Tax & Trade Blog
CRA Sham Investigations Target Telcos
The alleged fraudulent activities come in many forms and can even involve allegations of so-called GST ‘carousel schemes’. Below, we highlight two cases currently working their way through courts and the takeaway points for businesses unlucky enough to be facing similar situations.
Iris Technologies Inc. (“Iris Technologies”) is one such company currently in CRA’s gunsights. They provide long distance telecommunications services to individuals and companies in Canada and abroad, which, in 2018, expanded to include the buying and reselling of long-distance minutes. As a result of exporting the minutes abroad, Iris Technologies went from remitting sizable GST/HST amounts to CRA to claiming regular monthly net tax refunds, at one point claiming over $63 million in refunds for 2017 and 2018.
CRA audited Iris Technologies alleging its participation in a “carousel scheme” where the large refunds claimed by the company arising from tax paid to its suppliers were improper because the underlying tax was never remitted to CRA by suppliers further up the chain. This would theoretically allow the sham participants to reap a windfall from the refund, if paid.
It remains to be seen whether the allegations of sham will be successful, since the appeals of the underlying assessment are in progress. Currently, the company and CRA are dueling in a series of interimmotions attempting to compel CRA to release the company’s $62 million refund – for which Iris Technologies has so far been unsuccessful.
Newave Consulting Inc. (“Newave”) is another such company. Newave is involved in the resale of wholesale international voice-over-internet-protocol (“VOIP”) call traffic to both individuals and companies.
In 2018, CRA commenced an audit of Newave, alleging that it could not find enough evidence that Newave was engaged in actual commercial activity and that it was involved in a “carousel scheme”. In particular, CRA alleged that Newave was engaged in “intentional deceit” by creating fictitious call records to collude with its customers and suppliers to create fake supplies of call minutes. These fake supplies were then allegedly used to claim input tax credits (“ITCs”), generating refunds for Newave.
Newave brought an unsuccessful motion last year to attempt to stay any collection of over $72 million in tax and penalties assed by CRA. Like Iris Technologies, Newave’s underlying assessments are currently under appeal, so we will have to wait and see if the allegations are borne out in court.
The underlying takeaway point is that the moment a CRA auditor raises the possibility of anything related to ‘sham’, ‘fraud’, ‘deceit’, or GST ‘carousel schemes’, it is imperative to obtain professional advice from a lawyer.
There are two good reasons for this. First, these situations involve allegations of quasi-criminal activity, and can often come with references to CRA's Special Investigations Unit to investigate possible tax evasion. Specialized legal advice based on the facts and legal issues that play is usually called for.
Second, that advice, when obtained from a licensed and qualified lawyer, is privileged and confidential — which means that the information provided by the client in the professional context cannot be subpoenaed or used in court by the Crown Counsel, or otherwise disclosed. This would not be the case when professional advice is sought from and provided by a non-lawyer professional, like an accountant (or even a tax accountant).
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