KPMG should be charged with facilitating tax evasion: watchdog

April 7, 2016 | Last updated on April 7, 2016
4 min read

Canadians for Tax Fairness (C4TF) hopes the global blow-out from the Panama Papers will pressure the federal government to prosecute one of Canada’s top accounting firms.

The Ottawa-based tax watchdog has called on CRA to charge KPMG Canada with facilitating tax evasion following a CBC News/Radio-Canada investigation that revealed the firm’s multi-millionaire clients were offered amnesty after being caught in a seperate offshore tax-avoidance scheme.

“There is a perfect opportunity for the government to take KPMG to court and send a message to the wealth-management industry that this kind of aggressive tax planning is not going to be tolerated,” says Dennis Howlett, executive director of C4TF.

Worldwide, KPMG has been prosecuted before under similar circumstances. In 2008, two former KPMG executives were convicted in a fraudulent tax-shelter scheme that also resulted in the company paying nearly $500 million in penalties.

Back at home, an online petition calling on Finance Minister Bill Morneau to “close tax loopholes and stop tax dodging” has gathered more than 17,000 signatures. The government has committed to doing as much in its 2016 budget, and is giving CRA $444.4 million over five years to hire more auditors and invest in software to track tax evaders.

Read: RBC defends tax practices after allegedly appearing in leaked papers

CRA’s amnesty offer

In a confidential 2015 offer to KPMG clients, who each had invested at least $5 million in shell companies in the Isle of Man, CRA said clients would not face civil or criminal prosecution or penalties if they agreed to pay back taxes. CRA also waived interest for some years.

The document, which the CBC obtained, did not state whether KPMG would face any penalties. KPMG is fighting CRA in federal court over the agency’s attempt to obtain all client names and documents related to the investment scheme.

A KPMG spokesperson said, by email, that no one was available for comment.

Although CRA also declined to comment on the case, it noted in a statement that it conducts over 120,000 annual audits that result in $11 billion in additional taxes assessed, along with penalties and interest. Of that, about two-thirds, or over $7 billion, involves international and large business, and “aggressive tax planning, including high net worth individual and multi-nationals.”

Canadian anti-fraud lawyer Martin Kenney, who heads an international asset-recovery practice in the British Virgin Islands, says that while amnesty might enable CRA to collect from tax dodgers, he says Canada should follow the U.S. approach and vigorously prosecute those who do not participate in amnesty programs, and who have used offshore vehicles to fraudulently conceal income.

“If there’s clear tax evasion, you have to put some people in jail to make it clear people should not be playing games with their tax returns,” he says.

Kenney explains that, in addition to relying on tax treaties and Taxpayer Information Exchange Agreements to track offshore investments, Canada could adopt regulations similar to those in the U.S. There, passive foreign investment companies must report investment income on a current basis, even though the taxpayer has received no dividends or distributions of cash from investments in a foreign company.

Read: Ease your clients’ PFIC pain

Problems at CRA

C4TF accused CRA of mismanagement in a scathing report last December, What is Wrong at the CRA? It interviewed 25 past and present CRA auditors, fraud investigators and managers. Some spoke of being “forced” to “go after mom and pop operations that can’t afford to fight back” while for a “certain level in corporate Canada, there is a reality that you can pay very little tax.”

Using Statistics Canada data, C4TF says that Canadian companies have sheltered $199 billion offshore, which has resulted in an annual loss of nearly $8 billion in tax revenue.

The KPMG case is “the tip of the iceberg,” says Howlett, whose organization is keeping an eye on a dispute between Saskatoon-based uranium producer Cameco Corp. and the CRA over an outstanding tax bill that goes to court in September.

Based on notices of reassessment for 2003 to 2009, the CRA claims Cameco owes about $820 million in taxes on $2.8 billion in income. The company earned the income by selling uranium at US$10 a pound to its Swiss-based European subsidiary, which then sold it at a higher world price.

Read: Tax games: Are some companies playing with fire?

However, Howlett says such high-profile battles are rare, since CRA settles most cases out of court, with the outcomes normally kept confidential. But CRA spokesman David Walters tells that those agreements are not considered amnesty since CRA usually receives taxes owed plus interest without incurring litigation costs.

Walters adds the federal justice department provided $7.4 million worth of help to the CRA’s Compliance Programs Branch on tax-evasion cases in fiscal year 2014-15. That resulted in 95 taxpayers being convicted of tax evasion or fraud worth $12.5 million, which was recouped. Court sentences for those cases totalled about $10 million in fines and 57 years in prison.

Of that group, nine taxpayers had links to money and assets held offshore, and were found to have evaded $5 million in federal tax. Their convictions resulted in $4 million in fines and seven years of jail time.

CRA does not track write-offs from these criminal cases, says spokesman Philippe Brideau.

CRA did write off nearly $2.9 billion in tax debt in 2014-15. And this year’s budget earmarks $796 million over five years for combating tax evasion and collecting debts. The budget projects that will result in $10 billion in new revenue.

“It’s a fairly ambitious target,” says Howlett. “But they will need more capacity at the justice department to prosecute more cases, and [they’ll] also need to make amendments to legislation to limit the ability of companies to shift their profit to offshore subsidiaries and enforce the conviction of those who facilitate tax evasion.”