Michael Ford (post until Oct. 31/19)

Voluntary disclosure deal 'made sense' in KPMG matter

Although recent reports raise interesting points about the actions of accounting giant KPMG in an alleged offshore tax “sham,” criticisms of the use of the Voluntary Disclosures Program are not valid, as this option appears to make sense in this case, Canadian tax lawyer David J. Rotfleisch tells AdvocateDaily.com.

Last year, CBC News reported that the Canada Revenue Agency (CRA) offered amnesty to a number of wealthy clients of KPMG, who it alleges were caught using an offshore tax "sham" on the Isle of Man. As the article notes, the taxman offered the individuals a no-penalty, no-prosecution deal if they agreed to pay their back taxes and modest interest on the offshore investments, which they had apparently failed to report on their tax returns.

The article alleges that the offer was made “despite CRA uncovering the KPMG scheme,” however, it also mentions that a letter filed in court in September 2015 by a KPMG lawyer “stated that 15 clients had ‘self-identified’ to the federal tax authorities.”

But a new investigation by the CBC's Fifth Estate that explored the allegations notes that while top KPMG officials were convicted of tax evasion schemes in the U.S., in Canada, a different scheme led to a “secret amnesty deal” with the CRA. 

Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, explains that while the new report makes “valid points” about the actions of KPMG, the comparison to the KPMG prosecutions for tax evasion assistance in the U.S. is not applicable. 

“What KPMG has allegedly done in Canada appears to be a classic sham, where the legal appearance of documents and transactions does not match the reality,” says Rotfleisch. He adds that a tax “sham” is not the same as tax evasion.

“There is a high hurdle to pass for a tax conviction,” he says.

In addition, he says the media’s criticism of the ‘amnesty’ or the voluntary disclosure deal, “is not, to my mind, valid.

“If the taxpayers met the criteria for a voluntary disclosure, and there is no evidence to suggest otherwise, then entering into the Voluntary Disclosures Program deal made sense,” he adds.

As Rotfleisch explains, the Voluntary Disclosures Program is designed to allow taxpayers to reveal previously unreported income or information to the CRA before the taxman has started an audit or investigation. This will likely result in no penalties on taxes owing and no prosecution for tax evasion.

The voluntary disclosure issue also seems to be of concern to the CRA, says Rotfleisch.

In response to the Fifth Estate report, he says, Minister of National Revenue Diane Lebouthillier released a statement, noting that although media reports have characterized the CRA's actions as "amnesty,” this was not the case.

As the minister noted, “when deciding whether to pursue compliance orders or other actions before the courts, as a result of audits, the CRA consults the Department of Justice. Early dispute resolution, where appropriate, is in the public interest. Litigation is costly for everyone and the outcome of complex, tax-related litigation processes may be unsuccessful."

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