Again, the CBC has ticked me off.[1] They have been harping away at the KPMG/Isle of Man tax structure story, and the NDP have been making a big a deal about it in question period, but as I have tried to tell them when they interviewed me initially, the CRA offered some very rich people a very good deal for very good reasons.

First of all, rich people have the money to fight hard and can drag the government through the tax court for years. The CRA and Dept. of Justice do not have the horses for this kind of fight. They do, but it means ignoring a lot of other files.

Secondly, and more importantly, the KMPG structure is not the worst thing out there and the odds of securing a conviction or even a penalty against KPMG’s Isle of Man clients is minimal.

The test for penalties (and lets not even go into tax evasion, just penalties!) is set out in a 2013 case, Torres v HMQ[2], which the test for willful blindness amounting to gross negligence requires finding “a need or a suspicion for an inquiry”, of which the following are the kind of “flashing red lights” that you need to see:

a) The magnitude of the advantage of omission (In this case pretty big, not that big for rich people who previously were involved in other tax-advantaged structures set up by KPMG);

b) the “blatantness of the false statement” and how readily detectable it is (The structure was not blatantly offside when it was set up, and KPMG’s clients were told it worked by people at an organization of the highest calibre who had found them perfectly legal tax loopholes previously);

c) The lack of acknowledgment by the tax preparer who prepared the return in the return itself (Not the case here at all, KPMG signed the “professional preparer” box on all of the returns, taking full responsibility for the contents of the returns);

d) Unusual requests made by the tax preparer (Not the case here at all, as the Isle of Man structure was not very complicated compared with a lot of other tax plans KPMG clients had likely seen);

e) The tax preparer being previously unknown to the taxpayer (Not the case here at all);

f) Incomprehensible explanations by the tax preparer (Not the case here at all);

g) Whether others engaged the tax preparer or warned against doing so, or the taxpayer himself or herself expresses concern about telling others (Not the case here at all); and lastly,

h) the taxpayer makes no inquiry of the tax preparer to understand the return, not makes any inquiry of a third party, nor the CRA itself (Not the case here at all as the KPMG clients had the structure reviewed by “independent counsel”).

So yeah, the CBC and NDP can howl all they want, but if they force the government through political pressure to go after KPMG’s Isle of Man clients all they are going to get is years of “scorched earth” litigation followed by humiliation and a whopping bill from the taxpayers’ very expensive tax lawyers. Because remember, this is Canada; if you go after someone and lose, you have to pay their lawyer bill. Basically, going after KPMG’s clients is a big waste of time and taxpayer money. However, going after KPMG for “preparer penalties” well, that is a completely different thing!

by Jonathan N. Garbutt, Barrister & Solicitor

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This article is not intended as legal or tax advice and should be considered to be provided on a “For-your-information” basis only.


[2] Torres v Her Majesty the Queen, 2013 TCC 380