CRA warns of limited partnership real estate schemes

The Canada Revenue Agency (CRA) sent out a warning today to flag tax schemes involving professionals such as tax representatives and tax preparers, who are claiming to offer individuals tax write-offs through limited partnerships hingeing on real estate investments.

What the heck is a tax scheme?

Tax schemes are arrangements that are designed to deceive taxpayers by promising to reduce the taxes they owe, for example through large deductions or promises of tax-free income. These schemes can come in many different forms and are creatively planned to convince people that by participating they can expect to pay less taxes.

CRA’s outline of how this real estate tax scheme is delivered:

Beginning as an advertised real estate investment opportunity through what is being called a “limited partnership”, the scheme is usually heavily promoted as a product with a significant tax advantage and limited liability for the investor. The scheme’s promoter is promising a tax write-off for more than double what the taxpayer invests.

The claim of a significant tax write-off being received is because of costs expensed in the initial year of the project. The example given in the CRA press release is when an “investor has invested $5,500 and is advised that they can write it off on their taxes for $12,500 due to financial services, lease enhancement and tenant improvement costs expensed in the first year.” This is not the case, says CRA. “Limited partnerships are unique arrangements that provide investors with certain benefits similar to partnerships and corporate entities. However, different than general partnerships, the investor’s liability is restricted to the amount they invested. Therefore, they cannot claim a higher tax write-off than invested.”

Serious consequences can include jail time

The CRA has increased the number of audits of such promoters, as well as made improvements to its information gathering. It’s taking steps such as these, as well as informing taxpayers on how to recognize such real estate tax schemes and will continue to shut them down. There are serious consequences for being charged with this type of tax fraud, including penalties, court fines and jail time.

Protecting yourself and others from tax schemes

The CRA has outlined three tips to avoid and shut down tax schemes:

  • get professional, independent advice before investing, especially if a deal seems too good to be true
  • if you have participated in a scheme, go to CRA to correct your tax affairs through its Voluntary Disclosures Program before CRA comes to you
  • help ensure tax fairness for all Canadians by reporting a lead to the CRA

For more information on different types of tax schemes, visit Canada.ca/tax-schemes.

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