Costly lawsuits may have deterred CRA action on KPMG tax havens: experts

[The Canada Revenue Agency headquarters in Ottawa is pictured on Nov. 4, 2011. THE CANADIAN PRESS/Sean Kilpatrick]

Experts say the possibility of lengthy court fights at the taxpayers’ expense may have motivated a reported deal between the Canada Revenue Agency (CRA) and a group of rich Canadians who allegedly used creative accounting to avoid paying millions in taxes using offshore shell companies.

Those who participated in a tax-dodging scheme organized by accounting firm KPMG may receive amnesty from the CRA under a secret agreement that would see them pay back the missing taxes, plus interest, according to an investigation by CBC News.

The deal would allow the clients, of which there were at least 26, to escape civil and criminal prosecution as well as avoid any extra fines or fees.

CBC News said the scheme involved at least $130 million and lasted for at least a decade.

Lisa Philipps, a professor and expert on tax law at York University’s Osgoode Hall Law School, said the key difference in these types of cases is between tax evasion, which is fraud, and tax avoidance, which is legal.

“Tax avoidance, basically arranging your affairs to minimize your taxes, is part of Canada’s tax laws,” she said.

“Tax evasion, it’s basically hiding your money. That’s illegal.”

Philipps said she wasn’t familiar with this case, and wouldn’t comment on the particulars.

However, she said the lack of penalties in a tax case would suggest that the CRA didn’t find evidence of fraud, or that a settlement would bring in more money than what could be recovered by criminal or civil prosecution.

“If it was determined that this was merely an unsuccessful tax avoidance plan, it doesn’t mean that you were fraudulent,” she said.

Even tax preparers working in good faith can be too smart for their own good and go too far in interpreting the ambiguities and grey areas present in the law.

“It can take a while until CRA learns what the latest tax planning schemes are,” she said. “Sometimes it turns out the strategy is a little too cute.”

It’s the business of KPMG and other tax experts to reduce their clients’ taxes by whatever means possible, she said, while still working within the bounds of the law.

“They’re interested in attracting taxpayers with significant net worth who want to find the best legal way to reduce their total tax burden,” she said.

“The big accounting and tax-law firms, they’re not going to be interested in associating themselves with any type of fraud.”

Professor Allison Christians, McGill University’s H. Heward Stikeman Chair in Tax Law, said it was disappointing that the tax agency seemed to be letting potential tax cheats off lightly.

“The message to taxpayers is cheat, lie and steal, pay people to help you do it, because at the end of the day we’re not going to hit you with penalties,” she said.

She noted that the final punishment for KPMG has yet to be determined.

“The first step seems to be to let off everyone who benefitted from this fraud,” she said. “What’s the next step?”

In 2005, KPMG paid US$456 million in fines and other penalties in an agreement that helped the company avoid prosecution for a multibillion-dollar tax fraud involving offshore tax shelters.

Christians said that, even while under the regulators’ glare in the United States, KPMG pursued similar practices in Canada.

“Even while they were being monitored in our neighbour to the south, they were selling similar garbage here with impunity,” she said.

The CRA may have been motivated by the prospect of lengthy legal fights with the rich families and individuals at the centre of the case, she said.

Christians said that means those with the resources to fight the CRA can get off scot-free.

“But if you don’t have the resources to engage in a protracted battle with the CRA, you get no quarter,” she said.

“There’s so much opportunity here for the industry to win from this kind of conflict, so it’s really disheartening that this goes on.”

KPMG, the Canada Revenue Agency and the Ministry of Finance did not provide a response.