Just as many Canadians may be struggling to pay their 2013 taxes or are expecting tax refunds in the mail, Devry Smith Frank LLP (DSF) is warning consumers about a tax fraud that inflicts serious financial consequences on its prey. DSF is currently defending victims of a classic business losses scheme where perpetrators take a lump sum of cash from taxpayers upfront, promising to pay it back – with dividends – after investing it. Then they claim an inflated sum as a business loss on the victims’ tax returns, supposedly until the business is “profitable.” This business loss scheme is called “Partners in Research,” run by a web of corporations. Approximately 300 Canadians are casualties to the contrivance. Partners In Research has taken as much as $3 million dollars from investors and left them holding the bag, owing huge penalties and interest.

Schemes like these count on the idea that people don’t understand how scientific research funding works. They convince their victims that because they can get them a so-called tax refund before the research commercializes, they’re running a legitimate business.

Dianne Hudson, a GTA mother of five, was looking for a way to help make ends meet for her large family. With the best of intentions, she invested borrowed funds in the scheme, and fell victim to the PIR scam:

“My husband and I are a blended family with five children and the bills are endless. To me, this seemed like a chance to give my family a little more than the ‘practical’ life we have always led. I firmly trusted that this investment was true and my agent was very knowledgeable and educated on the investment.” But now Hudson is facing potential fines and interest of up to $60,000 for her part in the investment. “We’d hoped this was a means to help us, and it’s burying us.”

The scam works like this: the company claims they’ve taken out a seven-year loan on your behalf to invest upwards of $350,000 in scientific research. They ask for you to pay interest and a warranty fee on the loan, plus a membership fee totalling about $10,000. Then, PIR claims the full loan amount will be spent on research projects that create jobs for Canadians. You’ll get your investment back this year (and then some) through a tax deduction, and earn profits later.

While this all sounds good, the refund received is based upon a claim that your investment took a loss in the amount of one-seventh of the loan each year, usually $50,000 or more. The Canada Revenue Agency (CRA) later tracks down the fake deduction and the refund must be repaid. In addition, the victim owes a 50% penalty on the income tax owed, plus interest on both the refund and penalty. So not only does your investment disappear overnight, but the payback to CRA is serious money, usually as much as $30,000 or more.

DSF recommends taking a sceptical view of anyone proposing a business deal that sounds too good to be true. When it involves upfront tax refunds, it usually is.