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A Carousel Scheme. What Is That?

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Another question that we are often asked is what the CRA means by the term “carousel scheme”.  It is a great question, because the CRA does not define its position on that phrase anywhere, other than in private assessment documents that it sometimes provides to GST registered persons on the wrong end of the CRA’s Notices of Assessment powers.

According to the CRA, and in its simplest form:

[A] carousel scheme is an arrangement where amounts on account of tax shown to be 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 amounts collectible on account of tax; they are set up for the sole purpose of perpetuating the scheme. Sales invoices are issued in the name of the missing trader and the purchasing companies are monthly or quarterly filers that claim their ITCs from these invoices.

In the CRA’s view of the world the goods can change hands up the supply chain several times or only once, although there is one common element to every “carousel scheme”: “Eventually the goods end up with an entity where the tax status of the good changes. For example, the goods are processed in such a way that they become zero-rated, such as making the supply to a non-resident who exports the goods.”

According to the CRA, the “entity who “changes" the tax status of the supply from taxable to zero-rated, is known as the zero-rater” – meaning that this entity collects no tax on their sales (for a variety of possible reasons) but is otherwise entitled to lTCs on its purchases – resulting in a net windfall to the taxpayer.

Apparently, the same supply is then returned to entities in the supply chain, either as consideration for supplies previously made, or cash earned by the scheme is used to make new purchases – allegedly repeating many times, with the goods (which may or may not exist) going around on a "carousel".

The “missing trader’s” involvement in the scheme apparently involves the non-remittance of required taxes to the CRA, either through non-filing,

under remitting, or non-payment of the amounts due.  This means that when the zero-rater/exporter claims an ITC for the amounts charged by the missing trader, the government is potentially out-of-pocket with the value of the ITCs forwarded to the zero-rater/exporter.

The CRA cautions that carousel schemes are “difficult to detect, as the books and records look real, and the carousel goods may be hidden within real transactions” and that “[a]s such, the motivation for the transactions presented must be questioned.”

In the CRA’s view of a carousel scheme, “the structure of the transactions within the colluding group is manufactured to create GST/HST refunds, which may be the only source of funds”, and that [q]uite often, another part of a carousel scheme is the issuance of accommodation invoices” (see our recent blog on “Accommodation Invoices” here).

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