Fact sheet

Archived

This page has been archived on the Web.

Tax Shelters

January 1998

This is the time of the year when tax shelter promotions are most common. Revenue Canada would like to take this opportunity to warn investors about the potential risks and problems associated with tax shelters from a taxation perspective.

What is a Tax Shelter?

A tax shelter is defined in the Income Tax Act to be any property for which a promoter represents that an investor may claim deductions or receive benefits which equal or exceed the amount invested within four years of its purchase.

What should investors watch out for?

Investors should be wary of any tax shelter promotion where the anticipated net return to the investor in the first few years is predominantly due to projected income tax refunds. Investors should be particularly concerned with any tax shelter promotion where there is a suspicion that one or more of the following problems exist:

• no real business activity will be carried on;
• the business has no reasonable expectation of profit;
• the assets of the business are overvalued;
• the expenses are inflated or unreasonably high;
• losses for tax purposes will exceed the amount of the investment actually "at risk";
• verbal assurances of income tax consequences from the promoter or others that differ from, or are not confirmed by, professional opinions contained in the investment documents.

Investors should also be aware that there may be other requirements in the Income Tax Act that must be met for specialized tax shelter investments such as oil and gas shelters.

What happens if Revenue Canada determines that one of these problems exists?

• Where no real business activity is carried on or where there is no reasonable expectation of profit, all losses claimed by the investor will be disallowed.
• Where assets or expenses have been inflated, the inflated portion of the losses claimed by the investor for these items will be disallowed.
• Where losses claimed by an investor exceed the amount that the investor has paid or owes (this is called the "at-risk amount"), the losses will be reduced to the "at-risk amount".

In all cases, interest on the amounts owing will also be payable.

Furthermore, if the investor knowingly, or under circumstances amounting to gross negligence, made a false statement or omission pertaining to the tax shelter investment to the Department when filing a tax return, the law provides for an additional penalty of 50% of the taxes payable as a result of the reassessment. The investor could also face criminal prosecution if the Department determines there was criminal intent involved in the false statement or omission.

How many tax shelters are audited each year?

Revenue Canada reviews all tax shelters to ensure that losses claimed by investors are properly deductible for tax purposes. In the last four years, the investors in approximately 1,000 tax shelters were reassessed for additional taxes owing of over $250 million.

How many criminal prosecutions have resulted from tax shelter promotions?

Revenue Canada has obtained ten criminal convictions against tax shelter promoters for tax fraud. These convictions have resulted in fines of over $9 million and jail terms in all cases.

What can investors do to avoid future problems associated with tax shelters?

• Know who you are dealing with. Ask for the prospectus or offering memorandum and any other documents available in respect of the investment and carefully read them.
• Pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment. Often, these opinions will tell the investor about the problems that can be expected and suggest that the investor obtain independent legal advice.
• Get any verbal assurances from the promoter or others in writing.
• Ask the promoter for a copy of any advance income tax rulings provided by Revenue Canada in respect of the investment. Read the ruling given and any exceptions in it.
• Seek competent independent professional advice from a tax advisor before signing any documents.

Tax shelter identification numbers do not legitimize investments

Under the Income Tax Act, the promoter of any tax shelter has to get an identification number from Revenue Canada before selling the tax shelter. The number does not indicate that the Department guarantees an investment or authorizes any resulting tax benefits. Revenue Canada only uses this identification number later to identify unacceptable tax avoidance arrangements.

For more information on tax shelters and the general anti-avoidance rule, contact your Revenue Canada tax services office or see Information Circular 89-4, Tax Shelter Reporting, and Information Circular 88-2, General Anti-Avoidance Rule - Section 245 of the Income Tax Act. Both information circulars are available at Revenue Canada tax services offices

For media information:

Colette Gentes-Hawn
Media Relations
(613) 957-3522

Date modified:

1998-02-01