"There hasn't been any prosecution against KPMG for their role promoting this tax dodging scheme."
Ottawa (03 June 2019) — Canadians for Tax Fairness is highly critical of a federal government decision to make a secret deal with a wealthy family who used a high questionable KPMG scheme to attempt to avoid taxes. CBC reported last week that, instead of facing charges for tax evasion, the federal government reached a secret out-of-court settlement.
KPMG scheme was a particularly blatant attempt at tax avoidance
The KPMG scheme was intended to allow wealthy individuals to avoid paying any income tax at all on the funds they placed with KPMG. Under the scheme, funds were sent to shell companies in a tax haven — the Isle of Man — and payments from those shell companies were to be treated as tax free gifts, instead of investment income. The Canada Revenue Agency described this as a "grossly negligent" offshore "sham."
Deal disturbing for many reasons
1. We don't know what settlement this family made with the CRA. With others involved in this tax sham, the CRA allowed them to pay just taxes owed and a modest amount for interest. This particular family argued they should be able to pay a lower amount than what the CRA demanded because they claimed they they should be able to take advantage of the capital gains loophole. In other words, that wealthy tax cheats should be "entitled to their entitlements". Transparency is important so we can see if taxpayers and others involved in these schemes are treated appropriately and fairly. U.S. Supreme Court Justice Louis Brandeis appropriately said "sunlight is said to be the best of disinfectants." A chief justice of England stated that not only must justice be done, it must also be seen to be done. Neither appears to have happened in this case.
2. The settlements for this wealthy family and others involved in this case — for little more than the taxes owed — provide little if any deterrent. Yes, this was a tax scheme promoted by KPMG, but there should be some suspicion and a buyer-beware attitude for multimillionaires who use schemes like this to avoid paying any income tax, and even get money back from the government.
3. There hasn't been any prosecution against KPMG for their role promoting this tax dodging scheme. In the U.S., KPMG paid US$456 million in penalties for its part in creating fraudulent tax shelters, but there's been no prosecution or penalty of KPMG as a far as we know for their part in this tax dodging scheme in Canada. When the House of Commons Finance committee started hearings into this offshore tax dodge, KPMG's lawyer sent a letter to the chair of the committee, warning them and witnesses to not refer to KPMG as these matters were before the courts: essentially instilling a gag order. This seemed to be a weak rationale for closing down the hearings, given that KPMG had already appeared to defend itself, but the committee chair quickly complied. That was years ago and we still haven't heard anything since. If the court case being referred to were these cases which have been settled, then they very effectively engaged in a bait and switch manouevre to close down the hearings. If these cases are settled and no longer before the courts, then there's no reason the Finance committee can't re-open those hearings.
4. This comes shortly after Diane Bouthillier, Revenue Minister, promised to get tougher on tax cheats, saying they would no longer be able to hide, and suggested there could be some criminal charges.
Federal government sets penalties, determines whether the CRA and prosecutors should have the resources to do their jobs
In her defence, Minister Lebouthillier told CBC that the decision to settle this case wasn't hers, as prosecutors operate independently of politicians, and that she'd instructed the CRA to review their settlements to ensure more transparency. This may be the case, and it is of course inappropriate for Ministers or political staff to interfere in court cases, as we've seen with the SNC-Lavalin affair. But, politicians and governments do determine the general range of penalties and set the tone. And it is the federal government that decides whether the CRA and the prosecutors have the resources needed to take on people with deep pockets who are accused of tax avoidance.
One set of rules for the wealthy and another for the rest of us
It's especially disturbing if both politicians and government lawyers are easily intimidated by those who can afford higher priced lawyers and accountants, and they decide to back off and settle instead of taking cases to court. Last fall, the federal Auditor General found that the CRA was tougher on individual domestic and small businesses than on offshore and large corporation cases. This effectively means one set of rules for the wealthy and another set of rules for the rest of us.