Alert: Canada Revenue Agency warns of abusive investment scheme

The Canada Revenue Agency (CRA) is warning investors not to participate in an ongoing tax shelter arrangement being marketed by certain promoters identifying themselves as representatives of investment clubs or associations. This scheme is skillfully presented to individual investors and often appears legitimate.

Typically:

1. A promoter approaches you with an opportunity to invest in what appear to be high-yield offshore investments.
2. To participate, you may be required to become a member of an investment club, enter into a formal agreement, and pay a one-time fee and an annual renewal fee. Under the terms of the agreement, you will likely have to sign a non-disclosure and confidentiality agreement before participating.
3. To help you secure funds to invest, the promoter may encourage you to participate in either a loss arrangement that will improperly produce tax refunds, or in an allegedly tax-free registered retirement savings plan (RRSP) withdrawal arrangement. If you decide to secure funds through either arrangement, the promoter will usually charge an additional fee.
4. You will be instructed to transfer the secured funds to the promoter, who will then direct them into one or more offshore investments.
5. The promoter claims that the investment and your return on the investment cannot be traced. The promoter will tell you that you do not have to report the income you earn on the investment for Canadian tax purposes, and that you can bring your earnings back into Canada tax-free in various ways that may include the use of foreign corporations and foreign bank accounts

Potential investors should note that:

• In many cases, the offshore investments do not produce the expected results and your assets are susceptible to appropriation by the promoter. Assets moved offshore are less under your control and more, if not entirely, under the control of the promoter. You as an investor have very little recourse against the promoter to recover your original investment, appropriated by the promoter.
• Such arrangements often have excessive promoter fees.
• Your tax liability could increase because the loss claimed using the tax refund arrangement could be reversed if your return is reassessed. If you withdrew funds from your RRSP, to participate in the scheme, the value of the funds withdrawn could be added to your taxable income. Interest and penalties could also apply.
• By participating, you not only risk losing some of your RRSP assets, also losing other personal savings that you may have used to fund the investment.
• Canadian taxpayers must report all their income, whether it comes from Canadian or foreign sources. No matter what a promoter claims, you must report all earnings resulting from the scheme and pay the required income tax on those amounts.

Before participating in any type of investment arrangement, you should get reliable and independent legal and financial advice. Not following tax rules could result in additional tax and related interest levies. Cases of serious non-compliance or tax evasion could result in criminal prosecution, which could include fines and even jail time.

When the CRA has audited this type of scheme, the losses have been denied. Where RRSP refunds were used, RRSP amounts were added to income and taxes plus interest were assessed.

Revenue Agencies are working together internationally to combat tax evasion schemes that try to capitalize on the international flows of money.

The CRA is examining arrangements that follow the pattern described above, and continues to collaborate with its Joint International Tax Shelter Information Centre (JITSIC) partners, including the Internal Revenue Service of the United States (U.S.).

The JITSIC was formed by the tax administrations of Australia, Canada, the U.K., and the U.S. to supplement their ongoing work in identifying and curbing abusive tax schemes. The JITSIC enhances the detection and identification of abusive cross-border tax schemes by providing member countries with real-time information exchange channels.

For more information about RRSP withdrawals, see Tax Alert: Owners of self-directed RRSPs should use caution with tax-free withdrawal schemes.

For more information, visit www.cra.gc.ca or call 1-800-959-8281 (toll free).

This document is also available for download in .pdf format.

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