noblepa wrote:It is hardly unheard of, at least in the US, for a big, normally reputable investment broker or accounting firm, to come up with an investment product touting tax benefits which the IRS later denies. I assume the same is true in Canada, as well.
To me, the word "scam" implies a scheme intended to defraud the investors. This does not appear to be the case here. I'm sure that KPMG feels that they are simply being agressive in interpreting the tax laws in a way that is beneficial to their clients.
That said, when the smoke clears, the CRA and the courts may find that KPMG has gone too far, and go after the tax payers who invested in this for the taxes they would have otherwise paid.
I am not an expert on US taxes, let alone Canadian tax laws, but I think that the word "scam" is a bit too strong for a supposedly unbiased journalist to use.
Scam works for me if the scheme is as it is represented by the press so far. Also note the word "sham" used by the CRA. A sham is "a thing that is not what it is purported to be". I've given below what I understand is the KPMG scheme. Note that I use the word "assume" a lot because, until the case is heard in Tax Court, I have to do some reading between the lines;
1 - Taxpayer (in this case non-taxpayer) generously gifts $26,000,000 to a company in the Isle of Man. I assume that he does not legally own the company, it will be owned by some Manx lawyer. Since a gift is an irrevocable transfer of property the taxpayer now had, at least on paper, no more right to the money than you or I, and some Manx lawyer is suddenly rich. At this point there was no taxing event if he'd legitimately gifted as claimed or if he'd instead lent or invested the money in the company to invest for him.
2 - The company invests the money and makes a lot of income. At this point there is still no taxing event in Canada. Since the Isle of Man does not tax corporate income there is no taxing event there either.
3 - The taxpayer is of course now broke after giving away all of his wealth to an arm's length company in a foreign country. Recognizing this the Manx company, in an incredible act of generosity, sends money to the taxpayer as a so-called gift whenever he asks for it (see paragraphs 27 and 28 referred to below). Since gifts are tax free in Canada he's avoided tax on the income that would have been taxable had he kept and invested the $26,000,000. Had he legally owned the Manx company he would have been taxable on the money as a dividend.
So how is this not a sham? Do you really believe that taxpayer irrevocably gifted all of his wealth to some off-the-shelf company in a tax haven? That he was then broke with no more control over the money than you or I? That the company, supposedly arm's length from him, generously decided to gift money back to him from time to time even with no legal requirement to do so? Because, if it is not a sham series of transaction, you have to believe all of those things. The CRA is very reluctant to use the word "sham" in respect to transactions so I assume the use of it in this case implies that they've got some pretty solid documentation backing them up. The CRA, too dense to understand the brilliance of the KPMG "investment product", has apparently recategorized the money as undeclared income from an investment owned or controlled by the taxpayer.
As far as scam goes if the CRA is correct and the reassessment is confirmed by the Tax Court the Canadian government is being scammed out of taxes by sham transactions. I'm assuming that the taxpayer and KPMG were very careful not to tell the CRA anything about this. Why bother them when it is just exchanges of gifts?
The taxpayer has been hit with section 163(2) gross negligence penalties. This is the highest non-criminal penalty the CRA can impose. I assume they have decided not charged him with tax evasion because he has a reasonable mens rea defense. He was advised by qualified tax accountants. Also, as his Notice of Appeal states, he's 85 years old and suffering from dementia.
https://www.documentcloud.org/documents ... ce-of.html
The Notice of Appeal gives the ownership structure of the Manx company. As I assumed a tricky web that does not have the Coopers in it anywhere. It does have a Canadian "non-shareholder member" who has the right to vote when funds are distributed. A non-shareholder who can vote at shareholder's meetings? A new one on me. Check out paragraphs 27 and 28. These are the heart of the scheme.
I await the Tax Court decision with great interest, at such time as the Court gets around to hearing it. Nobody seems in a rush.