(November 28 – 11:00 ET) – The Canada Customs and Revenue Agency is warning investors about the risks of using tax shelters.

In a recent fact sheet, CCRA says tax shelters are permitted, but it cautions investors to be aware of the potential risks of using tax shelters, including the possibility that the projected losses or other deductions may not qualify for income tax deductions, resulting in unexpected taxes, interest or penalties.

The agency says investors should be wary of any tax shelter promotion where the anticipated net return to the investor in the first few years is predominantly due to projected income tax refunds.

Investors should be particularly concerned with any tax shelter promotion if there is a suspicion that:

  • no real business activity will be carried on;
  • the business has no reasonable expectation of profit; the assets of the business are overvalued;
  • the expenses are inflated or unreasonably high;
  • losses for tax purposes will exceed the amount of the investment actually at risk; or
  • verbal assurances of income tax consequences from the promoter or others are different from, or are not confirmed by, professional opinions contained in the investment documents.

In these cases some or all of the losses claimed by investors could be disallowed. In all cases, interest on the amounts owing as a result of reassessments will also be payable.

CCRA warns that if an investor knowingly, or under circumstances amounting to gross negligence, makes a false statement or omission relating to the tax shelter investment when filing a tax return, the law provides for an additional penalty of 50% of the taxes payable as a result of the reassessment. The investor could also face criminal prosecution.

The CCRA says it reviews all tax shelters to ensure that losses claimed by investors are properly deductible for tax purposes. In the last five years, the investors in approximately 800 tax shelters were reassessed for additional taxes owing of approximately $335 million it says.

The agency says there have been 14 criminal convictions for tax fraud against tax shelter promoters, resulting in fines of almost $10.6 million, and jail terms in 12 cases.

For investors to be on the safe side CCRA offers these tips:

  • know who you are dealing with;
  • ask for the prospectus or offering memorandum and read them carefully;
  • pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment;
  • get any verbal assurances from the promoter or others in writing;
  • ask the promoter for a copy of any advance income tax rulings for the investment given by the CCRA; and
  • get competent, independent professional advice from a tax advisor before signing any documents.

CCRA also reminds investors that there may be other requirements in the Income Tax Act that must be met for specialized tax shelter investments such as oil and gas shelters. It also notes that tax shelter identification numbers do not legitimize investments. Every tax shelter has to get an identification number from the CCRA, but it does not indicate that the CCRA guarantees an investment or authorizes any resulting tax benefits.
-IE Staff