Warning: If it Sounds Too Good to be True…
The Financialist • Issue 99 • October 2008
BY ANNE HAMMOND BA CIM CFP
We’ve all heard the old adage: if it sounds too good to be true, it probably is. Lately, the Canada Revenue Agency (CRA) has been focusing more on schemes that purport to allow people to withdraw registered funds without incurring any income tax payable.
To date, CRA has reassessed over 3,100 taxpayers who participated in these arrangements, and there are another 1,800 audits underway. The amount of money involved is a staggering $228 million in RRSP and RRIF funds.
You’ve probably seen these schemes advertised. “Take advantage of your RRSP now – no tax to pay!” Or perhaps, “I will loan you $5,000 to $250,000 over five years if your RRSP is locked in.”
Typically, the promoters of these schemes instruct a self-directed RRSP holder to purchase a particular investment – through a specific trustee – inside their RRSP. The investment could be shares of a private company, an interest in a mortgage, units of participation in a co-operative, or some other type of investment.
The funds used for the purchase are then loaned back to the owner of the self-directed RRSP at very low or no interest.
So what’s the catch?
First, if an RRSP is used as security for a loan, the value of the RRSP must be included in the RRSP holder’s taxable income. Similarly, if an RRSP is used to purchase shares of a private corporation or some other investment where the shares are not recognized as a “qualified investment” under RRSP rules, then the value of the shares will be added to the RRSP holder’s taxable income.
The increase in taxable income is effective for the year in which the RRSP is pledged as security for a loan or the ineligible investment is purchased. So if it takes several years for CRA to catch the problem, not only would the individual owe income tax for that particular year, but there would also be accumulated interest owing as well.
Second, it is not uncommon for promoters of these schemes to simply disappear with the funds used to purchase the investment. Sadly, many Canadians have lost their entire retirement savings in this very manner.
Why are so many people getting caught up in these schemes?
The promoters work very hard to appear professional and make the arrangements look legitimate. They may use a wide variety of promotional methods – the Internet, local newspaper advertisements, and promotional meetings.
They may also have opinion letters from professionals that give the impression that the letter writer endorses the scheme. CRA warns that these letters should not be interpreted as providing any assurance that these schemes do what they claim to do, or that the promised tax benefits are in accordance with the Income Tax Act.
How can you protect yourself?
It is very important that you seek independent legal and tax advice, meaning that you should speak with someone not connected to the scheme or the promoter. Your Rogers Group Financial advisor can help you determine whether you should discuss such an investment proposal with your lawyer or accountant.
You can also be proactive if you have invested in one of these schemes. CRA has set up a Voluntary Disclosures Program, whereby if a taxpayer makes a full disclosure before any compliance action or investigation is started, they may only have to pay the taxes owing plus interest. You can find more information about this program at www.cra.gc.ca under the heading “Voluntary Disclosures”.
And finally, remember the old adage. Registered Retirement Savings Plans were set up to allow Canadians to defer a portion of their income (and thus the income tax payable on it) until they are in lower tax brackets in retirement. RRSPs were never intended to allow individuals to avoid tax entirely, so when someone tells you they can help you get money out of your RRSP tax free, it’s most likely that their scheme is, indeed, too good to be true.