Tax scams have serious legal consequences − don't be a willing participant!
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Did you buy information from someone who claims the Government doesn’t have the right to collect taxes on the income you earn? Or that you could invest in something and claim a lot more than it’s worth for tax purposes?
STOP. It’s a tax scam.
Even though these arguments may sound compelling and convincing, they are scams. In addition to the high fees you may be asked to pay, these scams are illegal and will cause serious tax consequences for you. The Canada Revenue Agency (CRA) will reassess your income tax return, and require you to pay interest. You may be charged penalties, and even be prosecuted for tax evasion. Don’t be a willing participant! Remember that the CRA publicizes every court conviction to maintain confidence in the integrity of the self-assessment tax system and to deter non-compliance with the law.
Inform yourself: Top 5 tax scams
- Natural person vs. Legal person– In this scam, promoters convince you to treat yourself as two separate people for income tax purposes: a “natural person”, who is the flesh and blood individual, and the “legal person”, who is a legal entity created by the Government. They argue that the income a person earns belongs to the natural person who is not subject to Canadian income tax law. As part of this scam, the promoters might suggest that you:
- prepare your T1 return and claim fictitious losses;
- apply for a CRA business number in your name and create false information slips to report losses on securities;
- not file a return at all, based on the argument that you are not taxable and, therefore, not required to do so.
Reality: The courts have repeatedly and consistently rejected this scheme and have confirmed the legality of the Income Tax Act. For more information, see Tax Alert – Don’t buy into illegal tax protester schemes.
- Tax-free Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) withdrawals– In this scam, promoters promise to return part of your investment by offshore debit or credit cards, offshore bank accounts, or loan back arrangements. They also promise you immediate access to assets in “locked-in” RRSPs or RRIFs, as well as income tax receipts providing deductions of three or more times the amount invested in an RRSP, plus unrealistic returns on investments. Typically, they ask the owner of a self-directed RRSP or RRIF to purchase a particular investment through a specific trustee. The investment could be shares in a company, units of participation in a co-operative, a mortgage, or other types of investments, all of which are owned/controlled directly or indirectly by the promoters.
Reality: You can lose your entire retirement savings. Under these schemes, the amount you withdraw from your RRSPs or RRIFs counts as additional income and will be taxed in the year the investment was made or when the withdrawal occurred, even when your savings have disappeared with the promoters. For more information, see RRSP Tax-free Withdrawal Schemes
- False losses or expenses – In this scam, promoters convince you that you can claim large losses or expenses equal to your personal expenses. These might include payments for mortgages, personal loans, vehicle loans, and common everyday expenses. You are provided with a CRA business number and an “RZ account” (an information account) used to submit information slips for amounts related to your personal debts and expenses. These slips include the T5008 Statement of Securities Transactions, the T5 Statement of Investment Income, and the T4A Statement of Pension, Retirement, Annuity and Other Income. The amounts from the slips are reported on T1 tax returns as business losses, professional income losses, capital losses, or as expenses.
Reality: Under the Income Tax Act, you cannot make deductions for personal expenses. If you do not operate a business, you cannot claim personal expenses as deductions from other income. For more information, see our tax alert, Warning: If you claim false losses or expenses on your tax return, you can be fined, penalized, or even convicted.
- False charitable donation receipts – In this scam, individuals preparing tax returns for you will offer to sell youa large charitable donation receipt for a fraction of the value of the receipt. The receipts are false, and the donations are never made to actual or fictitious charities.
Reality: The fee you pay goes directly to the preparer of your return and there is no donation involved. Under the law, you cannot purchase a receipt for tax purposes, so your tax return will be reassessed.
- Purchase of precious gems or other high-value collectibles– In this scam, individuals convince business owners to buy expensive goods such as gems as an investment, claim the GST/HST input tax credits, and then sell the stones to a buyer in another country that the individual provides. The business owner never retains possession of the gems as the individual offers to “hold on to” the items in a secure location and save the business owner the cost of transporting and insuring the high-value item. Since the proposed “buyer” is out of the country, the individual tells you that there is no GST/HST charged on the sale.
Reality: You are out of pocket for the cost of the items since there is no actual transfer of the goods, and, therefore, no actual sale for GST/HST purposes. If there are actual goods, they may not be worth as much as the individual tells you they are, and a buyer may never materialize. The CRA will reassess your GST/HST return to reverse the credits claimed.
Get professional, independent advice
If you are thinking about participating in an arrangement to minimize your tax, be sure to get independent legal and tax advice. Independent advice means advice from a tax professional who is not connected to the particular arrangement.
Informing yourself is your best protection against scams and fraudsters. Go to www.cra.gc.ca/fraudprevention or call us at 1-800-959-8281.