CRA warns of RRSP schemes: Only two legal ways to withdraw funds, penalty-free, from plan

National Post


If it sounds too good to be true, it probably is. This is just one of the
lessons to be gleaned from the Canada Revenue Agency's latest program, launched
this past week, and ominously called the Taxpayer Alert initiative.

"Some taxpayers are feeling pressured or tempted to get into aggressive
financial and tax arrangements without knowing all the consequences of those
actions," says John McCallum, the federal Revenue Minister. "It's our commitment
to provide those taxpayers with timely and relevant information so they can
recognize and avoid falling into schemes or scams that could put them at odds
with Canada's tax laws."

The initiative provides Canadians with a "central repository of information"
about dubious and occasionally downright illegal tax schemes such as tax
shelters, tax havens and the underground economy.

This program follows the government's February budget announcement to invest
an additional $30-million a year to pursue aggressive international tax-planning

One of the first alerts the CRA chose to caution taxpayers about concerns the
claim, frequently found in sketchy, detail-absent, and often obfuscatory
classified ads in the back pages of less-reputable newspapers, that owners of
self-directed or locked-in RRSPs can get "immediate access" to their money

The promoters of these schemes claim you can legally make tax-free
withdrawals from your RRSP without paying any tax.

Under the Income Tax Act, there are only two authorized ways to withdraw
money from your RRSP without paying tax immediately.

The first is the federal Home Buyer's Plan which allows a first-time
homebuyer to withdraw up to $20,000 tax-free from her RRSP to purchase a
qualifying home. The amount must be paid back in yearly payments during 15

The second program is the Lifelong Learning Plan, which permits you to
withdraw, tax-free, up to $10,000 a calendar year ($20,000 maximum) from your
RRSP to finance full-time education for you or your spouse or partner. This
money must be paid back during a 10-year period.

The schemes promoted in the newspapers persuade owners of self-directed RRSPs
to either purchase shares of a private company or an interest in some mortgages,
often at highly inflated values. The funds you use to make the purchase are then
loaned back to you at either low or zero interest, but with significant

The risks are twofold: One, you could lose your retirement savings and two,
you may end up paying tax on the RRSP "withdrawal." Under the Tax Act, if the
shares of the private company purchased under the scheme are not considered to
be a "qualified investment" for an RRSP, the entire fair market value of the
shares must be included in your income in the year they were purchased.

Similarly, if you use your RRSP as collateral for a loan, something
explicitly prohibited by the Act, the fair market value of your RRSP must also
be added to your income in the year the RRSP is collateralized.

And if you think you may get away with it, think again. A tax case decided
last year involved Ms. Chantal Dubuc, who participated in just such a scheme
that she found out about by "contact[ing] a business advertising its services in
the newspapers."

Ms. Dubuc invested more than $20,700 in shares of one of the promoter's
companies. She then paid more than $3,200 in fees to obtain a $16,600 loan from
the promoter, which was guaranteed by the shares held in her RRSP. The CRA
reassessed her and made her include the entire $20,700 in her income.

The Tax Court concluded "the business ... was nothing more than an
organization set up by unscrupulous individuals in order to cheat those least
able to detect the swindle."

Nonetheless, the Judge upheld the CRA's assessment of tax owing on the RRSP
used as collateral as technically "correct" under the Tax Act, and Ms. Dubuc was
required to pay tax on the full amount, despite only getting access to a little
more than $13,000 of her RRSP money (the loan of $16,000 less the promoter's

So, before participating in any tax scheme or shelter that appears "too good
to be true," you may want to get some professional tax advice before proceeding.