Who wants to pay more taxes? If anything, most people try to pay as little tax as possible. It is important to know that although there are many legitimate ways to save taxes, there are some tax saving schemes to be wary of. The best way to guard yourself is to remember that when a money saving idea sounds too good to be true, it usually is. In the end, these types of schemes may cost you more money and aggravation.
> Tax Free Withdrawls from your RRSPs
As tax season approaches, there are people who will claim, “there is no tax to pay, so take advantage of your RRSPs” or “we will loan you $5,000 to $250,000 to put towards your RRSPs over the next five years, as long as your RRSPs are locked in.” This arrangement is basically a circular scheme that involves using your self-directed RRSPs to either purchase shares of a private company or pay interest on a private company’s mortgage. These funds are then loaned back to your self-directed RRSPs at either low or no interest.
What is your risk?
You may end up withdrawing your entire RRSP portfolio and you may face a huge tax liability. Why? If RRSPs are used as security for a loan, the full value of the RRSPs has to be added to your taxable income for the fiscal year, meaning that you will be taxed on your RRSPs now, rather than being taxed when you retire.
> Tax Shelter Donation
Donations are tax deductible, meaning not only can you give to the charity of your choice, but you may also claim your donation at tax time. Some agencies may promise that if you donate a certain amount (e.g., $100) they will give you a receipt claiming that you donated more (e.g., $500) so that you may deduct more from your taxes. Similarly, you may give a non-cash gift valued at a certain amount (e.g., $100) but claim that the value of the gift was more (e.g., $500).
What is your risk?
Current legislation limits the tax benefits of charitable donations made under tax shelters and other arrangements. The current legislative limits mean that although the person or agency receiving your donation may promise you a huge donation receipt with your rather modest cash contribution, you may end up getting a donation amount that is only equivalent to your actual cash outlay. In effect, the government may disallow part of your donation amount, which makes you responsible not only for paying your overdue taxes, but also the interest on those taxes.
These schemes are very carefully planned and promoted to give the appearance of legitimacy. Some even go as far as to give you a legal opinion. However, a legal opinion does not necessarily mean that the Canada Revenue Agency (CRA) has approved the transaction. It simply means that from a legal point of view, it appears the scheme is legitimate. Only in situations where the promoter has actually obtained an advanced ruling from the CRA, will the transaction be approved with no risk. You must exercise due diligence to protect yourself against such schemes. They may potentially have a serious negative impact on you and your bottom line. It is always a good idea to check with your trusted advisors first, including your investment advisor, lawyer and accountant, to verify the validity of schemes before committing yourself.