Beware of tax schemes that promise to reduce your taxes
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Beware of tax schemes that promise to reduce your taxes
What is a tax scheme?
Tax schemes are plans and arrangements that attempt to deceive taxpayers by promising to reduce the taxes they owe, either through large deductions, or through promising tax free income. Tax schemes can also include other creative ways to convince people to pay less than what they owe.
“Promoters” are individuals or corporations who promote or sell tax schemes that seek to break or bend the rules of the Canadian tax laws. These promoters deliberately make false statements to assist their clients in tax cheating, all the while obtaining a financial benefit.
Visit this site regularly to make sure you have the most up-to-date information available from the Canada Revenue Agency (CRA).
Unlike tax schemes, scams and fraud often attempt to imitate government services in order to gain access to your personal and financial information. You should be cautious if you receive any communication that claims to be from the CRA and requests personal information such as a social insurance number (SIN), credit card number, bank account number, or passport number. For more information about scams and fraud, visit Scam prevention and the CRA.
How to recognize a tax scheme
As Canadians get ready to file their taxes, the CRA reminds everyone to be cautious of tax schemes.
Here are some common elements of tax schemes:
- they are positioned as financial products or business opportunities
- they are advertised (internet, social media, newspapers, fliers sent to households)
- there is often a sales pitch (free info session, paid seminar, webinars)
- they promise tax savings which often include large returns on small investments
- a portion of the anticipated tax refund is the promoter’s fee
- they seem “too good to be true”
Examples of tax schemes
- Warning for newcomers to Canada: Watch out for tax schemes targeting you!
- Multilevel marketing tax schemes
- Canada Emergency Wage Subsidy tax schemes
- Self-directed RRSP tax scheme
- Real estate investment scheme
- Health Spending Accounts tax scheme
- Working income tax benefit tax scheme
- Wages to Loan tax scheme
- Offshore leveraged insured annuity schemes
- Offshore disability insurance plan schemes
- Tax shelter gifting schemes
- Straddle-loss schemes
- Combatting carousel schemes
Promoters of tax schemes are often polished and professional, and go to great lengths to make the schemes look legitimate.
Here is the general profile of a tax promoter:
- very personable and charming
- delivers polished presentations
- can be an individual or a group
- will receive a commission or payment from you and/or your investment
- may claim the scheme is approved by the CRA
- provides letters from professionals
- discourages you to seek a second opinion
- discourages you to speak with the CRA
If you are approached by a tax preparer who offers unusually or uncharacteristically large refunds, this can mean questionable practices. Do not assume that these schemes and the promised tax benefits are legal under the Income Tax Act. While most preparers provide excellent service to tax filers, there are dishonest ones who file false or fraudulent tax returns. If you suspect anything suspicious, get a second opinion.
Remember that even if someone else prepares your tax return, you are responsible for all the information on the return.
Your actions may have serious consequences
Through increased audits of promoters, improved information gathering and informing taxpayers on how to recognize tax schemes, the CRA continues to identify and shut down tax schemes.
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 the fee you already paid to the promoter.
The CRA is actively going after tax promoters to ensure greater fairness in the tax system. The CRA can apply third-party penalties against tax preparers, promoters, and other third-parties who intentionally file or prepare false statements, or omit information on other individuals’ income tax returns. Third-party penalties are explained in detail in the Information Circular IC01-1, Third-Party Civil Penalties. Third-party civil penalties are serious and can result in large financial levies. Learn more about court decisions regarding third-party penalties:
Supreme Court of Canada: Julie Guindon v. Her Majesty the Queen
Canadian Tax Court: Glenn F. Ploughman v. Her Majesty the Queen
The CRA will also investigate and prosecute those who promote and counsel others to commit tax evasion. When taxpayers are convicted of tax evasion, they must repay the full amount of taxes owing, plus interest and any civil penalties assessed by the CRA. In addition, the courts may fine them up to 200% of the taxes evaded and impose a jail term of up to five years.
The CRA publically shares cases of individuals, corporations and trusts convicted of tax evasion. For more information on CRA convictions go to Enforcement notifications.
What can you do?
Get professional, independent advice
Get a second opinion. If you are being sold or proposed a deal that seems too good to be true, you should seek independent advice from a reputable tax professional. Ask questions or enquire further before submitting your return.
Here are some other tips to help protect yourself:
- Be informed about who you are dealing with at tax time and what their qualifications are.
- Stay away from tax preparers who offer you false tax claims such as charitable donations, child care expense claims, or even business expenses or losses. It is not worth the risk. There are serious consequences to you.
- If you don’t understand your return, don’t be shy about asking questions.
- Make sure the tax preparer gives you a copy of your return for your records.
- Never sign a blank tax form.
- Generally, if it sounds too good to be true, it probably is.
Come to us before we come to you
The CRA is always on the lookout for tax schemes and is also focusing on the promoters of these 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.
If you make a full disclosure before any enforcement action is started and before the CRA receives information regarding your potential involvement in tax non-compliance, you may only have to pay the taxes owing plus interest in part or in full and would be eligible for relief from prosecution and, in some cases, from penalties.
Help us ensure tax fairness for all Canadians
Your tax dollars fund social programs that benefit our communities. People who evade taxes are taking resources away from all Canadians.
If you suspect someone of tax cheating, you can report a lead to the CRA. Steps will be taken to protect your identity, also, you may provide information anonymously. Information related to suspected international tax cheating should be submitted to the Offshore Tax Informant Program.
Case studies of tax schemes
These studies, based on real scenarios, describe schemes set up to avoid paying taxes. They also note some of the financial consequences for the people who organize the schemes and the participants.
Did you know?
- The Government of Canada has made it clear that it is cracking down on this type of activity with a historic investment into the CRA to provide the tools and resources it needs to pursue those who try to sell these schemes.
- This investment allowed the agency to expand its Promoter Compliance Centre, which is dedicated to identifying, deterring and unraveling tax avoidance schemes set up by these promoters, through increased audits, business intelligence, communication, and the resources to better warn Canadians against such schemes.
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- Date modified:
- 2024-04-24