cashing-in registered retirement accounts and investing in tax shelters to offset any tax liabilities from the early withdrawals.

Revenue Canada is opposed to the erosion of the tax base and is actively challenging tax shelters. There have been recent moves by the Canadian Finance Minister Paul Martin to curb such tax shelters. Tax shelters have been restricted in the United States and big brokerage houses rarely offer tax shelter investments these days.

The allure of the tax shelters is that over the short-term you can save more in taxes than you have cash invested. For example, a computer software tax shelter is an investment vehicle structured as a limited partnership. The partnership pays for the software with a portion in cash, let's say 25 percent, and the remainder is due on a promissory note while the term can be up to ten years.

The partnership can deduct over a two or three year period the total cost of the software, as valued by a bonafide appraiser. Hence, the deductions are greater than the cash invested.

There are two main issues is establishing the tax preferred status of a shelter. Is there a "reasonable'' expectation that the business will make a profit? The best shelters are an existing company where the partnership is active in the marketing of the product and where there is likely to be a profit. Is any bank loan or promissory note associated with the investment "at risk'' and deductible? To be at risk, an investor must be directly liable for the full amount on any note and there can be no "material'' contract guaranteeing revenue. Interest must be paid annually by January 30. The rate must be the prescribed rate or greater and the term cannot exceed ten years.

Revenue from the sale or use of the software will pay down the note, with the interest deductible to either the partnership or the limited partner. Often the vendor for the software is in a revenue-splitting joint venture with the partnership. Carefully review the sales projections to see if they are based on reasonable assumptions. In computing net income for the partnership for tax purposes, certain business expenses can be deducted provided that the amount is reasonable and not deemed a capital outlay. Read the offering document carefully.

The limited partner's share of the partnership income or loss will be allocated proportionately to each investor. Any loss, as usually experienced in the early years when software is written down, may be applied against income from other sources. The level of loss that can be deducted is limited to the "at-risk amount''. Any excess loss in a particular year may be carried back three years and forward seven. If the cumulative loss exceeds your investment in the partnership and there is a negative cost basis the negative amount is treated as a capital gain for the limited partner in that year.

Even though the partnership is Canadian, the partnership and the limited partners will be subject to US tax if it is conducting significant business in the US. Each investor must file a return if the partnership is deemed "effectively connected'' to a US business or trade. The partnership will pay the taxes due and reduce the amount of cash distributed. The US income tax paid by the partnership on behalf of the limited partner is usually creditable against the Canadian income tax payable in that year. Each partnership has been issued a tax shelter ID number from Revenue Canada. The limited partner must provide this ID to Revenue Canada to claim the deduction on their tax form.

Revenue Canada will not make advance tax rulings with respect to partnerships.

It is possible that certain deductions may not be allowed for income tax purposes currently. Future interpretations can change as well. If it is determined that the principal reason for a shelter is to reduce or postpone tax that might otherwise have been due, anti-avoidance provisions could apply.

The provisions are valid against partnership that are not for bonafide reasons or where there was a misuse or abuse of the Act.

The higher your income level, the higher your tax savings from a tax shelter because of the higher tax bracket. Revenue Canada does require that you compute an Alternative Minimum Tax (AMT) and pay at least 26 percent on adjusted annual income before tax shelter deductions. Be aware that tax shelters can expose you to cash-flow problems in those years when you are subject to a tax and a payment on a note for the investment, but there have been no cash distributions. Income subject to tax is calculated differently than cash flow for distributions.

If you are considering an investment in a tax shelter, proceed with caution.

Check that the principals in the partnership have experience in the particular business and that they have a substantial amount of their own money invested.

Don't invest just because it is a tax shelter. If you wouldn't invest in the business without the tax savings, don't invest.

To assist Canadian residents to build capital for the future Revenue Canada allows for many tax deferred retirement plans. It is a veritable alphabet of options: RRSP, RESP, DCPP, DPSP, RIF, LRIF, LIF, LIRA (not like the Italian currency) and SPPA the supplemental pension plan authority that reviews it all. Most are subject to an 80 percent Canadian investment restriction, but you can transfer from one investment vehicle to another within the plans if you wish to increase your returns.

Now as a non-resident Canadian, your retirement planning should change because your tax status changes outside of Canada. You can continue to contribute to your plan when you are a non-resident. If you are planning to remain outside of Canada, you may wish to cash-in your tax deferred retirement accounts and reinvest in any type of non-Canadian investment. You may choose to phase a plan out over a period of years by removing a portion of your assets each year. It may behoove you to pay taxes now versus more taxes in the future on the increased value of your investments.

Patrice Horner, MBA is an investment Advisor for GulfStream Financial Ltd., Bermuda. Greg Coleman, President of Capital Vision, Ltd. Toronto, Canada contributed to this article.