The CBC announced last week that the Canada Revenue Agency was investigating KPMG alleging the firm purposely created a tax structure for Canadian high net worth clients that would see them pay absolutely zero taxes while benefiting financially from those assets held outside the country.
From where the CRA sits the plan by KPMG was an elaborate scam to defraud taxpayers of millions of dollars in tax revenue.
The implications for financial advisors if left unchecked by CRA is two-fold: High net worth Canadians could be motivated to do the same with the end result being a dwindling number of HNW clients in need of advice, and secondarily, middle class clients could be left holding the tax bag leaving them with less disposable income for investments.
"It seems to me it's bad from the point of view of the advisors involved, but it's also just, you know, an instance of a larger problem where you have high-wealth, high-income taxpayers arguably not paying their fair share," Dalhousie tax professor Geoffrey Loomer told the CBC. “So it just means that more of the tax burden is borne by the middle class."
The facts in the CRA’s case revolve around a family that emigrated from South Africa in the mid-1990s. According to court documents Peter Cooper and his two adult sons Marshall and Richard signed up for KPMGs offshore company structure in 2000 that allowed them to pay no tax on their investments.
How exactly did it work?
The Coopers allegedly moved $26 million into an Isle of Man corporation whose offshore structure shielded them from any taxes while allowing them to maintain control of their assets. Between 2002 and 2010 the CRA alleges the family received more than $6 million from offshore corporation in the form of “gifts” tax-free while also receiving federal and provincial tax credits.
KPMG Canada is currently fighting the decision in federal court.
"The parties to the structure willfully presented its transactions as being different from what they knew them to be," the CRA said in tax court filings in Vancouver.