Industry News

Educate your clients to avoid being fooled by these potential scams

By Megan Harman |

The Canada Revenue Agency is witnessing a growing number of tax-avoidance scams involving trusts and RRSP strips, and is cracking down on these areas, according to CRA managers.

Speaking at the Canadian Institute of Financial Planners 2011 conference in Ottawa on Monday, Lynda Gibson, manager of the CRA’s aggressive tax planning division, said the CRA regularly sees aggressive tax planning transactions using trusts.

These include invalid and sham trusts, artificial capital loss creation, stripping surplus from a Canadian corporation, and failure to fully report activities subject to taxation.

“There are so many of these transactions out there,” Gibson said. “We are pursuing this rather aggressively.”

Gibson said cases of artificial tax loss are becoming particularly common. As an example, she said this occurred in one case where a business owner created two separate classes of shares, shifted most of the value of the company from one set of shares to the other, and then sold the low-valued shares to a trust that he created.

“That creates a capital loss, so the capital loss then counters the capital gain,” Gibson explained. “Obviously, we’re not happy with that.”

Also becoming more common are RRSP strip transactions, according to Phil Diguer, manager of the projects and initiative section of the CRA’s aggressive tax planning division. These are schemes in which a promoter offers investors the opportunity to gain immediate access to assets in their RRSP, for a fee.

“It’s basically just an offside withdrawal of funds from your RRSP or RRIF without appropriate payment of tax,” said Diguer.

Typically, individuals are instructed to transfer their RRSP to a self-directed arrangement with a trustee and then to purchase shares in a specified company controlled by a promoter. The promoter retains a portion of the funds – 30% or 40% – as a fee and directs the remaining amount to the individual through a loan, an offshore account, or debit or credit card transaction.

But in some cases, Diguer said the fraudsters operating these schemes ultimately pocket the entire amount.

“These arrangements can put their retirement savings at risk,” he said. “We have seen some taxpayers lose everything.”

He said the CRA has assessed 5,000 investors who have participated in these transactions, representing a total of $250 million in funds.

When the CRA discovers that a taxpayer has made an ineligible RRSP withdrawal, it includes the amount of the withdrawal in that taxpayer’s income, and they are subject to penalties and interest.

“We will tax and penalized each and every one of these strip participants,” he said.

Often the schemes appear legitimate, Diguer said, and so clients may be easily fooled. But he said it’s important to educate clients on these potential scams.

“You are prudent and wise to counsel your clients to be very, very wary of these types of investments,” he said.

The CRA managers urged advisors to help clients ensure they’re complying with tax rules.

“You’ve got to be upfront when filing and very clear when advising [your clients] on filing their tax returns, and your own,” Gibson said, “because you could be subject to significant penalties or interest.”