Registered retirement savings plan (RRSP) strip scheme

Aisha was experienced in the finance industry and working as a financial planner. Aisha was contacted by Javier to help promote an RRSP strip scheme.

In this scheme, Aisha advertised to clients that she could get them access to the funds in their RRSP investments without paying tax, in exchange for a fee. Generally, in order to cash in, make withdrawals, or receive payments from an RRSP, tax must be paid. There are very specific circumstances which would allow a tax-free RRSP withdrawal. None of Aisha’s clients were eligible for a tax-free RRSP withdrawal.

To make this scheme possible, Javier established a series of corporations. Aisha transferred the clients’ RRSP investment, with the clients’ consent, to one of Javier’s corporations. Javier would reinvest the RRSP funds from the original investment several times through a complex series of transactions and multiple financial products using his many corporations. Eventually, the clients received about 70% of the value of their RRSP without having paid tax. Of the total withdrawn from the RRSP, Javier took 25% as a broker’s fee and the remaining 5% was Aisha’s commission.

None of the corporations created by Javier were qualified for RRSP investments.

Because Aisha was a very experienced financial planner, it was established that she knew, or would be reasonably expected to know that she was supporting tax-free withdrawal of RRSPs, which is not allowed. Her actions, in collaboration with Javier, did not comply with the Income Tax Act.

What happened next

Aisha promoted the plan and received commission cheques from Javier’s companies for the completed transactions. Because of her involvement, following an audit, Aisha was assessed over $75,000 in third-party penalties.

Javier knew the RRSP arrangement he was promoting did not comply with the Income Tax Act. Because of his involvement in promoting the scheme and making false statements used to access clients’ RRSP funds without paying tax, he was assessed over $1.8 million in third-party penalties.

Consequences for the participants

The people who participated in the scheme had to pay the tax that they should have paid on their RRSP withdrawal. Interest and penalties were applied appropriately to each claim. An offer of a tax-free RRSP withdrawal indicates that a second opinion is required.