Investors should stay away from tax shelters involving investment clubs and associations that claim to offer high-yield offshore investments, the Canada Revenue Agency warns.

As an advisor who keeps tabs on tax developments, you can use this alert as an opportunity to warn clients about potential harm. It should also be a reminder to you not to be tempted by referral commissions on products that will get your clients into hot water with the taxman.

These schemes are often “skillfully presented” and “appear legitimate,” the CRA says in a tax alert released last month. The CRA urges investors to seek legal and financial advice that is independent of the promoter.

“The bottom line is that if it sounds too good to be true, it probably is,” says Paul LeBreux, president of Toronto-based Global Tax Law Professional Corp. and chairman of the Society of Trust and Estate Practitioners (Canada).

A large part of LeBreux’s practice involves advising on international trust and estate planning, and he is often asked by clients to give his opinion on tax shelters.

“Ask your clients if they honestly believe the Income Tax Act supports the promises they’ve been given. They’ll realize the answer often is ‘No’.”

LeBreux says even if the federal government dropped the tax rate substantially, underhanded tax shelter promoters would still be around: “There’s always someone looking to pay a little less taxes.”

The real problem, he says, is the complexity of the federal Income Tax Act — now more than 2,000 pages long. “These promoters are tax-savvy. They’ll show you several paragraphs of the tax act that appear to support their scheme.”

But clients and advisors are not without fault, LeBreux notes. Clients can be “greedy,” while advisors can be “jaded” by commission offers and large fees, and generally can find a way to rationalize a tax arrangement.

There is nothing wrong, LeBreux says, with taking a commission for a tax arrangement — “Provided it is suitable.”

Advisors need to conduct due diligence on tax arrangements as with any investment and get independent, expert advice regarding the viability and suitability of the arrangement.

Heather Evans, a lawyer and partner in the Toronto office of Deloitte & Touche LLP, suggests you ask to see all the supporting documentation. Ask for the promoter’s tax shelter identification number from the CRA. “Has the promoter been involved in other arrangements of this type in the past? Have they been challenged by the CRA? What’s the reputation of the people behind the arrangement?”

Kim Moody is a chartered accountant and partner in the Calgary office of RSM Richter, a consulting firm that offers wealth-management advisory services. Many of his clients include professional athletes, one of whom asked him about a scheme involving employment contract funds that would be recycled through offshore corporations and repatriated to Canada as capital. Moody told his client the scheme was abusive.

“These guys are really slick,” he says. “They prey on people who crave this kind of tax relief.”

Professionals such as doctors and dentists also are typically looking for tax breaks. They often set up professional corporations to do income-splitting with family members, but these deductions are limited, LeBreux says.

While there are legitimate, sophisticated offshore arrangements, they are most appropriate for very high net-worth clients, he says: “If you’re a small-time player, these opportunities are probably not for you.”

Even if the investments make money, the promoter will gouge the investors for huge fees. The promoter often absconds with investors’ funds. And because control of the funds has been signed over to the promoter, there’s little that can be done about it.

Even worse, people who invest in fraudulent schemes will be subject to tax rules, and any tax loss claim probably will be denied.

Even if an investor is involved in a legitimate tax planning arrangement, the CRA has rules governing reporting of offshore income. Non-compliance will result in having to pay taxes, interest and severe penalties. Serious cases of tax evasion can also result in criminal charges, fines and even jail time.

“No matter what a promoter claims, you must report all earnings resulting from a tax arrangement and pay the required taxes on those amounts,” the CRA alert cautions.

Tax agencies around the world are joining forces as tax promoters become more sophisticated in their schemes and in moving money offshore electronically. Canada has joined the U.S., Britain and Australia to collaborate in identifying and shutting down abusive tax shelters under the auspices the Joint International Tax Shelter Information Center, established in 2004 in Washington.

@page_break@The August tax alert accompanied an announcement from the CRA and the U.S. Internal Revenue Service that their JITSIC efforts had resulted in a crackdown on an abusive cross-border tax scheme. Few details were provided. But, clearly, the hunt is on. And it’s your job to make sure your client isn’t within the taxman’s sights. IE