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Coast Capital in Tax Court over RRSP Strip Scheme

By Andrew Rickard | August 25 2015 10:42AM

The Coast Capital Savings Credit Union is fighting a case in the Tax Court of Canada, arguing that it should not be held liable for taxes resulting from an RRSP strip scheme.

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In RRSP strip schemes, promoters offer clients a way to withdraw money from their locked-in or registered accounts without paying taxes; funds are transferred offshore in such a way as to avoid generating a T4RSP or T4RIF slip and, less a fee paid to the promoter, annuitants are given unfettered access to their cash. For example, a client might buy $100,000 of shares in Offshore Company XYZ through his or her RRSP, the promoter takes $20,000 in compensation, and the client is then able to withdraw and spend the remaining $80,000 tax-free though online banking, a debit card, or a credit card.

This is the kind of thing that happened to Coast Capital, which as RRSP trustee was instructed by clients to purchase shares of an offshore company. Coast Capital received and relied on a letter from a lawyer who was involved in the scheme, asserting that the shares qualified as RRSP investments and that they had a fair market value that was equal to the purchase price. In reality, the share price was inflated and the purpose of the transaction was to move registered funds offshore where the promoters could collect their fee and the annuitants could withdraw money without having to pay Canadian taxes. The credit union was unaware of these facts at the time.

The Canada Revenue Agency (CRA) discovered the scheme and assessed taxes; as RRSP trustee, the CRA deemed Coast Capital to be the purchaser of the shares and therefore liable to pay 25% of the shares’ cost as taxes under Part I of the Income Tax Act.

Coast Capital appealed the CRA’s assessment to the Tax Court of Canada. In a procedural motion heard on May 5 (2015 TCC 195), the credit union argued that the transaction was deliberately designed to deceive and that it should be re-characterized as a sham. However, Justice Valerie Miller indicated that only the Minister of National Revenue can be the victim of a sham.

“To my mind, in a tax case, if it is the Minister who must be deceived, it is only the Minister who can plead ‘sham’ and rely on the ‘sham’ argument to have the courts disregard a transaction,” reads the decision. “It is clear that both the Annuitants and the Promoters intended the purchase price for the shares be the stated purchase price. They set up a plan to withdraw the funds from the Annuitants’ RRSPs so that the Promoters received their fees and the Annuitants received a withdrawal of funds from their RRSPs. They misled the Applicant with respect to the value of the shares purchased by the RRSPs but this is not a ‘sham’. It is fraud.”

The case is still before the Court.

Correction:

An earlier version of this article inaccurately stated that the Tax Court handed down a ruling that “denied Coast Capital’s request for reassessment”. In fact, the Tax Court denied a procedural motion brought by Coast Capital to amend its original pleading; the case is still before the Court, and the final outcome is yet to be determined. The Insurance and Investment Journal regrets the error. Coast Capital has also asked that the article be updated to make it clear that it was unaware of the facts at the time of the events.

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