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Make information on investor scams part of your holiday gift giving

by Wayne Cheveldayoff, 2006-11-30

Ever wonder who gets taken in by phony tax-shelter and investment schemes? A lot of people in Canada end up losing a bundle this way.

If you are taking care to educate yourself about investments like reading this column, it probably won’t be you. But it could be someone you know, perhaps a friend or family member, and perhaps not yet but maybe they’ll get sucked in next year.

Here’s what you can do to make sure that they don’t.

As part of your holiday gifts to family, or along with the bottle of wine you take to your friend’s house to celebrate this season, pass along some stories of how people get cheated out of their money, and maybe even leave behind a printout of the warnings issued by the tax department or regulators.

And don’t forget your kids, grandchildren or nephews. A real-life tale about someone being cheated out of their savings is bound to make a lasting impression.

The latest scam warning from B.C. regulators highlights a scheme to make people feel they are getting something very special. Believe it or not, they are even told the high return being promised is so special that they must sign a non-disclosure agreement – a normal requirement of many companies to protect business secrets.

“We are concerned that this may be a Ponzi scheme – a scam that pays out current investors with money from new investors,” says the B.C. Securities Commission. “If it is, then it is only a matter of time before this scheme falls apart with investors losing their money.”

The commission is issuing the warning to stop too many people from getting sucked in, especially after learning that people can only invest with cash, money orders or bank drafts. “This cash-only investment criteria is a tell-tale sign that this could be a scam because typically this is used to avoid any incriminating documentation or provide a paper trail.”

The commission (see www.investright.org) a couple of weeks earlier warned about being approached to invest in real estate or infrastructure projects in India “with promises of substantial returns.” Of course, once it is out of the country, you’ll never see your money again.

The scammers play on your greed – the promise of high returns. Greed is good in the way it stimulates our economic system but that doesn’t mean you should let it overwhelm good judgment.

Sometimes the word of a great deal comes from friends or fellow members of a religious group. The play on secrecy is supposed to make you feel like an insider – ‘it’s how the rich get richer and they don’t want you to know’.

In an October 31, 2006 news release entitled “Warning: Tax shelters are risky”, the Canada Revenue Agency (CRA) hinted at its bewilderment that after warning Canadians for several years that many tax-shelter schemes are no good, there are many still being marketed by so-called experts to the unsuspecting public.

The CRA (www.cra.gc.ca) mentions gifting and donation arrangements, including those where you are set up to buy, say, art at a low price and donate at a much higher price.

It takes the CRA more than a year to do their audits, but when they do, they end up clawing back the taxes people thought they had saved. For the buy-low-donate-high schemes prior to 2002, the CRA has disallowed about $490 million donations from 6,700 taxpayers and for 2002, $360 million from 5,700 taxpayers. It is currently working on the 2003 tax year and has so far disallowed $66 million from 1,800 taxpayers.

The CRA says that any ploy to give you a donation receipt for a higher amount than what you paid for a good will not be accepted. In effect, if you paid $100 for something and donated it, all you can claim is $100.

It also warns that just because a tax shelter has a CRA identification number, doesn’t mean it is approved or will succeed. The ID number is just for tracking, and that makes it easier to audit you and take back your tax savings.

Also see Investor Watch at www.csa-acvm.ca, NASD Investor Alert at www.nasd.com and Internet Fraud at www.sec.gov.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.

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©2006 Wayne Cheveldayoff