Many innocent taxpayers can easily be taken in by the promise of reduced taxes using alleged tax shelters. Unfortunately, the government views tax law as something each taxpayer has the responsibility to understand on their own. That means that honest people can find themselves in a lot of trouble when they unknowingly look for tax shelters that turn out to be tax schemes.

What’s the difference you might ask? In the case of a tax shelter you are using legitimate tax deductions offered by the government while a tax scheme is a purposeful avoidance of paying taxes. The monetary consequences when you are caught in these schemes can be so dire they can put you at risk of bankruptcy.

What is a tax scheme?

Tax schemes are designed to falsely reduce taxes through large deductions, or the promise of making tax free income. These schemes are dreamed up by promoters who then endorse them under the guise of tax or investment experts. The promoters present creative ways to reduce the amount owed on taxes in exchange for money.

In some cases, taxpayers knowingly participate in the schemes in order to cheat the government out of taxes. However, often it is innocent people who are convinced they are in fact using legitimate means to reduce the taxes they owe.

Signs of a Tax Scheme

As a rule, the basic theory to avoid tax schemes is to always work on the premise that if it sounds too good to be true, chances are it is. There are some common factors you can watch out for when it comes to tax schemes including:

• The promoter is asking for a portion of your tax refund in exchange for their services
• The scheme is being promoted as a financial product to reduce taxes
• There is a business opportunity to earn cash and avoid paying taxes
• The tax “shelters” are advertised
• You are expected to attend a free info session to learn more about the scheme

A Tax Scheme Example

Many tax schemes are based on a company or expert claiming they can provide advice on how to take advantage of a little known loophole in the income tax act. Often this would be directed at small business owners or the self-employed who are more likely to face large tax payments instead of a potential refund.

The promoter poses as a tax expert who provides false information on potential deductions you can file such as car payments, mortgage payments, etc. It is not uncommon for these schemers to ask for all of your tax paperwork so they can file your taxes on your behalf. Everything will seem on the up and up and you will be given your tax return to sign.

Unfortunately, most people will trust the schemer and not question the fact they are suddenly entitled to a $50,000 refund. The schemer will then expect payment for their services which is usually a flat fee for the return preparation, and then a percentage of your return payable at the time of the filing. They get your money and you end up with a sizeable penalty and tax payment owed to the government.

The Consequences

When the CRA detects what they consider gross negligence your taxes will be reassessed and fines, interest and penalties will be charged for the money they determine you owe. According to the CRA this would lead to “a gross negligence penalty equal to the greater of $100 and 50 percent of the understated federal tax payable — and certain overstated refundable tax credits — related to the unreported income”.

You Are Responsible

The CRA certainly does not make it easy for taxpayers. Even if you have hired someone you feel is a professional with the qualifications to file your taxes on your behalf, it is still your responsibility to understand all tax laws and look for discrepancies. It is up to each individual to make sure their highly complicated tax return is prepared and filed properly. When the CRA finds you have not filed properly they will reassess your return and send you the bill.

Notice of Assessment

A CRA Notice of Assessment can be one of the most feared documents an individual can receive. Even if you unknowingly allow your taxes to be filed by a dishonest person, you can see a tax reassessment that can range on average between $25,000 to $80,000, once all the penalties and interest are added. Even scarier is the fact the government can decide to reassess a return years later and apply the interest for all of those years to not only the money they determine you now owe, but also the fines and penalties they apply.

Government Waived

Although you can take the case to court, only the CRA has the power to waive penalties applied. As well, if you do decide to challenge the penalties in court, the CRA can make your life impossible by freezing your bank accounts, garnisheeing wages and registering liens against you so they can collect what they deem as unpaid taxes, penalties and interest. You will also be faced with hefty fees for a tax lawyer.

Winning the CRA Battle

When you find yourself in an impossible situation due to tax schemes you can take action by speaking to a trustee. We can assist in helping you avoid paying the penalties, interest and sometimes even part of the taxes owed. In many cases, filing for bankruptcy or even a consumer proposal can help you get out from under the thumb of the CRA.

We can file a consumer proposal on your behalf with an offer to repay a part of the debt you owe. This can include outstanding tax debts, penalties and interest. It does get more complicated when the CRA is involved. They will look at your home equity, do a thorough review of your budget, and even expect you to admit to your mistakes. However, in the end you can come out on the other side without having to pay the full penalties and interest applied by the CRA.

Protect Yourself from Tax Schemes

To avoid being caught in a scheme your best bet is to be honest and realize that although there are legitimate ways to reduce the amount of taxes you owe, there is never a legitimate way to avoid paying taxes altogether. Working with a reputable accountant is your safest bet so you gain from their knowledge of tax laws without falling for those too good to be true promises that will just lead to trouble.  

If you would like more information on tax schemes, call Charles Advisory Services at (416) 915-9007 or contact us here.