"Come to us before we come to you."
That's the message from the Canada Revenue Agency warning taxpayers about investing in unregistered tax shelters that provide inflated or unsubstantiated tax losses or deductions.
Unregistered tax shelters take many forms, but typically involve investors buying a tax loss that's well in excess of the cash investment. People who promote the schemes often promise a large tax loss that can be claimed when investors file their income tax returns. The loss usually results in a tax refund, enabling taxpayers to recover their initial cash investment.
However, the CRA said that simply buying a tax loss does not mean it's deductible. It added that a number of the schemes have already been reviewed and claims made by investors disallowed.
The CRA warned that taxpayers who invest in these schemes can lose their entire cash investment as well as any tax refunds they may receive from making a claim on their tax return. Investors knowingly participating in unregistered tax shelters can receive penalties of up to 50% of the taxes payable after the reassessment.
Promoters of tax shelters can also face penalties. If promoters failed to register and obtain a tax shelter number from the CRA when required, they being penalized 25% of the proceeds received from investors for their participation in the tax shelter.
The CRA is advising taxpayers to get independent professional advice before investing in any tax shelter. People who have already invested in such a scheme can contact the CRA to correct their tax return through the CRA's voluntary disclosures program.
Full disclosure before any compliance or enforcement action has started can limit the penalties and prosecution in court.