In a joint effort, the Canada Revenue Agency and the U.S. Internal Revenue Service have shut down a cross-border tax scheme that has defrauded hundreds of middle- and high-income individuals of tens of millions of dollars.

The fraudulent tax scheme involved investors in Canada and the U.S. who purchased what appeared to be high-yield offshore investments through offshore corporations and foreign bank accounts. Typically, investors made these purchases using cash or proceeds from withdrawals, purportedly tax-free, of retirement funds (RRSPs in Canada; IRAs in the U.S.). Investors also bought into the seemingly lucrative investments by using tax refunds improperly generated by losses that were said to have occurred from natural resources industry investments.

As schemes go, this one wasn’t particularly complex — and that’s what probably what made it very attractive to investors, says Carey Singer, a partner with one of the largest chartered accountancy firms in Canada, Mintz & Partners LLP in Toronto: “This scheme is probably easy for people to get trapped in it. There was nothing special about it.”

That ordinariness gave the scam credibility. It also made it less likely that clients would’ve sought out their financial advisor for a second opinion. “It’s hard to detect,” says Singer. “Bigger schemes are known to accountants and financial advisors, but these are dressed up as regular investment opportunities.”

One of the tools the CRA now has at its disposal to detect tax-abuse schemes on a national — and international — scale is the Joint International Tax Shelter Information Centre, says Ariane Boyer, a CRA spokeswoman in Ottawa. In 2004, Canada, the U.S., Britain and Australia inked a deal in which they pledged to work together to identify and curb “transactions, arrangements and schemes” intended to avoid the payment of taxes. The shutdown of this scheme is the first fruits of its labour.

“The creation of JITSIC is the product of a shared focus by the partner countries on the need to counter international aggressive tax-avoidance practices,” says Boyer.

“This initiative,” she adds, “is in addition to other legitimate processes that are formal and sometimes slow and cumbersome. The commissioners intend this to be a forum for dynamic, spontaneous exchanges of information, advice and expertise.”

JITSIC represents a departure, — at least, for the North American partners, says Singer: “Historically, when the CRA and the IRS work together, it has been on ways to catch individuals or companies that have been avoiding taxes. This is a joint effort to stop people out there setting up illegal schemes and bilking investors.”

Such schemes are growing in number and diversity. “Globalization and modern-day technology makes simple, secure, international financial investments available to all taxpayers, and this presents one of many challenges confronting tax administrations worldwide,” says Boyer. What investors don’t often realize, of course, is that these investments and their tax benefits may be fraudulent.

The CRA, through JITSIC, is currently investigating roughly 50 schemes to see if they meet tax regulations. These include hybrid entity use and offshore brokerage accounts. “As we learn from these projects, the information has been integrated into our risk-assessment systems. These systems feed into the additional field staff looking at aggressive tax-planning schemes,” says Boyer.

The members of JITSIC are not alone. The concern over illegal tax-avoidance scams is international. The Organization for Economic Co-operation and Development’s forum on tax administration, headed by IRS commissioner Mark Everson, was established in 2002 to promote co-operation among revenue bodies and to develop good tax administration practices. It spent its entire fall meeting focused on two issues. One of them was international non-compliance; the other was organizational reforms for more effective tax administration.

“The leaders of tax administrations from over 30 countries share the view that international non-compliance is a significant and growing problem. We agreed to improve practical co-operation among revenue bodies and other law-enforcement agencies of governments to counter non-compliance,” Everson said at the conclusion of the OECD’s forum earlier this fall.

“Our discussions also reveal continued concerns about corporate governance and the role of tax advisors and financial and other institutions in relation to non-compliance and the promotion of unacceptable tax-minimization arrangements,” he added.

Financial advisors have a key role to play in helping curb the spread of tax schemes that do not meet CRA approval. This role can begin before a client is ever approached, and should continue afterward. Singer recommends that advisors alert their clients about any tax scams they are currently aware of. Advisors may also wish to refer their clients to the CRA’s Web site for more information; a special section devoted to illegal offers can be found at www.cra-arc.gc.ca/newsroom/alerts/.

@page_break@At the same time, clients should be encouraged to share any investment opportunities with their financial advisors, even if those opportunities are coming through someone else or another organization. It’s a form of due diligence that will help protect clients from getting conned.

One of the red flags that advisors need to be aware of, and to share with their clients, is the lure of offshore wealth. “Any time it is mentioned to go offshore, that is when you should get a second and third level of confirmation,” says Singer.

Interestingly, although the proliferation of technology makes it easier to reach potential investors with illegal tax scams, it also makes it easier to catch even the savviest of criminals. “The real-time exchange of information, including the identities of promoters and hundreds of investors has been critical to this investigation,” says Everson.

It’s also been critical to changing public opinion. “There is a perception that once you cross borders, it’s very difficult if not impossible to enforce tax laws,” says Singer.

But what the CRA and the IRS have done, he adds, is let the world know this is not the case: “The publicity that this catch got was worth it. There is a deterrent factor.” IE