Audits of Registered Plan Strips (John Scholz)
The CRA is auditing taxpayers for “advantages” received from a “registered plan strip” relating to investments made with John Scholz, Northland Capital Inc., and Red Hill Capital Inc.
Investment Restrictions on Registered Plans
The Income Tax Act (“ITA”) imposes certain investment restrictions on registered plans. Registered plans include retirement savings plans (RRSPs), registered education savings plans (RESPs), registered retirement income funds (RRIFs), registered disability savings plans (RDSPs), and tax-free savings accounts (TFSAs).
These registered plans are only allowed to invest in property that is considered a “qualified investment.” These registered plans are also not allowed toinvest in property considered a “prohibited investment.” In addition, these registered plans must avoid any investments or structured transactions that aim to shift value into or out of the registered plans artificially or result in certain other supplementary advantages.
These investment limitations are intended to safeguard against abusive tax planning and help ensure that registered plans do not provide tax advantages unrelated to their fundamental objectives.
“Advantages” in Respect of Registered Plans and “Registered Plan Strips”
A special tax is imposed under subsection 207.05(1) of the ITA if certain supplementary advantages are received in relation to a registered plan. An “advantage”in relation to a registered plan includes any benefit, loan or indebtedness that is conditional in any way on the existence of the registered plan. An “advantage” also includes a “registered plan strip” in respect of the plan.
A “registered plan strip” is defined in subsection 207.01(1) of the ITA as:
“the amount of a reduction in the fair market value of property held in connection with the registered plan, if the value is reduced as part of a transaction or event or a series of transactions or events one of the main purposes of which is to enable the controlling individual of the registered plan, or a person who does not deal at arm’s length with the controlling individual, to obtain a benefit in respect of property held in connection with the registered plan or to obtain a benefit as a result of the reduction….”
For the special tax to apply, the advantage must be extended to, or be received or receivable by, the “controlling individual” of a registered plan, the plan itself, or any other person not dealing at arm’s length with the controlling individual. Typically, the taxes are imposed on the controlling individual of the registered plan. The “controlling individual” is the annuitant, subscriber or holder of the plan. However, if the advantage is extended by the issuer, carrier or promoter of the registered plan, the issuer, carrier or promoter is liable to pay the tax.
With regards to responsibility for the tax, the CRA has stated that:
Responsibility for compliance with the advantage rules depends on the circumstances. Although financial institutions generally have no obligation under the Act to identify investments or transactions that may result in the annuitant being liable for the advantage tax, we would expect that financial institutions would not knowingly facilitate the holding of, orparticipate in, such investments or transactions in light of the serious tax consequences for the annuitant.
Under subsection207.06(2) of the ITA, the CRA has the authority to cancel or waive all or part of the tax on advantages in certain circumstances. In determining whether to exercise its discretion, the CRA will take into account various factors. These factors include reasonable error, the extent to which the particular transactions that gave rise to the tax also gave rise to another tax payable, and the extent to which the payments were made from the taxpayer’s registered plan.
RRSP Strip Schemes
In RRSP strip schemes, promoters will typically promise clients that they can get them immediate access to their “locked-in” RRSP funds without incurring any taxes. In general, taxes must be paid upon withdrawals or received payments from an RRSP. The CRA will generally assess those it claims to have participated in these schemes with taxes upon withdrawing funds from the RRSP, as well as interest and penalties.
John Scholz Found Guilty of Tax Evasion
On July 13, 2021, Joern Scholz (also known as John Scholz) was sentenced to three years imprisonment after being found guilty on April 13, 2019, of fraud over $5,000 under the Criminal Code of Canada for the evasion of federal income tax and goods and services tax/harmonized sales tax (GST/HST). John Scholz was initially sentenced to a conditional jail sentence, which the CRA appealed to the Court of Appeal for Ontario. The Court of Appeal determined that the situation warranted a three-year prison sentence as John Scholz’s tax evasion was a large-scale fraud on Canadian taxpayers.
With advice from the Ontario Securities Commission, the CRA investigated John Scholz. The investigation revealed that John Scholz operated an investment counselling business and did not report any of the commission fees he had received from his clients on his tax returns from 2011 to 2013. Specifically, John Scholz did not report taxable income totalling $2,149,730 for 2011, 2012, and 2013 tax years and therefore evaded a total of $605,355 in federal income tax. John Scholz also did not file GST/HST returns for the 2011 to 2015 taxation years, which resulted in him evading remittance of GST/HST totalling $445,789.
Contact our firm today if the CRA has contacted you regarding a registered plan strip resulting in an advantage or if you have invested with John Scholz and are worried that the CRA may audit you in the future. Our firm can represent you against the CRA and advise you on how to tackle your tax situation.
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By Kaveh Rezaei – Attorney at KR Law Firm
**Disclaimer
This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.
