Bruce Ball, FCPA, FCA, CFP
The CRA is stepping up its efforts to crack down on what they refer to as “tax promoter schemes.” As the CRA discussed at the CPA Canada-CRA Compliance Committee’s fall meeting, the CRA has implemented a Promoter Compliance Strategy that aims to:
- enhance communications to better warn Canadians against promoter tax schemes
- expand the Promoter Compliance Centre, which is dedicated to identifying, deterring and unravelling tax schemes
- increase the number of dedicated promoter auditors
- apply third-party civil penalties to promoters and other advisors involved where warranted
Educating yourself and your clients on what’s a promoter and some of the schemes the CRA is reviewing can help prevent potential costs when participating in them.
What's a promoter?
A promoter is an individual or corporation who sells tax schemes that, in the CRA’s view, seek to break or bend Canadian tax rules. Promoters are commonly paid a commission on promised tax savings and may provide legal opinions backing their proposed scheme’s validity. Throughout the lifetime of your practice, you and your clients may get approached by promoters selling tax strategies that promise to significantly reduce or eliminate taxes.
Some tax schemes currently under a CRA review
The CRA provided CPA Canada with a listing of tax schemes it is currently reviewing. Some of the schemes in the listing are described below. Note that we have simplified the description of these schemes.
1. Surplus strip schemes
The promoter offers owners of small private Canadian businesses a way to distribute corporate surplus tax-free as a sale of shares without giving up control of the corporation. The scheme specifically involves claiming the capital gains deduction.
2. Leveraged insured annuity schemes
The promoter offers a complex strategy using life insurance to distribute corporate surplus by increasing paid-up capital or creating a loan payable to the shareholder. The strategy also creates interest and insurance expense deductions. This can similarly be achieved through critical illness or group accident and sickness policies. For tax planning involving insurance, keep in mind that many tax changes have been made recently that will need to be carefully reviewed to determine whether a particular strategy is acceptable.
3. Offshore services and international business corporations (IBCs)
The promoter advises a Canadian corporation to establish a Barbados IBC subsidiary. The IBC subsidiary charges the Canadian parent a fee and deducts it from its profit. The Canadian parent effectively avoids Canadian tax by offshoring profit to Barbados. In the CRA’s view, the IBC subsidiary provides no real services in these schemes.
4. Straddle losses
The promoter offers a scheme that uses foreign exchange forward contracts to create losses used to offset the taxpayer’s income.
5. Private health services plans (PHSP)
The promoter markets health services accounts to businesses operating as sole proprietorships that have no arm’s-length employees. Contributions to the account are then deducted, even though the definition of a PHSP is not met.
Protecting your practice and clients
Taking part in a tax scheme can potentially bring serious consequences, including third-party civil penalties, for your practice and gross negligence penalties for your clients for schemes that are offside.
To protect your practice and clients from inadvertently participating in a questionable tax scheme, consider these points before you implement a third-party tax strategy:
1. Apply professional judgment
Does the strategy appear too good to be true? Would the seller get a commission based on the promised tax savings? Do you fully understand how the strategy works? Although not an exhaustive list, the CRA has provided some schemes that are under review. Does the strategy have elements that resemble some of these schemes? If a tax opinion is provided, it should be reviewed carefully to determine if the opinion given is on point and correct. If facts or conclusions are assumed, determine whether these factors are crucial to the success of the plan.
2. Work within your circle of competence
When you think a tax strategy might be valid, seek the opinion of a trusted tax specialist before you recommend it to your client.
3. Do a cost-benefit analysis
Even if you believe the proposed strategy is valid, would your client budget enough funds to cover the significant legal and tax advisor fees that might be needed to defend it against a CRA dispute? Undertaking a cost-benefit analysis for your client is warranted because professional fees can significantly reduce or even eliminate the tax savings. Keep in mind that it may be necessary to resolve the dispute with the CRA in court.
If you have a client that has undertaken any of the above tax schemes and you are concerned about potential penalties, they may be able to have penalties reduced or waived by submitting a voluntary disclosure application with the CRA. Again, you should seek the advice of a tax specialist.
See CPA Canada’s Tax Risk Management Guide for more information on protecting your practice and your clients from aggressive tax schemes.
Keep the conversation going
In addition to CPA Canada’s tax risk management guide, what other resources can CPA Canada provide you that would help minimize the risk of taking part in a tax scheme?
CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practice tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.