Those who consider purchasing these investment tax shelters should realize that not all tax shelters are created equal and as a result an impulsive purchase might be costly. An investment tax shelter can be structured in different ways, however if structured properly, our tax laws allow certain expenses incurred by the underlying operators of the tax shelter to be deducted by the investor for tax purposes instead of by the operator. The majority of these expenses are generally deductible by the investor in the first year.
While the types of tax shelters available have declined in recent years, there are still several available. Investment tax shelters in the resource sector such as mining and oil and gas companies are generally the most common. Investment tax shelters illustrate that the tax write-offs are deducted at an individual's marginal tax rate that usually results in a reduction of tax of up to 45% (top marginal tax rate varies by the province) of the investment. Furthermore, although these tax deductions generally reduce the ACB of the investment to nil, when the investment is sold capital gains tax will be payable of up to only 23% of the proceeds (based on the 50% capital gains inclusion rate multiplied by a 45% marginal tax rate). This tax differential makes the investment even more appealing from a tax standpoint.
Although this tax treatment is valid, the above result is only favorable if the tax deductions are accepted by the CCRA and there is adequate income and proceeds upon disposition so that the investment tax shelter provides a competitive after-tax investment return.
Before making an investment in a tax shelter, investors should consider all of the following questions:
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What is the promoter's track record?
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Is there a prospectus or offering memorandum?
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Is future financing required? (i.e. additional future installment payment or liability for debts incurred by the tax shelter)
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When will the tax deductions be available?
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Will the tax deductions trigger Alternative Minimum Tax?
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How liquid is my initial investment?
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How does the tax shelter investment affect my overall asset allocation strategy and my risk tolerance?
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How long do I plan to hold the investment and what are the tax implications on disposition?
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Has the promoter received an Advanced Income Tax Ruling from the CCRA regarding certain aspects of the tax shelter? Is so, can I see a copy?
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Do I understand the tax shelter well enough to be comfortable with the investment?
You should be comfortable with the answers to the above questions before jumping in. To find out what the implications, and opportunities, may be for you, contact us today.
