Canadians should be cautious of unregistered tax shelter investment schemes that advertise inflated or unsubstantiated tax losses or deductions, the Canada Revenue Agency warned on Thursday.

According to the CRA, a number of different schemes promise investors a large tax loss that can be claimed when they file their income tax returns. But the scams put taxpayers at risk of losing their entire investment, as well as any tax refunds they may receive as a result of making a claim on their tax return.

Typically, unregistered tax shelters involve buying a tax loss that is well in excess of the cash investment. The loss usually results in a tax refund, enabling the taxpayer to recover the initial cash they invested plus more. But many Canadians falsely assume that buying a “tax loss” means it is deductible.

If the CRA determines that a scheme is an unregistered tax shelter, all tax deductions or credits claimed by taxpayers participating in the unregistered tax shelter will be denied. As well, the cash investment to participate in the unregistered tax shelter is not deductible since it was made solely to acquire tax losses. Reassessments will be issued and penalties will be considered, the CRA says.

When an investor is found to have knowingly participated in an unregistered tax shelter to get tax benefits that he or she was not entitled to receive, penalties can amount to 50% of the taxes payable after reassessment, according to the CRA.

In order to avoid penalties or prosecution, investors that have participated in such an arrangement are urged to contact the CRA and correct their tax return through the CRA’s Voluntary Disclosures Program.