How would you like to reduce up to 100% of your income taxes? Oren Gutman and Martin Horvathclaim it is possible. A poston their Money Mechanics website explains how it works: in brief,the taxpayer buys losses from research & development firms and applies them to their taxable income.
This has long been a common practice in the corporate world. Toronto-based Gutman and Horvath say they can now offer this tax-reducing strategy to smaller taxpayers thanks to innovative structuring.
I decided to investigate and began by asking Gutman if he would like to be interviewed. He agreed. Here is part of a Q&A we did by email:
Q&A with the promoter:
Q: Buying tax losses from R&D firms is an intriguing idea for reducing taxes. Has this been done before by individual taxpayers?
A. Most certainly this has been done extremely successfully involving large scale transactions by both individual tax payers and corporations on a private basis, directly with the tax loss selling companies. Through innovative structuring, it is now finally available to the small taxpayer also while still remaining just as viable for the large taxpayer.
Q. How does your firm/individual taxpayers acquire tax losses from companies?
One of the programs purchases the tax losses from private companies with leverage via a loan and is available to the very small taxpayer all the way to the very large taxpayer. The other program purchases tax losses from publicly traded companies and involves internal leverage, in other words no loan, and only accepts very large taxpayers who are able to write $4M plus cheques.
Q. Does CRA say anything about this tax-reducing method? Is there any risk it could be disallowed?
A: According to the definitions, guidelines, and parameters of the Income Tax Act (1917) of Canada, the deduction of any and all expenses regarding, stemming from, or incurring from the cost of doing research, exploring solutions or promoting investments are 100% tax deductible and therefore CRA should not disallow the tax deductions. Having said that however, CRA has previously challenged strategies even though they were in full compliance with the Income Tax Act, some with success and some with embarrassing failure.
What other tax experts think
I also asked a couple of tax specialists about this strategy. The people at taxtips.casaid they had never heard of it. The people at Ottawa Tax Services said they had heard about it but had not researched it. They also advised contacting Canada Revenue Agency at 1-800-959-8281 to make inquiries about the validity of the strategy.
See update to this post.