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Carousel Scheme Defence

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MILLAR KREKLEWETZ LLP is a boutique Canadian law firm with lawyers who have significant expertise in carousel scheme matters, including defending businesses/directors accused of same or 'sham transactions' by CRA in the course of an assessment.

The following is a short introduction to carousel schemes in Canada. 

Please note, this background is intended for informational purposes only and does not constitute legal advice on any issue. We would be pleased to provide specific and current advice to your specific situation, if desired.


Carousel Schemes Defence

Carousel Schemes – General

The Canada Revenue Agency (“CRA”) uses the term “carousel scheme” to describe a situation where (in CRA’s view) a group of GST/HST registrants work in collusion to create a fake supply chain in order to generate false GST/HST refunds.

According to CRA, in its simplest form, a carousel scheme “is an arrangement where [the] GST/HST... collected on goods that are part of a resupply chain is never reported and at least one member of the supply chain goes missing (missing trader).  The missing trader registers as an annual filer and goes missing before they remit any GST/HST … [and] they are set up for the sole purpose of perpetuating the scheme.”  CRA also observes that “[s]ales invoices are issued in the name of the missing trader and the purchasing companies are monthly or quarterly filers that claim their input tax credits from these invoices”. 

Essentially, a carousel scheme usually generates money by artificially putting multiple participants in a position to recieve a GST/HST refund as a result of their supplies to a "missing trader".  The participants get their refund (since they are frequent filers) and the missing trader (who is typically an annual filer) fails remits any GST/HST (leaving the Minister out of pocket for the value of the refund).

According to CRA, the subject goods in the scheme can change hands up the supply chain several times or only once, with the goods eventually ending up with an entity where the tax status of the good changes – e.g., goods have been processed into zero-rated goods (e.g., the process of refining scrap gold into pure gold) or are said to have been exported on a zero-rated basis or supplied outside of Canada on a non-taxable basis.

CRA internally refers to the last supplier that "changes" the tax status of the supply as the “zero-rater”.

At this point, the CRA seems to suggest that the original goods, or a portion of the original goods, are returned back into this system, at the start of the supply chain, either as consideration for supplies previously made, or the cash earned by the scheme is used to make new purchases – with this carousel type process repeating many times.  In some instances, the CRA suggests that the “goods” at the heart of the carousel scheme may not even exist!

CRA also points to other examples where there may also be multiple carousels within the group, with one or two points in common. That is, they may have the same missing trader, or the same zero-rater.

Common to these schemes, says the CRA, is that the GST/HST collected by the missing trader is not remitted to the Canadian government, either through non-filing, under-remitting or non-payment of the amounts due. The zero-rater claims an input tax credit for the amounts charged by the missing trader, resulting in net revenue loss to the government.

In this world, it appears that the CRA’s “carousel schemes” require at least one zero-rater and at least one missing trader. Without a zero-rater to receive GST/HST refunds from CRA, there is no source of cash in the scheme, and without at least one missing trader there is no tax leakage at the bottom of the supply chain.   On their face, the transactions appear legitimate, and in most cases appear to follow all documentary requirements prescribed in the Excise Tax Act.

CRA has apparently tasked its Audit Branch to question the motivation and benefits behind these sort of transactions, advising Audit that in true “carousel schemes”, the structure of the transactions within the colluding group is generally manufactured to create GST/HST refunds, which may in fact be the only source of funds.  This schemes are identified by looking at the entire supply chain to develop a complete picture of what is occurring.   While such schemes are “difficult to detect, as the books and records are prepared based on transactions intending to deceive”, the CRA cautions that the “more complexity that can pe introduced into the supply chain, the more difficult it is for audit to detect the scheme and gather sufficient audit evidence”.

CRA Audit Initiative

With these ground-rules in mind, it appears that “carousel schemes” have been a recent area of focus for CRA auditors, leading to significant ITC denials and/or large assessments being brought recently against businesses in a number of industries, including the scrap gold and the telecommunications industries:  see for example, Express Gold Refining Ltd. v. Canada, 2020 FC 614 and Iris Technologies Inc. v. Canada, 2020 FCA 117.

