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More GST Sham Audits of Telco Businesses

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As we blogged about here, here and here, CRA continues to audit telecommunications businesses for possible sham and carousel transactions (i.e., GST fraud).

The alleged fraudulent activities come in many forms, and one auditing efforts seems focussed on suppliers and/or recipients connected to the Iris Technologies Inc. case, winding its way through the Tax Court of Canada (“Iris Technologies”).

Iris Technologies has been in the CRA’s gunsights for a number of years now, and allegedly involved in the fraudulent sale of long distance minutes to individuals and companies in Canada and abroad. CRA’s current focus appears to be on the allegedly fraudulent nature of these sales, seemingly taking the position that if Iris Technologies’ purchases and sales were sham transactions, then so too must be the suppliers and recipients transactions on the other side of Iris Technologies (i.e., those suppliers selling minutes to Iris, and those recipients purchasing minutes from Iris) – many (all?) of whom the CRA may be alleging are part of the same carousel schemes.

It remains to be seen whether the allegations of sham will be successful, since the appeals of the underlying assessment are in progress.

Director Liability Issues

The stakes are high for these businesses and their individual directors (as most businesses would be expected to be run as “corporations”), and when corporations fail to pay their GST debts, the CRA has the ability to assess the corporation’s directors personally.

What this means is that a director of a corporate GST debtor can receive a Notice of Assessment addressed to the director personally, and the legal effect of the Notice of Assessment is to make the director (or all of the directors) jointly and severally liable for the same amounts owed by the corporations.

These sorts of Director Liability Assessments must be objected to and appealed separately.

Worse, once issued, the CRA is able to begin collections against the director personally (think garnishment of wages, liens on homes, assessments of spouses, children and other related persons that may have received transfers from the director at a time when the GST was owed by the corporation).

Criminal Prosecution Concerns

Even worse, in ever situation involving allegations of quasi-criminal activity, one is often worried about parallel investigative activity by the CRA's Criminal Investigations Branch (formerly knows as “Special Investigations Unit”). The CIB is charged with investigating possible tax evasion, and often a vigorous civil defence of a proposed assessment is needed to lay the groundwork for possible criminal defences.


Not a pretty picture at all! What this all boils down to is that corporations facing audits by the CRA cannot afford to adopt a “do nothing” strategy, and the 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.

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 – even a tax accountant!)

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Guest Wednesday, 19 June 2024

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