Warning! Schemes can have serious tax consequences!
The Canada Revenue Agency (CRA) is warning Canadians about tax schemes that claim you can benefit from the funds or property held in registered retirement investment vehicles without making a withdrawal and without paying any income tax.
Taxpayers who participate in these tax schemes could be avoiding or evading taxes, and this will result in serious consequences.
Remember, if it sounds too good to be true, it probably is.
Benefiting with no withdrawals?
Rules in the Income Tax Act (“prohibitive advantage rules”) prevent individuals from using the property or funds held inside their RRSP or RRIF to realize an advantage. While the law allows some notable, legal exceptions (such as using the funds to participate in the Home Buyers’ Plan and the Lifelong Learning Plan), individuals must normally first withdraw the property or funds from their RRSP or RRIF and pay the related income tax.
Through his RRSP, Daniel buys shares of a corporation that owns a condominium unit. The fair market rental rate is $1,000 per month, or $12,000 per year. In return for his RRSP buying the shares, Daniel gets to rent the condo at a reduced rate of $750 per month, or $9,000 per year.
Daniel has enjoyed the advantage of a preferential rental rate through the use of his RRSP funds. That will cost him -- he must pay tax equal to 100% of the fair market value of the benefit extended to him. That is, Daniel would have to pay $3,000 (the difference between the market rate and the actual rate) in taxes for every year that he rents the condo at this preferred rate.
Through his RRSP, Daniel buys shares of a corporation that owns a condominium unit. The corporation sold the condo unit to Daniel at a reduced price of $250,000—less than the fair market value of $400,000.
Daniel has enjoyed the advantage of a reduced purchase price through the use of his RRSP funds. That means he is subject to a tax equal to 100% of the difference between the actual sale price and the fair market value of the unit. Daniel would therefore have to pay $150,000 in taxes.
The schemes only look legitimate
Promoters of these schemes are often polished and professional, and go to great lengths to make the schemes look legitimate. They may use Internet ads and websites, local newspaper ads, and hold promotional meetings or seminars in hotel banquet halls.
Promoters will often provide letters from purported professionals to give the impression that they endorse the scheme. Do not assume that these schemes and the promised tax benefits are legal under the Income Tax Act.
Get professional, independent advice
If you are thinking about investing in one of these arrangements, get independent legal and tax advice from a tax professional who is not connected to the scheme or the promoter.
Come to us before we come to you
Have you received questionable tax advice and are now wondering if it was legitimate? Did you willingly participate in a questionable tax scheme? If so, come forward and correct your tax affairs through the CRA's Voluntary Disclosures Program. Filing a valid voluntary disclosure before the CRA starts compliance action means you could pay only the taxes you owe plus interest, and you may avoid penalties and potential prosecution. More information on the Voluntary Disclosures Program is available at www.cra.gc.ca/voluntarydisclosures.
For more information on the prohibited advantage rules in the Income Tax Act, go to Tax Payable on an Advantage.
For more information about other RRSP-related schemes, see the following Tax Alerts:
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