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TAX TIP Warning: Watch Out for Tax Schemes Involving Multilevel Marketing Businesses!

Saturday, 14 October 2023 06:33.PM

The Canada Revenue Agency (CRA) is always on the lookout for tax schemes and opportunities to warn Canadians about them. Has someone encouraged you to deduct expenses and claim business losses to offset taxable income? If so, this might be related to a tax scheme involving multilevel marketing (MLM).

What are tax schemes?

Tax schemes are plans or arrangements that go against the Income Tax Act. Tax schemes may be advertised by promoters, who can be tax representatives and tax preparers who encourage taxpayers to participate. Promoters recruit taxpayers by promising to reduce their taxes. Such schemes may promise large tax deductions or tax-free income.

What is a multilevel marketing business?

Multilevel marketing is the practice of selling goods or services on behalf of a business. In a multilevel marketing business, participants are encouraged to sell products to family and friends, and recruit other people to do the same. Participants receive a commission on their sales as well as the sales of any participants they recruit.

Multilevel marketing is also called direct marketing. Under a multilevel marketing business, participants are not employees of the related multilevel marketing company. Instead, participants are individual business owners, who receive a T4A slip from the company.

Why multilevel marketing businesses may be offensive to the CRA

Many participants in a multilevel marketing business earn minimum amount of income or don't earn anything. They are encouraged by company promoters to deduct excessive personal and business expenses. This results in individuals claiming consistent business losses and receiving large tax refunds which they are not entitled to.

Be careful

Before claiming business expenses, ask yourself:

• Can the income you earn from multilevel marketing be supported?
• Do you have documentation (receipts, slips, etc.) to support the expenses you claim?
• Are you being advised to claim personal expenses on Form T2125, Statement of Business or Professional Activities?
• Were your expenses incurred mainly for earning business income or for personal enjoyment?

For more information, visit business expenses.

Your actions may have serious consequences

Those who choose to participate in these schemes face serious consequences, including penalties, court fines and possibly even jail time. The same consequences apply to those who promote these schemes. All taxpayers, including those who pay tax experts to prepare their income tax and benefit return, are legally responsible for the accuracy of their return as filed.

Remember: It's your responsibility to support any claims you make with proper documentation.

What can you do?

The CRA encourages all Canadians to seek an independent second opinion from a reputable tax professional on important tax matters.

People who avoid or evade taxes take resources away from social programs that benefit all Canadians. If you suspect tax evasion, you can report it online at reporting suspected tax or benefit cheating in Canada or by contacting the Informant Leads Centre at 1-866-809-6841. The CRA will take action to protect your identity. Also, you may provide information anonymously.

To correct your tax affairs, you may submit an application through the Voluntary Disclosures Program.

For more information, visit beware of tax schemes that promise to reduce your taxes.

SOURCE: Canada Revenue Agency

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