Warning: Wages to Loan tax scheme - Read before you weep

Don’t sign any agreement that says your wages are a loan

The Canada Revenue Agency (CRA) is warning Canadians about getting involved in schemes where promoters are telling participants they don’t have to pay tax if they turn their wages/salaries into non-taxable loans.

Popular target groups may include new-Canadians, seniors and students. Students because the scheme is often promoted as a way to pay down debt by freeing up cash.

How to recognize the Wages to Loan tax scheme?

A good rule of thumb – If something sounds too good to be true, it most likely is.

In a wages to loan scheme you’re paid in the form of a loan instead of regular wages.

The promoter will lease your services to an employer and will keep a percentage of your pay for their ‘service’. The promoter then gives you the balance of your pay as a loan.

The employee is informed they are not legally obligated to pay any taxes because they are being paid in the form of a non-taxable loan. This is false! Since employees do not pay back the loan, it is considered employment income and is taxable and subject to all payroll deductions.

Employers are responsible for making all payroll deductions, including the Canada Pension Plan (CPP); employment insurance (EI); income tax or other types of income, and then, reporting and remitting these slips to the CRA.

Your actions may have serious consequences

Those who choose to participate in these schemes, as well as those who promote these schemes, face serious consequences, including penalties, court fines and even jail time. Also, as a participant, you could end up being assessed additional taxes in addition to paying a fee to the promoter.

Budget 2016 made further investments in the Promoter Compliance Centre, thus enabling it to identify and unravel tax avoidance schemes set up by promoters. The Centre’s activities include increased audits of promoters, improved information gathering, and informing taxpayers on how to recognize tax schemes.

What can you do?

Get professional, independent advice

This scheme is a method of tax avoidance. If you are thinking about investing in one, the CRA encourages all Canadians to seek an independent second opinion from a reputable tax and/or legal professional on important tax and/or legal matters.

Come to us before we come to you

The CRA is always on the lookout for tax schemes. Did you willingly participate in one? If so, the CRA encourages taxpayers to come forward and correct their tax affairs through the Voluntary Disclosures Program (VDP): www.canada.ca/taxes-voluntary-disclosures.

If you make a full disclosure before any compliance or enforcement action is started, you may only have to pay the taxes owing plus interest and may avoid penalties and prosecution.

Help us ensure tax fairness for all Canadians

Your tax dollars fund social programs. People who evade taxes are taking resources away from all Canadians.

If you suspect someone of tax cheating, you can report it over the internet at www.canada.ca//taxes-informant-leads or by contacting the Informant Leads Centre line at 1-866-809-6841. Steps will be taken to protect your identity, although you may provide information anonymously.

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