The CRA recently released a notice that warns Canadians to be on the lookout for real estate investment schemes that promise a significant tax write-off—more than double what you invest. But the old adage rings true: if it sounds too good to be true, it probably is. If you have a client approach you about a great real estate investment, here’s what you need to know to provide them with sound, financial advice:
The CRA release outlined that this real estate investment scheme promises a tax write-off that exceeds the original investment by claiming deductions for Financial Services and Lease Enhancement and Tenant Improvement costs in the first year. However, the investment is structured as a limited partnership, which restricts the investor’s liability to the amount they invested.
As Budget 2019 proposed to provide the CRA with $50 million over five years to implement four new residential and commercial real estate audit teams (notably in BC and Ontario), it’s even more important than ever that taxpayers consult a tax professional who is up-to-speed before making what could be a costly mistake. Making false statements by under-reporting taxable income or claiming expenses that are non-deductible or overstated (which is what the real estate scheme is advising investors to do) is a serious offense and can result in being charged with tax evasion. This comes with heavy fines ranging from 50%-200% of evaded taxes and up to five years imprisonment.
A recent conviction by the CRA demonstrates the risk. On May 3, 2019, the CRA released a notification on compliance actions being taken against an Anmore, BC land developer and builder for tax evasion. He was found guilty on two counts of tax evasion, one count of making false statements under the Income Tax Act, and one count of GST/HST evasion under the Excise Tax Act and was sentenced to pay a $23,100 fine.
It’s important to note that different rules apply dependant on how the investment is structured. It’s imperative that one consults a professional well-versed in the rules surrounding real estate and partnerships to ensure compliance.
As an advisor, you have the integral role of ensuring that your clients remain informed and above-board.
Additional Educational Resources: Ensure your clients aren’t getting caught in investments that seem too good to be true, and provide them with expertise and knowledge for tax-efficient investments that are CRA compliant by taking Tax Strategies for Investors as a certificate course or as part of the MFA-Retirement and Succession Services Specialist™ designation program.
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