The CBC recently reported on an offshore tax avoidance scheme in the Isle of Man set up and managed by international accounting firm KPMG, for wealthy Canadians whereby their multimillionaire clients paid no income tax in Canada and actually received government tax credits and GST rebates.
The scheme worked like this. They would set up a shell company in the Isle of Man for a client. The client would then purport to give away their assets to the shell company. The company would earn income from the client’s money in the Isle of Man, and the client would then receive money back in the guise of tax-free “gifts” from the income earned offshore. KPMG would get an annual fee based on a percentage of the tax avoided.
In this particular case, the KPMG clients paid little or no income tax between 1999 and 2010 although they received millions in so-called “gifts” from their offshore investments. When the Canada Revenue Agency (“CRA”) eventually discovered the scheme,the clients were audited and assessed $ 4 million in “gross negligence” penalties for undeclared income, on top of whatever tax they owed. The CRA said the scheme was a “sham” and that “deception was part of the plan” to not declare income in Canada but to label the money as tax-free gifts.
The clients first applied for a tax amnesty through the CRA’s Voluntary Disclosure Program (“VDP”). The CRA rejected their application because they were already under investigation and therefore their disclosure was not voluntary.
Click here to read my earlier post about how Tax Amnesty works
The clients then appealed the CRA’s decision to impose $4 million in gross negligence penalties for their undeclared income prior to 2010.
The CRA subsequently agreed to an out of court settlement, the details of which are confidential and are not disclosed in the court documents. However, under the Income Tax Act, the CRA has no statutory authority to waive any income tax owed, but can waive penalties and part of the interest.
This is only one of several cases uncovered by the CRA involving tax avoidance schemes set up in the Isle of Man by KPMG on behalf of high net-worth clients. In those other cases, the CRA also entered into secret settlement agreements.
In a statement issued by the CRA regarding offshore financial structures, the CRA responded to criticism by stating:
“The CRA is ensuring that those who choose to break the law face the consequences and are held accountable, starting with tax professionals who facilitate non-compliance – the CRA levied more than $44 million in third-party penalties on tax advisors last year and there are presently a number of criminal cases under way. The Agency has a full-time dedicated unit focused on offshore non-compliance and we are reviewing money transfers over $10,000 between Canada and four offshore jurisdictions such as the Isle of Man. In addition, the CRA is risk-assessing 100% of large multinational corporations, analyzing the tax affairs of risky high-net worth taxpayers, and working with credible paid informants.”
However, to date, neither these clients nor anyone from KPMG have been charged or prosecuted for participating in the Isle of Man scheme. This raises the question, if there is no prosecution or penalties for those who facilitate or engage in offshore tax evasion and the only consequence if you’re caught, is that you’ll have to pay the tax that you should have paid in the first place, then what incentive is there to encourage tax compliance?
I predict that these types of offshore tax schemes are going to continue until the Government of Canada starts prosecuting and sending tax evaders and their facilitators to prison. And I’m not talking about “slap on the wrist” six month prison terms. I’m talking about the Al Capone type of prison terms that the courts in the United States hand out. Remember, Al Capone got 11 years for tax evasion.
As always though, if you are being audited by the CRA regarding an offshore tax avoidance scheme, or you are a creditor looking to find the offshore assets of someone who owes you money, you should contact a tax litigation attorney experienced in offshore tax havens.