It seems that the only thing hotter than inflation these days is CRA’s auditing and assessments in missing traders, carousel schemes and shams. Affected industries so far include telecom, gold and precious metals, diamonds and precious gems – and even include mom-and-pop start-ups in the home-made muffins industry. Left unchallenged, these assessments can invariably lead to corporate bankruptcy and insolvency and, more problematically, can involve personal assessments of directors, spouses and children!
Typical Alleged Scheme
CRA has been auditing in this area for a number of years now, first focussing on so-called GST-carousel schemes started in the UK. The core of the CRA’s concern is catching “fake supply chains”, but its approach often snags innocent parties.
In a typical example, a business (the “Dupe”) buys and sells goods or services from a seemingly reliable registered supplier, first checking and ensuring that the reliable registered supplier has a GST/HST registration number assigned by CRA, using the CRA’s own automated GST Registry System. The Dupe then pays that reliable registered supplier GST/HST, taking a GST/HST input tax credit (ITC) for the amount of taxes paid. The up-to-now reliable registered supplier suddenly goes “missing” (hence, “Missing Trader”) without remitting tax, leaving the CRA out-of-pocket for ITCs provided to the Dupe.
Invariably, the CRA comes back to the Dupe, assesses and denies the ITCs, and puts them in a very, very difficult position – all the while letting the Missing Trader (which the CRA itself registered as a statutory collections agent under s 221 of the Excise Tax Act (“ETA”)) off scot-free. The CRA will actually even allow the Missing Trader to sue the Dupe (under s 224 of the ETA) if the amounts charged to the Dupe are not paid as and when charged!
Why is it called a Carousel?
Given that the transactions often repeat themselves, with the Missing Trader making multiple sales to the Dupe (in CRA’s view, with the intent of repeatedly generating ITCs for the Dupe), CRA characterizes these transactions as “carousel schemes” – or a “sham” for GST purposes (i.e., transactions purposely set up with an intent to deceive the CRA as to what has been going on).
The reality of these situations is often unclear. Certainly, there are likely cases where the Missing Trader is real, and a bad actor. But in other circumstances, the truth of the matter is less obvious (e.g., why would the CRA allow Missing Traders to be registered to collect GST/HST well after assessing the Dupe to deny their ITCs?) We have seen innocent clients in these situations, faced with multi-million dollar liabilities.
Indeed, many of these situations involve GST registrants being assessed by CRA with no knowledge, information or belief that anything has been amiss, and the CRA using its power to make assumptions to conclude that the registrant has been either directly involved with the situation or “wilfully blind” to the situation.
Personal & Third-Party Liability
Often, the situation is NOT one where a corporate bankruptcy will help matters. This is because of the CRA’s power to assess directors for personal liability, and to assess third-parties (like spouses, children, and others) receiving payments from the corporation, or the director personally, during a period of time when the CRA believes taxes are/were due. Things like payments for mortgages, corporate dividends, and transfers of hard assets like cars, houses and cottages become targets in so-called derivative assessments by the long-arm of the CRA.
What if CRA’s Gun Sights Find Me?
GST/HST registrants contacted by CRA for audits in this area need to treat such inquiries with the utmost importance. Legal assistance is absolutely required, as that single phone call or email often becomes the first communication in what ends up being a long litigation process, where the very economic livelihood of business owner (and his or her family) is put at serious risk.
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