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Proposed rules aim to stop CRA from paying out more bogus refunds

WeMaple AI by WeMaple AI
November 29, 2024
in Canadian news feed
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Proposed rules aim to stop CRA from paying out more bogus refunds
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When the federal government tabled its 2025 budget last month, it included a proposal that tax fraud experts say is long overdue — if also a belated acknowledgement that the Canada Revenue Agency has been repeatedly duped into paying out untold millions in bogus tax refunds to scammers.

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The proposed legislation would help prevent a type of fraud known as a carousel scheme from succeeding on Canadian soil and comes on the heels of an investigation by the fifth estate that found the federal treasury has repeatedly lost millions of dollars to international crime networks in the past several years.

“Finally, the CRA has faced up and admitted its tax system has a major issue that it knew about many years earlier,” said Mike Cheetham, a British expert on carousel schemes consulted by the fifth estate who has spoken before the U.K. Parliament on the subject. 

“Why they have taken so long to try and correct the system defies belief,” he said. “This was totally preventable from the start and the CRA has a duty to protect the taxpayers’ revenue.” 

The federal government’s proposed legislation in its November budget appears to bring Canadian rules about some taxable commodities in line with European fraud prevention norms.

The proposed legislative fix, known as a reverse charge mechanism, is designed to prevent fraudsters from claiming bogus GST and HST refunds.  

Swindling the System

Carousel schemes involve a series of fake companies working together to make it look as if goods are being sold and resold, with the last company in the chain claiming a refund — even though no tax was paid in the first place.   

The reverse charge mechanism changes the way GST is paid, removing the ability of the scammers to collect a refund.

A source familiar with the CRA told the fifth estate they believe the Canada Revenue Agency has lost hundreds of millions to carousel schemes. 

The source has been granted confidentiality by CBC News because they are not authorized to speak publicly on these matters.

The agency stated in a recent email that it has  “no systematic way” of adding up exactly how much of the public’s money has been wrongly paid out to fraudsters. 

The agency also said, however, that  “more than $1.1 billion had been identified between 2017-18 and 2022-23” involving carousel schemes. It is not clear what “identified” means in this case.

Still, a fully written but unreleased Nov. 8, 2023, CRA media statement obtained though an access to information request shows that officials at the agency set up what they called a “carousel scheme task force” in October 2023, soon after the fifth estate began investigating why the federal treasury was losing hundreds of millions to networks of scammers.

Internal CRA email exchanges show Bob Hamilton, the CRA commissioner, was also consulted as the agency and Department of Finance co-ordinated how to respond to those questions.

On Nov. 9, 2023, the Department of Finance told the fifth estate that it had introduced a reverse charge mechanism in one particular industry prone to carousel schemes — carbon emission trading.

However, department officials did not respond to repeated followup questions about why other industries known for carousel frauds were not also included.

“What is the reason a reverse charge mechanism was not introduced for other industries identified as being prone to carousel fraud schemes, including telecommunications?” the fifth estate asked on Nov. 21, 2023.

Now, two years later, the 2025 federal budget specifically proposes a reverse charge mechanism for “the telecommunications sector.” The changes, according to the budget, will help “prevent carousel fraud.”

Still, sources say CRA officials were well aware of the issue for more than a decade.

In 2017, for example, the CRA advertised that it had partnered with U.K. authorities to take down a network of carousel scheme fraudsters. However, since then it has declined to talk about that case or whether any of the stolen funds were recovered.

The confidential source familiar with the CRA told the fifth estate that “many attempts” were made internally within the agency to have the Finance Department implement a reverse charge mechanism, but that eventually those employees “gave up” after no one would champion those efforts.

A fifth estate investigation revealed two years ago that the agency believed it had been repeatedly duped into paying out bogus refunds for more than a decade — as tranches of taxpayer dollars disappeared overseas to Hong Kong, Dubai and Islamabad.

In a recent email to the fifth estate, the Finance Department said the reverse charge mechanism proposal in the 2025 budget is “one possible tool to address fraud” and that “what may be considered appropriate for one country at a particular time may not necessarily be appropriate for another country.”

“It is expected that this measure would prevent unwarranted refunds from being paid, generating $90 million in federal revenues over four years beginning in 2026-27.”

For its part, the CRA stated in a recent email that it had identified $600 million in fraudulent carousel schemes in the telecommunications sector between 2020-21 and 2023-24.

The confidential source familiar with the CRA told the fifth estate that for the proposed changes to have an impact, the government will need to impose a reverse charge mechanism on numerous other industries prone to carousel fraud, not just telecommunications. 

“While having it now is good, it applies to only one industry and that ship has sailed,” the source said.

The source also said they are not aware of a single criminal investigation into carousel schemes in Canada, and that the CRA needs to move the cases from civil court to be tested in the criminal arena.

According to Cheetham, international crime groups targeted the weaknesses in the Canadian tax system after European governments moved more quickly to implement the reverse charge mechanism and other legislative deterrents.

“The solution is to go after the criminals very fast, very hard,” said Cheetham. “Why has that not been done [in Canada]?

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