Evelyn Jacks

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What is a tax shelter?

A tax shelter is defined in the Income Tax Act as any property for which a promoter represents that an investor can claim deductions or receive benefits which equal or exceed the amount invested within four years of its purchase.

Why is a tax shelter used?

One attractive feature of tax shelters is that they provide you with deductions without requiring cash contributions on your part because assets are being purchased with borrowed funds. Tax shelters provide one of the following deductions.

Capital Cost Allowance

This is the deduction of the capital cost of equipment or a building over a period that may be shorter than its estimated useful life.

Natural Resources Exploration and Development Deductions

Investors in natural resources (mining and energy) exploration and development programs are allowed various write-offs for expenditures incurred. The timing of the write-offs depends on the nature of the expenditures, which range from Canadian exploration expenses (100 percent write-off available in the first year) to Canadian development expenses (written off on a 30 percent declining balance basis) to Canadian oil and gas property expenses (10 percent declining balance basis) and foreign exploration and development expenses (written off at the greater of foreign resource profits earned in the year and 10 percent declining balance).

Scientific Research and Development Deductions

Direct investors in scientific research programs and partnerships may deduct current or capital expenditures on qualified research undertaken in the year in Canada, except for most expenditures on building acquisitions and rental payments for buildings acquired after 1987. To qualify for these deductions, for federal tax purposes you must be actively involved in the business that can benefit from the research.

TYPES OF TAX SHELTERS:

• Rental Real Estate
• Natural Resource Investments
• E-Commerce Limited Partnerships
• Art Flips
• Film Limited Partnerships

Provided by CDG Books Inc. Authors of "Taxes for Canadians for Dummies"