Eric Miller is an Associate Lawyer at Rosen Kirshen Tax Law. Eric recently completed his second year at the University of Windsor, Faculty of Law. He received his Bachelor of Arts in Philosophy with Distinction from the University of Guelph and graduated on the Dean’s List.
Jason Rosen is a founding Partner at Rosen Kirshen Tax Law. Jason provides effective and aggressive representation by taking a proactive, client centered approach for his domestic and international clients alike. Throughout his time in the field, Jason has gained a comprehensive understanding of tax procedures and the dispute resolution process.
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John Scholz and RRSP Advantages
Have you recently received correspondence from the CRA regarding an audit or reassessment of your income tax returns for an alleged “strip” of a registered plan (such as an RRSP, RESP, RRIF or RDSP) resulting in an “advantage”?
The CRA is auditing taxpayers for “advantages” received from the transfer of their registered plan to Western Pacific Trust Company, the subsequent purchase of shares of Red Hill Capital Inc., and the direct repayment of the value of their registered plan from John Scholz of Northland Services Inc. following the purchase of the shares.
These audits are targeting taxpayers under a specific and technical provision of the Income Tax Act (the “Act”). In this blog post, which draws from Income Tax Folio S3-F10-C3, published by the CRA, we outline the meaning of these provisions and some of the reasons for their implementation. We also highlight another recent CRA publication regarding John Scholz.
An “advantage” in relation to a registered plan is defined under subsection 207.01(1) as any of the following:
The CRA considers the above series of transactions involving John Scholz to result in an “advantage” under subsection 207.01(1) of the Act.
Under subsection 207.05(1), the Act imposes a special tax for “advantages”. The tax is equal to the amount of the advantage and is payable by the annuitant, subscriber, or holder of the plan, unless the advantage is extended by the issuer, promoter, or carrier of the plan. In the latter case, the tax is payable by the issuer, promoter or carrier.
The person responsible for paying the tax is also required to file a special tax return. The CRA has discretion to waive all or part of the tax.
Registered Plan Strips
The CRA defines a “registered plan strip” as the amount of a reduction in the fair market value of property of a registered plan other than a TFSA.
The reduction may be considered a “strip” 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 or any person who does not deal at arm’s length with the controlling individual to obtain a benefit in respect of the property of the plan or to obtain a benefit from the reduction.
The above definition involves a few technical terms:
The definition of a “registered plan strip” can apply even when no amount is traceably removed from a registered plan but where the value of the plan has still been reduced. For example, this could occur by way of transactions that dilute the equity of a corporation, trust, or partnership in which the plan is invested. It could also occur where a plan has directly or indirectly invested in a debt obligation and steps are taken to ensure that the debt cannot be repaid, or where no actions are taken to enforce repayment.
Advantages and the Reason for the Rules
The advantage rules originally applied only to TFSAs but were extended to cover RRSPs and RRIFs from March 23, 2011 and to RESPs and RDSPs from March 23, 2017.
The advantage rules target abusive tax planning arrangements that seek to artificially shift value into or out of a registered plan while avoiding the statutory limits for contributions or withdrawals. They also apply to benefits and loans that are conditional on a registered plan.
Normal investment activities and conventional incentive programs will generally be excepted from the application of the advantage rules. Amounts excepted from the rules may include amounts included in income, amounts withdrawn under the Home Buyers’ Plan or the Lifelong Learning Plan, direct transfers of funds that are permitted to be made on a tax-deferred basis, and the non-taxable portion of payments from RESPs or RDSPs relating to a return of contributions.
For the most part, the advantage rules do not impact the average investor. However, there has been a recent uptick in CRA audit activity surrounding advantages allegedly received by taxpayers following their dealings with John Scholz.
The CRA recently investigated the investment counselling business of John Scholz. The investigation revealed that Scholz did not report any of the commission fees he received from his clients for the 2011 to 2013 taxation years.
Scholz was found to have failed to report taxable income totalling $2,149,730 for these years, and to have evaded a total of $605,355 in federal income tax. Scholz also did not file GST/HST returns for the periods ending in 2011 to 2015, and he was found to have evaded the remittance of GST/HST totalling $445,789.
On April 13, 2019, Scholz was found guilty by a jury in the Hamilton Court House of one count of fraud over $5,000 under the Criminal Code for the evasion of GST/HST remittance.
On September 26, 2019, Scholz was sentenced to a conditional jail sentence of two years less a day, including 12 months of house arrest, curfew for the remainder of the sentence, and to 200 hours of community service. He also received a fine of $445,789, representing 100% of the amount of GST/HST that he evaded.
It is important to note that Scholz was not found guilty of anything having to do with the RRSP advantage issue.
If you have recently dealt with John Scholz and are concerned that you may be audited, or if you have recently received a notice of reassessment for an alleged “strip” of a registered plan resulting in an “advantage”, call us today. We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.