Tax shelters: Looks are deceiving
The recent Supreme Court decision on interest and expense deductibility is likely to unleash a new wave of tax shelter offers as aggressive promoters rush to take advantage of it.
Well here’s my advice: Buyer beware!
Over my working life, I’ve invested in several tax shelters and looked at a whole lot more. Brokers still send me prospectuses for new issues. For instance, there are a bunch of share-through offerings coming to market right now.
My personal experience
Although I have never done an overall analysis, my estimate is that, when all is said and done, I have at best broken even on these ventures, even taking the tax savings into account.
Some have been huge winners, including the first one I ever got into, a pulp mill modernization in B.C. that netted me a profit of more than 600 per cent at the end of the day.
One has been a total disaster. This was a supposly low-risk investment in a number of strip malls in Ontario and Alberta. It ran into an incredible string of bad luck, such as the bankruptcy of the convenience store chain that anchored several of the malls. Today, it’s virtually worthless.
Other shelters did what they promised to do, but rarely much more.
Double hit possible
Although it never happened to me, I know people who put money into very aggressive shelters and suffered a double whammy. Not only did the business go under, but the tax claims were disallowed by CCRA.
The latter probably wouldn’t happen now, in the light of the Supreme Court ruling. But that’s small consolation if the underlying investment turns sour.
Picking winning shelters is extremely difficult. I’ve seen several that looked very promising—proven managers, strong concepts—only to fall on their face. You have to be a first-rate analyst (or have an advisor who is) to properly assess a tax shelter’s potential.
But you also have to be lucky.
Focus on dependables
And what happens when you do get a good one? The tax people get you in the end anyway.
Take flow-through shares, for example. All those depreciation costs are flowed through to you and you can claim a nice deduction. But the cost base of your shares is reduced correspondingly.
When you sell, you can find yourself on the hook for capital gains taxes, even if you’ve actually lost money on the whole deal.
So I’m not planning to invest in any more tax shelters. Rather, I suggest focussing on legitimate tax-advantaged securities: stocks that pay good dividends, preferred shares, REITs, certain income trusts, etc.
They’re not risk free and the tax breaks won’t look as enticing. But they’re a lot more dependable than some of the deals that are coming down the road.
This article originally appeared in the Internet Wealth Builder.