The Canada Customs and Revenue Agency is warning investors about the risks of investing in certain tax shelter arrangements, and that advance income tax rulings do not guarantee deductions.
CCRA says that investors should be aware that advance rulings do not necessarily guarantee proposed deductions. In some cases, promoters state that they have obtained an advance income tax ruling from the CCRA.
Although the Income Tax Rulings Directorate of the CCRA may rule on certain aspects of proposed transactions, they will not rule on issues such as the existence of a business, reasonable expectation of profit, and the fair market value of a property or service. When tax shelter investments are audited and deductions denied, it is usually on these issues that the CCRA bases its reassessments.
The CCRA warns potential investors to be wary of any tax shelter promotion where the anticipated net return to the investor in the first few years comes mainly from projected income tax refunds.
Investors should also be careful if they suspect that:
- no real business activity will be carried on;
- the business has no reasonable expectation of profit;
- expenses are inflated or unreasonably high;
- losses for tax purposes will exceed the amount of the investment that is actually at risk; or
- the promoter or others are making verbal assurances of income tax consequences that are different from, or are not confirmed by, professional opinions contained in the investment documents.