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Carousel Schemes & Scrap Gold

Posted by on in Commodity Tax Blog
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One of the CRA’s latest projects appears to involve the scrap gold and telecommunications industries, which has been the subject of a number of recent CRA audits, culminating in a number of legal challenges in various contexts.

In the May 2020 case of Express Gold Refining Ltd. v. Canada, the taxpayer was in the business of buying scrap gold and other precious metals, and getting it refined for resale in a pure form.  It paid the GST/HST on its purchases, but did not collect this tax on its sales on the basis that sales of refined precious metals are not subject to GST/HST.  It generally filed credit returns, and the CRA began an audit – while delaying a GST refund of near $10 million.  While not identifying this as a “GST carousel” audit, the CRA did admit that the taxpayer’s GST return had initially been flagged by an automatic system for further screening, and that the CRA had identified the scrap gold business as “a high risk industry”.

In Iris Technologies Inc. v. Canada, a more recent “GST carousel” case released over the summer months – albeit in the telecommunications sector – the CRA did appear to accuse the taxpayer of participating in a “carousel scheme”, all the while attempting to deny ITCs of over $62 million!

While there are a number of different definitions of what a “carousel scheme” could be, the CRA describes one prime example as follows:

CAROUSEL / MISSING TRADER SCHEMES

In a carousel scheme, a fake supply chain is created by a group of GST/HST registrants who work in collusion. Within the fake supply chain, the same goods are sold over and over among the registrants. At one point during the purchase and sale of goods, at least one of the registrants involved in the scheme collects the GST/HST, but then does not remit the tax to the Government (the so-called "missing trader").

Carousel / missing trader schemes have been a problem within other value-added tax jurisdictions and have become an issue in Canada in recent years. The CRA continues to improve its processes to detect and prevent these types of GST/HST refund arrangements.

While there is no doubt that these sorts of schemes do exist, one wonders if CRA auditors are now mistaking routine tax non-compliance (e.g., GST ITC documentary requirements not met;  bankrupt suppliers) as “carousel schemes” where other factors may explain the (alleged) non-compliance.

For example, in this article, the CEO of Iris Technologies Inc. denies the allegations and says that the CRA does not understand the complexities of how the company operates!

Unfortunately for the GST registrants finding themselves in these situations, the current CRA assessments are usually massive and can place potential liability for same on a personal basis, on the corporate directors.  Indeed, when one factors in the “directors liability” and “derivative assessment” provisions of the Excise Tax Act, corporations facing GST “carousel” assessments often find that liability for payment of the assessed amounts extends beyond the corporation, to directors and their relatives personally!

While “carousel” assessments can often be successfully challenged, a great deal of time and effort is usually required, with the facts of the situation being extremely important.

Do you require assistance in this area?  If so, contact us here.

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