The Tax Court of Canada has held that a taxpayer must include $117,00 in income that she withdrew from her RRSP to invest in a tax-avoidance scheme.
The decision in Chiasson v. The Queen, which was released in late April and deals with the “qualifying investment” requirement for RRSPs, shows, once again, the misfortune that can befall taxpayers when they succumb to the appeal of investment firms that offer dubious claims of RRSP eligibility despite a lack of active business activity. It also highlights the importance of consulting financial advisors when entering into highly risky investments.
The taxpayer, Ana Maria Chiasson, had done well with the advice of a financial advisor with Assante Capital Management Ltd., but subsequently suffered setbacks. After failing to consult her advisor on a significant shift in strategy, Chiasson lost both her original capital, some of the gains realized thanks to the advisor’s advice, and the tax-free status of her savings.
Chiasson’s losses occurred following a decision she made in 2001 to move a substantial chunk of capital to a self-directed account at an Alberta-based venture-capital firm that lacked tax returns, bank and financial statements, and which held investments in offshore accounts. As the court noted, these deficiencies made it virtually impossible to assess the nature of the firm’s business properly.
Chiasson works in the customer service department at Air Canada. After her husband died in 1991, she received proceeds from a life insurance policy of about $100,000. Her advisor, Jean Piché, helped her increase the amount in her RRSP to more than $164,000 in 2000 from $103,000 in 1996, using balanced and diversified funds.
In 2002, Chiasson subscribed for 150,000 Class B (non-voting) shares in Alberta-based Landmark Capital Partners Ltd., at $1 a share. The deal went through Yorkton Securities Inc. and Chiasson testified that she followed the advice of a financial analyst at that firm. After various adjustments, the final amount of the transfer was $117,000.
The decision notes that “Landmark was a company used in an arrangement designed to allow for the tax-free withdrawal of RRSP funds.” The scheme was promoted by the Institute of Global Prosperity and was part of a group of companies owned by Nelson Bayford, the decision notes.
The tax-free withdrawal scheme was promoted at various events, such as conferences in which tax-saving shelters were discussed. Under the scheme, about $3.6 million was eventually paid to an offshore entity, Landmark Capital Inc. (Barbados), which then paid out most of the investments to the firm’s controlling shareholders or their agents.
The decision notes that the company did not have a payroll account with the Canada Revenue Agency (CRA) and did not report any revenue from the sale of goods or services. Its only activity was to issue Class B shares and invest the proceeds in the Barbados company.
To be eligible for tax-sheltered status, investments in an RRSP must be “qualified investments,” as defined in the Income Tax Act – generally interests in active businesses. The requirement must be met when the investment is purchased and throughout the time the investment is held in the RRSP.
Most of the investments held by the Barbados company were paid out to the controlling shareholders shortly after they were received. The company wrote down most of the $3.6 million it had received from investors such as Chiasson, and the Barbados company’s business licence expired at the end of 2002.
In 2006, the CRA reassessed Chiasson, who had also lost her investment, requiring her to include $117,000 in her taxable income, the amount she had withdrawn from her RRSP. She appealed the decision, alleging that the purchase of the Landmark shares was a qualifying RRSP investment. She recognized, the decision says, that she had not conducted any due diligence with respect to Landmark’s activities.
In holding for the CRA and dismissing Chiasson’s appeal, Justice Réal Favreau noted that, “determination of whether or not a particular investment is a qualified investment for registered retirement savings plans is a complex and perilous exercise out of reach for the vast majority of Canadian taxpayers.”
The decision also notes that “an investment in a new private start-up corporation such as Landmark is always problematic and risky. This is why it is highly recommended in such a case to seek an opinion from the trustee of the plan or from tax professionals confirming that the proposed investment is a qualified investment.”
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