BMO accused of running massive tax-avoidance scheme

The bank reportedly sidestepped Canada's tax system through shell companies, loans, and stock swaps

BMO accused of running massive tax-avoidance scheme
In the aftermath of this week’s revelations from the Paradise Papers, there has been more intense focus on the use of international shelters to escape domestic tax laws. Parallel to that, a new report has unearthed charges against the Bank of Montreal (BMO) for allegedly using a complex setup of foreign shell companies to skirt Canada’s tax laws for five years.

According to documents obtained from the Tax Court of Canada, BMO’s US operations routed US$1.4 billion ($1.7 billion at the time) through companies based in Nevada, Nova Scotia, and Delaware from 2005 to 2010, reported CBC News. The CRA said the bank dodged millions in tax in fiscal 2010 by inflating its losses by $288 million. 

BMO had reportedly set up specific types of subsidiaries in the US and Canada to exploit differences in tax treatment under their respective tax codes. It transferred funds through those subsidiaries via a complex series of investment transactions, wherein a subsidiary would either lend money to or buy common shares in another subsidiary — which in some cases would later get swapped for preferred shares. A given subsidiary could then collect income from the one it invested in via dividend or interest payments.

The money used in the scheme was raised from bonds the bank sold in Europe and the US. While BMO doesn’t dispute the transactions, it has filed an appeal insisting that they were for “bona fide purposes,” that it did not abuse the law, and that the losses reported were suffered legitimately as a result of currency fluctuations — but that’s not how the CRA saw it.

When BMO unwound its complex setup in 2010, the Canadian dollar had gone up more than 20% against the greenback over five years. The bank claimed a capital loss of $322 million on its Nevada subsidiary’s common-share stake in its Nova Scotia company. The Nevada company actually also received dividends from the Nova Scotia company, which theoretically should have offset its claimed loss. But since those came from preferred shares, not common shares, the bank didn’t count the dividends against its reported losses.

According to the CRA, BMO had no bona fide reason to pay those dividends through the preferred shares rather than the common shares. Claiming that the decision was made to circumvent the relevant section of the Income Tax Act, the agency has deemed $288 million of the loss to be inflated. The CRA has invoked the general anti-avoidance rule, a section of the Income Tax Act that nullifies tax-minimizing schemes that adhere to the letter of the law, but violate its spirit.

A trial has been set for June in Toronto.

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