When a shelter is the storm: Beware high-yield off-shore tax schemes

National Post


When it comes to discussing the merits of various tax shelters, often
reciting the age-old mantra "if it sounds too good to be true, it probably is"
is sufficient to steer wayward clients away from becoming the next victims of
aggressive tax-shelter promoters.

These promoters often market highly questionable and, often, ultimately
unsuccessful schemes to the naive and unsuspecting public. Yet sometimes even
this maxim isn't strong enough to keep determined clients from being the next
victims of tax shelters gone bad.

Earlier this month, the Canada Revenue Agency and the United States Internal
Revenue Service announced that they had made "significant progress in unraveling
an abusive cross-border tax scheme."

The scheme, which was marketed to hundreds of middle and high-income
investors on both sides of the 49th parallel, involved tens of millions of
dollars in improper deductions and unreported income, stemming from various
retirement account withdrawals, such as RRSPs, RRIFs and U.S. IRAs.

Typically, a Canadian or U.S. promoter would approach a potential investor
with the opportunity to invest in "high-yield offshore investments." Often,
investors join an investment club, pay both one-time and annual renewal fees
(which are often excessive) to the promoter and sign non-disclosure and
confidentiality agreements with the promoters.

In some cases, these promoters would encourage the investors to raise the
cash for the offshore investment opportunity by participating in either a "loss
arrangement" that may generate an inappropriate tax refund or through a
"tax-free RRSP withdrawal arrangement." Both arrangements, of course, come with
additional fees attached.

The investor then transfers the funds to the promoter to purchase the
offshore investments. The promoter promises that both the investments and any
earnings thereon can neither be traced nor need be reported in Canada. Plus,
they can be repatriated at a later time back to Canada, "tax-free."

The CRA recently cautioned investors against such schemes. Often, the
offshore investments don't perform as promised and you have little recourse to
recover your original investment from the promoter.

The investor who participates in a loss arrangement or RRSP withdrawal scheme
to fund the offshore investment also risks having his or her loss denied or the
withdrawn RRSP funds included in his or her income, resulting in tax
liabilities, arrears interest and possibly penalties.

The CRA also reminded Canadians that that they are required to report their
entire worldwide income on their Canadian tax return, notwithstanding what a
tax-shelter promoter may claim.

It is to these promoters, however, that CRA Commissioner Michel Dorais
directed his strongest warning: "Tax administrations in many parts of the world
are working together to detect and shut down abusive tax schemes. Promoters who
believe they can play one country against another in developing tax schemes
should beware."

Yet, despite both the best efforts of the CRA to warn Canadians about the
dubious merits of tax shelters and the fact that in the last year alone,
taxpayers have lost at least three major tax- shelter cases at the Federal Court
of Appeal, investors still crowd hotel ballrooms across the country on Saturday
mornings, waiting with bated breath to hear the latest and greatest new

Perhaps P.T. Barnum was referring to tax shelters and their promoters when he
purportedly coined the phrase: "There's a sucker born every minute ... and two
to take 'em."