03/10/2017 11:15 EST | Updated 03/10/2017 11:44 EST

Canadians Deserve To Know Why KPMG Tax Dodgers Were Let Off Easy

In the fall of 2015, Canadians heard news reports of wealthy tax dodgers using accounting giant KPMG's Isle of Man scheme to avoid paying tax at home. Later, in the spring of 2016, we learned that the Canada Revenue Agency negotiated a secret deal with KPMG to offer their clients secret amnesties without penalties and very little interest if they just agreed to pay the taxes they should have paid in the first place.

In response to public outrage, the House of Commons Finance Committee decided to conduct hearings to find how the Canada Revenue Agency was handling the KPMG Isle of Man file. The hearings also aimed to get KPMG officials to explain themselves and their practices.

kpmg building

The logo of financial services company KPMG is seen on a building in Toronto June 11, 2015. (Photo: Chris Helgren/Reuters)

Things did not go well -- at least, from the perspective of regular taxpaying Canadians.

After both KPMG and Revenue Canada officials had a chance to explain themselves and the committee was ready to hear from the legal experts and critics of the tax scheme (including representatives of Canadians for Tax Fairness), a KPMG lawyer lobbed a letter into the proceedings. He argued that the Isle of Man issue was "before the courts" and that it could not be discussed by any of the witnesses.

It is a whole other blog to discuss why that argument was incorrect, because parliamentary committees have parliamentary privilege that overrides anything that may be before the courts. The fact remains that the committee bought the argument and did not allow witnesses, including myself, from mentioning KPMG or dealing with specific issues related to the Isle of Man case. This had an impact on their final report, released late last year. KPMG is not mentioned in any of the document's 14 recommendations.

KPMG did not get off so lightly in the United States when they were caught marketing similar dubious tax products there.

They've been willing to gamble that they won't be found out. But they also know that if they are, there is always a way to negotiate a special deal.

U.S. Senate hearings on KPMG tax scams were much more aggressive and resulted in the firm admitting it engaged in a fraud that generated at least $11 billion dollars in phony tax losses, as well as the indictments of a former deputy chairman and two former heads of KPMG's tax practice. KPMG ended up having to pay fines of over a half a billion dollars.

In Canada it was a different story. The committee blinked. They never got to the bottom of the issue -- they did not hear from tax law professors on whether they thought KPMG should be charged with facilitating tax evasion and why those secret CRA deals should not have been approved.

Recently, more wealthy Canadians were named in news stories about the KPMG scheme. And at least one of them admitted in a CBC Fifth Estate documentary that the product was sold to him for the express purpose of creating a false trail. KPMG facilitated this dodge for a down payment of $100,000 and a yearly fee based on a percentage of taxes saved.

It is outrageous enough that wealthy clients got off with a slight reprimand. KPMG has, so far, paid no price for their role. Even more frustrating is that they continue to be awarded lucrative government contracts federally, provincially and municipally. Government suppliers are subject to a code of ethics. But they are safe as long as they aren't found guilty of anything.

The committee let Canadians down by not recommending a full investigation into this case and laying charges against KPMG if the evidence warrants it. And Canadians are right to keep demanding one.

This is hardly an isolated incident. Whether it is Swiss banks or Panamanian law firms, international tax avoidance industry is big business. In last year's report "What's Wrong at the CRA? And How To Fix it" we showed that the tax avoidance industry knows that the CRA was sucker-punched during the Harper years. And they've been willing to gamble that they won't be found out for over-stepping the line of legality. But they also know that if they are, there is always a way to negotiate a special deal. Quietly. Privately. Cheaply.

The minister has promised to make those findings public and then seek input from Canadians.

Although the Finance Committee report failed to call for that investigation into the actions of KPMG in the Isle of Man case, it did raise some important issues. It recommended that all tax products be registered before they are offered to clients. Registration requirements for tax products could be an effective tool in reining in the frontier attitudes of tax avoidance salespeople. Strong and timely enforcement are critical to that effectiveness.

In a written response to the committee, the Revenue Minister Diane Lebouthillier indicated some support for beefing up the rules and increasing penalties for non-compliance. She might not have much choice. She is having a hard time balancing her "tough on cheats" rhetoric with a sparse record of prosecutions and stories about secret deals negotiated with big firms like KPMG. She needs to create stricter rules around these schemes and put resources in place to make sure they are followed.

The parliamentary committee also recommended a review of the Voluntary Disclosure Program. This program was designed as an escape hatch for taxpayers who realized omissions -- or had a pang of conscience -- after they had filed. But there are increasing concerns that somehow, some people were receiving notice that they were about to be audited or realized their names may have been included in leaks of information, and then used the VDP before the audit started. A departmental review of the VDP is expected to be completed by the end of the month.

The minister has promised to make those findings public and then seek input from Canadians. We need to hold her to that promise.

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