Learn something new every day
More Info... by email
A tax shelter is an investment with tax deductions and tax benefits of greater value than the investment itself. The specifics of what constitutes a tax shelter depends on the local tax authority and varies between countries. Rental real estate, natural resource prospecting, film production, and alternate energy sources are examples of common tax shelters.
A tax shelter may be geared towards individuals or corporations. At the corporate level, taking advantage of a tax shelter requires expert knowledge of the tax code. Even professional accounting firms, however, don't always get it right. Following the US bear market of 2000-2002, regulators uncovered the widespread abuse of tax shelters. Arthur Anderson, a major accounting firm at the time, was disbanded for its role in helping companies such as Enron and Worldcom evade taxation. Executives at such firms found themselves in criminal court facing lengthy jail sentences.
While tax shelters have a reputation for skirting the law, governments often intentionally create a tax shelter to encourage investment in specific sectors of the economy. During the energy crisis of the 1970s, for example, many governments created tax shelters to encourage investment in alternative energy sources such as windmill farms, solar energy and ethanol-fueled vehicles. Tax shelter incentives can be so strong that entire industries can be created seemingly out of thin air. In Brazil, the tax code of the 1980s encouraged investment in ethanol vehicles so strongly that at one point virtually every car sold in the country was powered by ethanol.
The most widely used tax shelters are those used to encourage retirement savings in western countries. Individual Retirement Accounts (IRAs) in the US and Registered Savings Plans (RSPs) in Canada are examples of widely available, easily understood tax shelters. An annuity, generally offered by banks and insurance companies, can also be structured as a tax shelter. While tax shelter fraud is most commonly associated with corporations, individuals abusing annuities and trusts can also be charged with tax evasion.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!