Larry MacDonald wrote a post today on a scheme to reduce up to 100 percent of your income tax. The scheme purportedly involves purchasing tax losses from R&D firms and when Larry asked the promoters if it would pass muster with the CRA, they claimed that “CRA should not disallow the tax deductions”. No surprises there. That’s precisely what promoters behind tax shelter gifting arrangements claim (see Beware of tax shelter donation arrangements, 19 August 2008) and the CRA has a long record of reassessing taxpayers and denying the donation.

Even if we ignore the elephant in the room — the obvious risk that CRA would subject any tax avoidance scheme to extra scrutiny — a scheme with a long history already exists that allows taxpayers to save (up to) 100 percent of their income tax. It is called flow-through shares (FTS) and it allows certain corporations involved in mining, oil and gas, renewable energy and energy conservation sectors to transfer exploration and development expenses to investors in return for equity investments. The investors are allowed to deduct the renounced exploration expense from their income.

If saving on income taxes are the main goal, FTS provide a much less risky way to do so. However, FTS are not without investment risks as I pointed out in this earlier post (See Comment on Flow-Through Funds, 26 March 2007).

This article has 17 comments

  1. From what I know about Flow-Through entities, your losses are limited by your total investment dollars. Many years ago, I had a financial adviser heavily pushing a flow-through entity to me, which is the one and only time I did any research into it. Personally, I couldn’t see the benefit of investing $10,000 in an investment that is a $10,000 write-off, along with the unwanted attention that it may draw from Rev Can. Not only did I reject that investment, I pulled all my investments from that financial adviser.

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  3. That does sounds a little too good to be true. :)

    I should have read more articles on their site before publishing the guest post. Ironically I reject almost all guest posts submitted but I liked that article. Oh well.

    Mike

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  5. Canadian Capitalist

    @Mike: That guest post by itself doesn’t offend me. In fact, I liked that post. It’s just that the fact that it is written by a “financial consultant” who disses advisors on one hand and is offering hare-brained ideas to clients on his website. Yes, we all know homes are not that great an investment. But, I’d take an overpriced hovel where I live any day over a spectacular “investment” property in some banana republic thousands of miles away. Yes, a lot of mutual funds leave much to be desired but I’d take that over getting my hands on all the gold I can get. And what’s with a meeting to discuss your gold investment option? All I need to do to buy gold is have a discount brokerage account and know the ticker symbol GLD or find a friendly neighbourhood dealer who can sell bullion to me.

    @Phil: I don’t think most flow-through shares / limited partnerships will have a problem passing CRA scrutiny. It is a legitimate way for mining companies to obtain funding for their exploration activities. Strictly speaking, a flow-through investment converts earned income into future capital gains. However, they leave much to be desired as an investment. Personally, I’ve avoided them because I think that the benefits are eaten away by their high fee structure.

  6. CC
    Thanks for the link to the post. As the independent tax specialist said in the post, one’s due diligence regarding these kind of tax strategies should include contacting Canada Revenue Agency at 1-800-959-8281 to make inquiries about their validity. And if the schemes are too aggressive, CRA will get an earlier warning.

  7. Well, the post is gone now. I don’t link to companies/sites that I don’t approve of.

  8. Canadian Capitalist

    @Larry: Unfortunately, the CRA may not provide a straightforward answer to questions about a tax avoidance scheme’s validity. If the scheme here involves questions of legality, the CRA is likely to deny the deduction in its reassessment and take up the matter in tax court. At least, that’s the strategy the CRA follows in tax shelter gifting arrangements.

    @Mike: I can’t make up my mind on whether you did the right thing. Yes, they get a link back from your site but the comments from skeptics in that post might give some food for thought for anyone wondering about the motives of the author.

  9. CC
    I thought CRA would have indicated to callers that they were rolling the dice — like the promoter did in the post. Oh well, live and learn.

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  11. I was expecting something along the lines of only making enough money to cover one’s personal exemptions plus any applicable deductions. Simple and legitimate, but leaves much to be desired from a standard of living perspective.

    • Canadian Capitalist

      @AKA: True. A better idea would be to earn enough to put taxable income just under the first tax bracket. The tax is fairly low and the standard of living would be much better. As a bonus, those with children will receive hefty CCTB transfer payments.

  12. Thank you for all the comments and mentioning our original interview with Larry. Preet from Where Does All My Money Go was actually kind enough to suggest we have a phone interview/podcast to discuss all these issues, so you can all look forward to that next week for all your concerns to be answered.

    All the best,
    Oren

  13. @Canadian Capitalist: yes, that is the same Martin. Funny enough, that is a badge that he proudly wears and gladly shares information about. Again, we will discuss all these issues with Preet in the podcast and then you can all come to your final verdict at that time.

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