Beware of RRSP Fraud

by admin on March 17, 2009

in Red Flags of Fraud

The economy is suffering, and people everywhere are looking for ways to stretch their money a little further. So are the scam artists, and their plan is to use your concerns about the economy to trick you into false investments.

Consider this scenario:

John recently retired, and in the past year has seen his retirement savings reduced significantly. He has been forced to rethink his retirement plans and may need to downsize into a smaller home to cut costs.

After reading an ad in the local newspaper, John contacted the “Custom Financing Centre,” a firm offering financial assistance to holders of RRSPs and other registered plans. He was told that he could withdraw money from his RRSP without paying tax. This looked like a very attractive offer!

A simple scheme was proposed to him:

  • Use the amount accumulated in his RRSP to buy shares of an “RRSP eligible” company. Then, obtain a loan equivalent to 80% of the RRSP, which could be used as he saw fit.

Since this was an exceptional offer, it was only available for a limited time. John didn’t take much time to think it through, lest he miss his chance.

Remember, when it sounds too good to be true, it probably is. Don’t give in to pressure to invest.

John finally understood this, but it cost him dearly:

  • The shares he purchased were worthless. He therefore lost his entire RRSP because the “RRSP eligible” company in which he invested did not exist.The shares were not RRSP eligible, despite what he had been told.
  • He thus could not withdraw money from his RRSP without paying tax and he received notices of assessment from the provincial and federal governments. He was now obliged to pay tax on all the money withdrawn from his RRSP, plus interest and substantial penalties for infringing the rules.

RRSP schemes like this one were seen during the last economic downturn in the 1990’s and are starting to pop up again. Be careful.

The lessons to be learned:

Before you invest, ensure that the dealer and the dealer’s representative are registered with Nova Scotia Securities Commission;

  • Make sure the company that issued the shares (or the securities) has filed a prospectus with the Nova Scotia Securities Commission;
  • f the investment is being sold as an exempt security, make sure you understand the exemption, and that you qualify for it;
  • Never take it for granted that the person you are dealing with is telling the truth.

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