Companies that have their ITCs denied as part of a CRA “carousel scheme” assessment may typically find it difficult to turn CRA around at the Appeals Stage (i.e., CRA has already made up its mind at this point).  Reference to proper ITC documentation (including GST Registration numbers for all suppliers charging GST/HST) is often summarily dismissed by CRA, based on its viewpoint that carousel schemes usually appear legitimate and can appear to follow all ITC documentary requirements under the Excise Tax Act and Regulations.  As a result, maintaining pristine ITC supporting documentation often ends up being the last nail in the coffin with the CRA on Appeal, with CRA looking at this type of proper legal compliance as confirmation of something nefarious in the background.

The broad net cast by CRA also catches otherwise legitimate businesses who unwittingly appear in a chain of suppliers accused of participating in a carousel scheme! 

As a result, challenging and defending these type of carousel assessment is very challenging, and almost always required specialized or expert tax litigation support.

Millar Kreklewetz LLP has significant experience with carousel scheme audits and assessments, and defends these at both the CRA Appeals stage, and before the Tax Court of Canada.

Further Help with Carousel Schemes

 Millar Kreklewetz LLP is well-placed to provide assistances with all carousel scheme related matters, and persons in need representation with respect to an allegation by CRA of same are encouraged to use the form on this page to contact us for specific legal advice applicable to their unique fact situation.

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Preferential Trade Agreements

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MILLAR KREKLEWETZ LLP is a boutique Canadian law firm with lawyers who have significant expertise in customs and trade matters involving Canada's various Preferential Trade programs.

The following is a short introduction to Canada's various Preferential Trade Programs, and the access that they allow Canadian businesses to the free trade in goods and services with many foreign countries.


Preferential Trade Programs

Canada has engaged a number of foreign countries in so-called "Free Trade Agreements" (or "FTAs") which are essentially preferential trade programs aimed at enabling Canadian importers and exporters to compete on an even playing field with local businesses in the particular FTA partner country by removing otherwise artifical barriers to trade in the global markets.

Under preferential trade programs like the ones outlined below, a range of Canadian goods and services benefit from the reduction or elimination of tariff and non-tariff barriers to trade, such as quotas or technical barriers.

Canada's FTA's are generally regarded as providing a competitive advantage across a wide range of Canadian industry sectors.

What FTAs does Canada have ?

Canada currently has the following preferential trade programs with the following foreign countries:

Country In Force Date
   
Korea January 1, 2015
Honduras October 1, 2014
Panama April 1, 2013
Jordan October 1, 2012
Colombia August 15, 2011
Peru August 1, 2009
EFTA* July 1, 2009
Costa Rica November 1, 2002
Israel January 1, 1997
Mexico January 1, 1994
United States           January 1, 1994

In addition, Canada's Department of Foreign Affairs, Trade and International Development is also in the process of negotiations with more than 60 other countries, crossing the panaply of the world's key markets

Rules of Origin & Assistance

All of the preferential trade agreements set out above operate under very technical rules for determining the duty free status of goods imported and exported to Canada (generally referred to as "Rules of Origin"), and some have similar rules affecting the "marking" requirements for the particular goods (e.g., "Made in Canada", etc.).    Millar Kreklewetz LLP offers assistance in determining the eligibility for duty free status, or other preferential treatement, under these various FTAs.

Exporter Verification

All of the preferential trade agreements set out above also provide rules allowing a country of import to verify the exporters eligibility for duty free import, and the way in which that eligibility may be audited or verified.  Millar Kreklewetz LLP offers assistance with all exporter verifications, whether initiated by the government of Canada (and related to Canadian importations), or initiated by a foreign government in respect of Canadian exported goods.

Trade Disputes

Many of these preferential trade agreements also provide established rules for trade and / investor disputes.  Millar Kreklewetz LLP offers assistance with all FTA relates trade and investor disputes.


Millar Kreklewetz LLP is well-placed to provide both substantive and procedural assistance with any of Canada preferential trade programs or FTAs, and interested persons are encouraged to contact us for a consultation on the issues inherent in their particular matters.

Canadian Income Tax Litigation

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Canadian Income Tax is not only a concern for residents of Canada, but should also be a concern for non-residents as well. 

Whether you are a large corporation planning to launch Canadian subsidiary, or a medium sized corporation looking to carry on business in Canada from across the border or overseas, you have to be aware of Canadian income tax rules.

In addition to the application of domestic Canadian income tax rules, corporations should consider the applicability of Canada’s numerous tax treaties, and the impact those may have on operations by varying the domestic rules that would be otherwise applicable. 

Millar Kreklewetz LLP has a number of lawyers with expertise in income tax issues, and specific experience with the Canada-US tax treaty, and is ready to assist companies looking to carry on business in Canada with their Canadian income tax compliance.

