to consider the request, taking the position that it simply did not have the jurisdiction to grant such relief outside of the ten-year window.

New interpretation brings hope for reassessed donors

A new case recently decided by the Federal Court of Appeal gives new hope to those with large interest bills. In the Bozzer case, the taxpayer put forward an alternative interpretation of the relevant provision. This interpretation allows the CRA to use its discretion to vary the interest assessment for the ten-year period ending with the date of the application for interest relief. So, for example, a request made on June 1, 2011 for an assessment arising from the 1999 taxation year could gain interest relief for the period from June 1, 2000 to June 1, 2011.

Given the effect of daily compounding this could be a huge relief to taxpayers - assuming the CRA uses its discretion to grant it.

This scenario should give much hope to the thousands, if not tens of thousands of people dealing with assessments arising out of the disallowed tax shelters. 

Adam Aptowitzer of Drache Aptowitzer LLP is a charity law lawyer with a national practice based in Ottawa. He has been published in Canadian Taxpayer and the Not-for-Profit News. He has also published a widely distributed study on the regulation of Canadian charities with the C.D. Howe Institute.

As a speaker, he has presented to the National Symposium of Charity Law, the C.D. Howe Institute, the Association of Fundraising Professionals, the Canadian Association of Gift Planners, the Ottawa Estate Planning Council and various large and small Canadian charities. He has also given expert advice on Parliament Hill. Adam is an executive member of the Canadian Bar Association's Charity and Not-for-Profit Law section.

Contact him at 613-237-3300 or visit http://www.drache.ca.