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CRA Warns On RRSP Withdrawal Schemes

by Mike Godfrey,, Washington

30 November 2007

The Canada Revenue Agency (CRA) issued a statement on Thursday highlighting the recent increase in the number of questionable Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) tax-free withdrawal schemes.

The CRA warned that investing in such schemes could result in the loss of entire retirement savings to unscrupulous promoters, and in a reassessment of tax returns.

To date, the CRA has reassessed over 3,100 taxpayers who participated in these schemes, resulting in additional taxable income of approximately $144 million. Audits of another 1,800 taxpayers with $84 million in RRSP and RRIF investments are currently underway, with audits on other arrangements are about to begin.

According to the tax authority, Canadian taxpayers should avoid schemes that promise the following:

  • Withdrawal of funds from an RRSP or RRIF without paying tax. Promoters often promise to return part of the taxpayer's investment by offshore debit or credit cards, offshore bank accounts, or loan-back arrangements;
  • Immediate access to assets in “locked-in” RRSPs or RRIFs;
  • Income tax deductions of three or more times the amount invested in an RRSP; and
  • Unrealistic returns on investments.

Typically, promoters of these questionable schemes direct the owner of a self directed RRSP or RRIF to purchase a particular investment through a specific trustee. The particular investment could be shares in a company, units of participation in a co-operative, a mortgage, or other types of investments.

The CRA cautioned that taxpayers should avoid these schemes for two reasons:

  1. The full amount of any withdrawal or ineligible investment is included in the taxpayer's income in the year the investment was made or the withdrawal occurred. This means that taxes are assessed on these amounts, as well as any applicable interest. Penalties may also be levied for amounts not reported.
  2. These arrangements can put their retirement savings at risk. In some cases, the promoter walks away with all the funds and cannot be found. Many Canadians have lost their entire retirement savings to unscrupulous promoters by participating in such arrangements.

The danger with these schemes, according to the Agency, is that they appear to be legitimate. The promotion of these schemes usually appears very professional, and various promotional methods may be used, including the Internet, local newspaper advertisements, and promotional meetings.

Promoters often provide opinion letters from professionals which give the impression that the letter writer endorses the scheme. These letters should not be interpreted as providing any assurance that these schemes do what they claim to be doing, or that the promised tax benefits are in accordance with the Income Tax Act.

The CRA has increased its RRSP compliance activities to include promoter audits and audits of trust companies. If individuals have invested in one of these arrangements and wish to correct previous omissions or errors, they can do so through the CRA's Voluntary Disclosures Program.

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