Please visit our Home Page or elsewhere on the Millar Kreklewetz LLP Website for free information about our core tax and trade practice areas.

If you are in need of assistance with Canadian Income Tax, please visit the Contact Us page, and feel free to contact one of our lawyers.  

Recent Anti-Dumping Investigations, Inquiries & Expiry Reviews

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Click here for an Introduction to Anti-Dumping and Countervailing Duties

MILLAR KREKLEWETZ LLP is a boutique Canadian law firm with lawyers who have significant expertise in customs and trade matters involving the imposition of anti-dumping duties and countervailing duties, and the application of Canada's Special Import Measures Act (SIMA).

 

The following is a short summary of recent notable Anti-Dumping and Countervailing Investigations launched by the Canada Border Services Agency (CBSA), and Inquiries or Expiry Reviews launched by the Canadian International Trade Tribunal ("CITT").

Recent Notable Activity

The Canadian International Trade Tribunal (CITT) has recently initiated proceedings with respect to the following imported goods:

Oil Country Tubular Steel - December 4, 2014 (Section 42 Inquiry) - The CITT recently announced a section 42 proceeding in respect of the dumping of oil country tubular goods,, when originating in or exported from Chinese Taipei, the Republic of India, the Republic of Indonesia, the Republic of the Philippines, the Republic of Korea, the Kingdom of Thailand, the Republic of Turkey, Ukraine and the Socialist Republic of Vietnam.  The purpose of the section 42 inquiry under the Special Import Measures Act (SIMA) is to determine whether the dumping and subsidizing of the above-mentioned goods have caused injury or retardation or are threatening to cause injury.  Persons wishing to participate in the inquiry and at the hearing as a party must file a notice of participation with the Tribunal on or before December 15, 2014.  A public hearing relating to this inquiry is expected to be held in March 2015.

Certain Whole Potatoes - November 10, 2014 (Expiry Proceeding) - The CITT recently notified importers and exporters taht it will initiate proceedings to determine whether or not to initiate an Expiry Review of its prior finding made on September 10, 2010 (Expiry Review No. RR-2009-002), which had continued several orders relating to the dumping of certain whole potatoes. 

The current proceeding is to determine whether or not an Expiry Review will be initiatived, and it will not be initiated unless the CITT decides that there is sufficient information to indicate that it is warranted. 

The Tribunal's expiry proceeding will be conducted by way of written submissions.  Any firm, organization, person or government wishing to participate as a party in these proceedings must file a notice of participation with the Tribunal on or before November 26, 2014, and written submissions are due to be filed on December 3, 2014.

Further Assistance

Millar Kreklewetz LLP is well-placed to provide assistances with all anti-dumping and coutervailing matters. Please use the form on this page to contact us for specific legal advice applicable to their unique fact situation, or to initiate an appearance in respect of a current proceeding before the CITT.

Other Free Information on CITT Activity

Click here for further information on the CITT's Preliminary Injury Inquiries, click here for further information on the CITT's current and historic Section 42 Inquiries, and here for the CITT's current list of Expiry Reviews.

HST Lawyer

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An HST lawyer is typically a lawyer whose practice is focused on HST or GST issues. Canada’s “Harmonized Sales Tax” or “HST” in its short-form, is really part of our Goods and Services Tax system (“GST”), and provided for in Part IX of the Excise Tax Act.

HST lawyers will typically be familiar with most issues arising in the HST context, although some HST lawyers will practice in a variety of HST areas, while others may focus exclusively on certain types of HST issues. An HST lawyer will often also represent clients before many different levels of government (audits, objections, appeals), and many will also represent clients in appeals to the Tax Court of Canada.

Generally speaking, a HST lawyer will be more familiar with the HST than a general practitioner.

HST Lawyers at Millar Kreklewetz LLP

Millar Kreklewetz LLP has a number of HST lawyers with expertise across all possible HST issues, and who can represent you on HST matters before the Canada Revenue Agency (CRA), and any other government department.

The HST lawyers at Millar Kreklewetz LLP are also able to represent you before the Tax Court of Canada, the Federal Court of Appeal, and Supreme Court of Canada on any HST or GST matters.

Please visit our Home Page or elsewhere on the Millar Kreklewetz LLP Website for free information about our core tax and trade practice areas. If you are in need of a lawyer, please visit the Contact Us page, and feel free to contact one of our HST lawyers.

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