CRA signs secret settlement with wealthy KPMG clients involved in offshore tax scheme

The Canada Revenue Agency has once again made a secret out-of-court settlement with wealthy KPMG clients caught using what the CRA itself had alleged was a "grossly negligent" offshore "sham" set up to avoid detection by tax authorities, CBC News has learned.

Watchdog group accuses the Liberals of covering up the KPMG affair

A stock image of Canadian bank notes.
The Canada Revenue Agency has made an out-of-court settlement with wealthy KPMG clients caught using an offshore tax scheme that it previously said was 'intended to deceive' tax authorities. (Peter Scobie/CBC)

The Canada Revenue Agency has once again made a secret out-of-court settlement with wealthy KPMG clients caught using what the CRA itself had alleged was a "grossly negligent" offshore "sham" set up to avoid detection by tax authorities, CBC's The Fifth Estate and Radio-Canada's Enquête have learned.

This, despite the Liberal government's vow to crack down on high-net-worth taxpayers who used the now-infamous Isle of Man scheme. The scheme orchestrated by accounting giant KPMG enabled clients to dodge tens of millions of dollars in taxes in Canada by making it look as if multimillionaires had given away their fortunes to anonymous overseas shell companies and get their investment income back as tax-free gifts.

KPMG is a global network of accounting and auditing firms headquartered out of the Netherlands and is one of the top firms in Canada.

"Tax cheats can no longer hide," National Revenue Minister Diane Lebouthillier promised in 2017.

Now, Tax Court documents obtained by CBC News/Radio-Canada show two members of the Cooper family in Victoria, as well as the estate of the late patriarch Peter Cooper, reached an out-of-court settlement on May 24 over their involvement in the scheme.

Details of the settlement and even minutes of the meetings discussing it are under wraps. A CBC News/Radio-Canada reporter who showed up to one such meeting this spring left after realizing it was closed to the public.

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Journalists discovered references to the final settlement agreement in Tax Court documents only by chance.

CRA cites privacy in keeping settlement details secret

The Canada Revenue Agency says strict privacy provisions of Canadian tax law make it difficult to disclose minutes describing individual taxpayer information.

The Isle of Man tax dodge had been active as far back as 1999 and, according to documents filed in Tax Court by the CRA in 2015, had "intended to deceive" federal regulators.

Still, significant details of the scheme remain a mystery, including the role played by the KPMG's senior executives. With no public trial, those details may continue to remain secret.

Toby Sanger, executive director of the advocacy group Canadians for Tax Fairness, says the CRA should never have agreed to settle the case. 

"I think it's outrageous," he said. "We've had a lot of tough talk and promises from this minister about how they will crack down on tax evasion by the wealthy and corporations, but unfortunately, we've seen no evidence of this so far."

Minister of National Revenue Diane Lebouthillier responds to a question during Question Period in the House of Commons in Ottawa on Thursday, October 19, 2017.
National Revenue Minister Diane Lebouthillier called out tax cheats in 2017 and stated her intention to clamp down on the KPMG scheme. (Adrian Wyld/The Canadian Press)

Revenue Minister Diane Lebouthillier said in an email statement to The Fifth Estate/Enquête that while she cannot comment on specific cases, she finds the lack of transparency about settlements brokered by her agency "problematic."

"I have instructed the CRA to review its processes to allow for more transparency with respect to the reasons for which a settlement is reached," she said.

KPMG took 15% cut of taxes dodged

One member of the Cooper family, Marshall Cooper, previously told The Fifth Estate that he was unaware of Canadian tax laws when he emigrated from South Africa in the mid-1990s and that it was KPMG that came up with the offshore tax plan.

Documents show KPMG planned to take a 15 per cent cut of the taxes dodged, including $300,000 from the Cooper family. Internal records show the scheme was marketed across the country, with successful KPMG sales agents and accountants referred to as product "champions." 

Tax court documents obtained by CBC News/Radio-Canada show members of the Cooper family in Victoria reached an out-of-court settlement with CRA. Marshall Cooper, pictured, previously told The Fifth Estate that he was unaware of Canadian tax laws when he emigrated from South Africa in the mid-1990s. (Facebook)

In all, more than 20 wealthy families participated in the offshore scheme.

Two years ago, Lebouthillier issued a news release outlining her intention to clamp down on the KPMG scheme, publicly stating that those involved could even face criminal charges over possible "tax fraud."

