Revenue Canada cracks down

A growing numbers of mass market schemes designed for aggressive tax planning are being targeted aggressively by the Canada Revenue Agency.

At the CIFPs 9th Annual National Conference-2011, in Ottawa, the CRA sent out a clear message: if it sounds too good to be true it’s just so and must be avoided.

Phil Diguer, manager of the projects and initiatives section of the CRA’s aggressive tax planning division, particularly targeted RRSP strips, where investors are promised immediate access to assets in “locked-in” RRSPs or RRIFs.

“Basically [an RRSP strip] is an offside withdrawal of funds from an RRSP or RRIF without appropriate payment of tax,” he said.

Taxpayers should avoid schemes that promise immediate withdraw of funds without paying tax, to return part of the taxpayers investments by offshore debit or credit cards, through offshore bank accounts or through a variety of loan-back arrangements, he added.

Those and immediate access to assets in locked-in RRSPs or RRIFs “are typical characteristics that you will see in an RRSP strip.”

“Income tax receipts providing deductions three or more times the amount invested in RRSPs and, of course, unrealistic return on investment” are some others.

“Typically the promoters of these questionable schemes direct the owner of self-directed RRSPs to purchase a particular investment through specific trustee and that investment, of course, could be shares or units in a company,” said Diguer. Needless to say these companies are controlled by the promoter.

The investment is not a qualified investment as defined under the Income Tax Act. These shares are worth, if at all, only a fraction of the price paid. The promoter retains a portion of the funds – about 30% to 50% – as a fee and directs the remaining amount to be paid to the taxpayer.

These funds are then directed back to the taxpayer through a loan, deposited in an offshore account, or placed on a debit or credit card.

Diguer stresses that taxpayers should avoid these schemes for two fundamental reasons.

“First, these arrangements can put their retirement savings at significant risk. In some cases the promoter walks away with 100% of the monies that were in the plan.”

The second reason being any “tax-free withdrawal” from RRSP is ineligible and will attract penalties including interest, even when the savings are lost to promoters.

These schemes, he said, do look legitimate on the face of it and that it would be prudent and wise for financial planners to “counsel their clients to be very wary of these types of investments.”

The CRA message, said Diguer, is loud and clear: “We will tax and penalize each and every one of these strip participants.”

Further, such transactions are an erosion of the Canadian economic base since the funds associated with offshore transaction would not be re-invested in the Canadian economy.

The CRA has been going after RRSP strip participants since 2005 when they first issued a tax alert. Here’s what the 2009 alert, the most recent, said:

“By definition, when an RRSP is ‘stripped,’ value is removed from the trust so that it is left with property of little or no value. The consequence is that when the CRA issues an assessment under Part XI.1, the RRSP is unable to pay the tax and the liability falls to the issuer.”

Over 5,000 taxpayers have been reviewed or reassessed by the CRA involving $250 million worth of transactions, said Diguer.

The CRA, he said, is also pursuing those making non-qualified investments in Tax Free Savings Accounts (TFSAs) which are taxable at regular income tax rates.

Taxpayers must ensure that withdrawals of deliberate over contributions, prohibited investments, non-qualified investments or amounts attributable to swap transactions, or of related investment income, from a TFSA do not create additional TFSA contribution room.

Any income attributable to deliberate over contributions and prohibited investments subject to the existing General Anti-Avoidance Rule is subject to a 100% tax.

An individual may correct any inaccurate or incomplete information regarding their tax affairs through the CRA’s Voluntary Disclosure Program, said Diguer.

If a taxpayer makes a disclosure before any compliance enforcement action is started, they may avoid penalties and prosecution. Provided individuals come to the CRA before the CRA comes to them.