What Are GST/HST Carousel Schemes?

The Canada Revenue Agency (CRA) is responsible for collecting various taxes, including the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST). When the government does not collect the amount of tax it is due, the CRA may begin initiatives (audits and investigations) targeted to collect this missing revenue. One of the latest initiatives is to pursue collection from GST/HST carousel schemes. However, innocent businesses are sometimes identified in these tax campaigns. If you are concerned about being a target of a CRA investigation, consider contacting Jeremy Scott Law at (902) 403-7201.

What Is a GST/HST Carousel Scheme?

The CRA explains that in a GST/HST carousel scheme, a group of businesses collude to set up a fake supply chain to collect GST/HST refunds. The businesses sell non-existent goods or the same goods repeatedly. One of them collects the GST/HST or creates fake documentation to show that they charged GST/HST. However, the business does not remit the collected tax to the government. The last business involved in the supply chain may claim that they have exported the goods offshore. All of the companies (other than that which did not remit the owed tax) then will claim refunds on the tax they purported to pay to the missing trader. This allows them to attempt to profit from GST/HST deductions based on the fake transactions and to which they are not entitled.

In order to create a carousel scheme, goods and services must be imported into the country, transferred to some other businesses, and then exported out of the country. The scheme is complete when a shell company receives an unwarranted refund from the government for tax that it never paid.

Carousel frauds are more common in Eastern Europe where governments lose hundreds of millions of dollars to it every year. However, in recent years, it has become a bigger problem in Canada. Here, the industries most likely to be involved in these schemes tend to be:

• Scrap gold and refined precious metals
• Software
• Media
• Telecommunications

Infamous GST/HST Carousel Schemes

GST/HST carousel schemes have become a major problem for CRA in recent years, leading to the CRA to improve its ability to detect and prevent them. Some recent instances of GST/HST carousel schemes include:

United Kingdom-Based Scheme Attempts to Obtain $52M in Canadian Tax Refunds

In this scheme, 11 foreign nationals based in Great Britain were able to obtain $4.7 million in GST/HST refunds and rebates before the CRA detected the fraud. The scheme attempted to obtain more than $52 million from fraudulent tax refunds. The CRA conducted raids in Ontario, as did Her Majesty’s Revenue and Customs department. The scheme endured from 2011 to 2015. 11 people set up 84 corporations and falsified bank statements, sales invoices, and other documents to carry out the scheme.

The CRA detected the scam once it noticed similarities for many of the GST/HST returns it received, including:

• Many of the businesses claimed they were in the telecommunications industry but had little evidence of business activity

• Many refunds were for $1 million or more

• The company’s shareholders were not Canadian residents

• Addresses belonged to virtual offices or post office boxes

• Many of the businesses failed to file T2 corporate tax returns

• All of the businesses reported “nil net income”

Over 80 tax investigators executed search warrants at three locations in Ontario and six locations in the United Kingdom.

Targeted Effort Saves Canadian Government $526.4 Million

The CRA reports that it devoted additional audit resources to help identify fraudulent GST/HST refunds from April 1, 2016 to March 31, 2017. These CRA efforts resulted in:

• More than 70,000 GST/HST audits and examinations
• The prevention of $1.27 billion in unwarranted GST/HST refunds being issued
• The denial of more than $223.9 million in refunds
• $302.4 million in assessments for GST/HST
• Assessment of $168.1 million for accounts that involved carousel schemes

Possible Consequences for Innocent Businesses

While the CRA’s investigative effort can protect the integrity of the economy, the CRA can sometimes cause harm to legitimate businesses. Sometimes, legitimate businesses may unknowingly be used in these schemes. For example, the CRA may not issue a GST/HST refund the business is due and expecting. Instead, it might decide to conduct an audit that takes over a year to complete. The CRA may conduct a thorough investigation that involves validating alleged transactions and reported activity. This can have devastating effects on the business’ cash flow.

The innocent business might receive the goods that were sold within the chain, being completely unaware of any fraud. When businesses find themselves in this situation, they often learn that they are at a disadvantage with the CRA because the CRA investigators may have conducted audits or investigations into other companies. The business usually does not have access to this same information due to confidentiality concerns. If an adverse decision is made against a business, it has the right to appeal the decision. However, this can result in even longer delays and increased legal costs. Additionally, the Excise Tax Act allows the government to impose tax liability on the corporate directors personally.

In addition to potentially losing the very money the business needs to survive, there are even more serious consequences that can befall someone who is believed to have participated in a carousel scheme. The CRA can recommend cases for criminal prosecution if it believes tax laws have been violated. Because the potential consequences are so severe, some people turn to a tax lawyer such as Jeremy Scott Law to understand all of their legal options.

Contact Jeremy Scott Law for a Confidential Consultation

If you are concerned about being implicated in a GST/HST carousel scheme, you might decide to retain the services of a knowledgeable tax lawyer who can review the circumstances surrounding your case, review your tax history, answer questions you have about the audit process, and advise you of a legal strategy. If you are in this situation, consider contacting Jeremy Scott Law at (902) 403-7201. You can arrange a consultation with a tax lawyer, and your information will be kept confidential.

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Please note the content above and throughout this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind.  I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any legal issues you may face.  I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website and will not be held liable for anything contained in this document or any use you make of it. Finally, accessing the information on my website does not create a lawyer-client relationship.