"The case of KPMG is before the courts right now, and we continue to pursue action against KPMG," Lebouthillier said in 2017 in an interview with Radio-Canada.

"We will see this to the end as Canadians have asked us to do."

She said at the time that her government took the matter "very seriously." 

"Those who choose to participate in these schemes must face the consequences of their actions," she said in a separate statement.

Yet more than two years after that pledge, participants in the KPMG scheme, namely, members of the Cooper family, were offered a secret out-of-court settlement.

In her statement to The Fifth Estate/Enquête this week, Lebouthillier said the decision to settle was not hers to make and that she had instructed the CRA to review its settlements to "allow for more transparency."

The Isle of Man, pictured, is at the centre of a tax-dodging scheme that, according to documents filed in court by the CRA in 2015, was 'intended to deceive' federal regulators. (CBC)

Minister says 'systemic changes' are coming

To "ensure integrity of our tax system," Lebouthillier said, out-of-court settlements are made by the CRA and the Department of Justice "at arm's length" from the minister and the minister's office.

"Canadians deserve a fair and equitable tax system, and we will continue to make systemic changes within the CRA to make sure that this is the case," she said in her statement this week.

CBC News/Radio-Canada first revealed four years ago that KPMG, one of the largest accounting firms in Canada, with tens of millions in federal contracts, had for years been running a massive offshore tax dodge for wealthy clients it had kept hidden from federal investigators.

The Trudeau government's previous tough talk on the so-called sham had come after a document leaked to The Fifth Estate/Enquête showed the CRA itself had offered a secret "no penalties" amnesty in May 2015 to many of the KPMG clients involved in the scheme.

The CRA offered to have them simply pay the back taxes owed — but with the condition they not tell the public about the offer.

Liberal MPs halted a parliamentary finance committee investigation in 2016 after KPMG argued the investigation could prejudice court cases. Now, it looks like those court cases might never happen. (CBC)

Stung by those revelations, Prime Minister Justin Trudeau said in 2017 that the government had learned a lesson from the KPMG affair and promised to do a "better job of getting tax avoiders and tax frauders."

Since then, the Liberal government vowed to make sure those kinds of offshore tax dodges were in the past.

In fact, it was concerns over future KPMG court cases that prompted the Liberal-dominated House of Commons finance committee to shut down its own investigation into the embattled accounting firm back in 2016.

Documents had already begun to emerge detailing the extent to which KPMG was helping clients not only dodge taxes but also hide money from potential creditors, including circumventing the Canadian Divorce Act by "protecting" assets from ex-spouses.

Lawyers for KPMG had argued that the ongoing finance committee investigation could prejudice cases before the court.

Several KPMG executives had been named to testify in the spring of 2016, but Liberal MPs voted to shut down the inquiry, arguing that any more testimony and documents should be produced in court and not in Parliament.

Now, it appears that those future court cases cited as a reason for shutting down the investigation might never materialize.

The Fifth Estate and Enquête also later revealed that in June 2016, around the same time the Liberal MPs shut down their investigation, a former senior KPMG executive was appointed to the Liberal Party's national board of directors.

"There is no reason why the finance committee shouldn't restart their hearings," Canadians for Tax Fairness's Sanger said.

Settlements offer 'substantial savings to the public'

Sanger said it all seems like a Liberal "coverup" to close down the KPMG investigation.

Canadians still do not know who were the key people at KPMG involved in running the investigation, for example, how high up it went within the organization, or all the names of the wealthy clients who participated.

Max Weder, the lawyer for the Cooper family, said he "can't comment on the settlement."

Documents show the family paid virtually no tax over a span of eight years — and even obtained federal and provincial tax credits — despite receiving nearly $6 million from an offshore company worth $26 million that KPMG helped set up.

KPMG has always maintained the scheme was legal. The firm's lawyers claimed any money the Coopers received were gifts and therefore non-taxable. Nevertheless, KPMG now says it would not set up this type of offshore structure anymore.

For its part, the CRA said that the settlement was made in accordance with the law and is "supported by the facts of this particular case." The agency also said it "maximized revenue" by making a decision to settle out of court, instead of facing an uncertain ruling in Tax Court.

"There is generally substantial savings to the public and a benefit to the justice system when cases are resolved through a settlement," a CRA spokesperson said in a statement.

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Harvey Cashore

The Fifth Estate

Harvey Cashore is an investigative reporter with the CBC's weekly investigative program The Fifth Estate.

With files from Frederic Zalac, Kimberly Ivany