Combatting carousel schemes

The prevention of aggressive tax schemes is a priority for the Canada Revenue Agency

Over the past several years, the Government of Canada has committed to combatting aggressive Income Tax and Goods and Services Tax/Harmonized Sales Tax (GST/HST) arrangements. While most Canadians are compliant and pay their taxes, there are individuals and groups that use aggressive tax schemes to obtain unwarranted GST/HST refunds. These arrangements are not unique to Canada, they undermine the tax system, and are continuously evolving.

When tax planning reduces taxes or confers a benefit in a way that is inconsistent with the overall spirit of the Income and Excise Tax Acts, the arrangements are referred to as “tax avoidance.” The Canada Revenue Agency's (CRA) interpretation of the term "tax avoidance" includes all unacceptable and aggressive tax planning.

The scope of non-compliance in these aggressive arrangements covers a spectrum from deliberate misrepresentation to elaborately coordinated avoidance and evasion schemes that erode the tax system and span international jurisdictions. The CRA is committed to combatting all such instances using the appropriate examination or investigation tools. These tools include our civil audit powers to review and validate reported transactions, or our criminal investigative powers that address activity which falls into the category of criminal behaviour. When a business falsifies records and claims unwarranted refunds or rebates in order to intentionally avoid complying with Canada’s tax laws, it may be considered criminal tax evasion.

The CRA continuously works to identify and address these aggressive arrangements, and other threats to the revenue base, whether they’re carried out domestically or involve international elements.

GST/HST schemes in Canada

There are different aggressive schemes within Canada’s GST/HST system, but the one that we see often is referred to as a “carousel” scheme. The name “carousel” comes from the circular manner in which the transactions flow through a fabricated supply chain. This scheme involves a group of entities who work together to sell goods to each other, or, at times, provide the appearance of selling goods. In this supply chain, at least one registrant, known as the “missing trader”, charges GST/HST but does not remit it to the government. Most carousel schemes also have a “zero-rater” at the heart of the scheme. A zero-rater is an entity whose business activities change, or appear to change, the taxable status of the supply by either claiming to sell it offshore, or by changing the nature of the commodity. As a result, the zero-rater does not have to charge and remit GST/HST to the government but can still claim an input tax credit amount. This ability to claim GST/HST credits, combined with the effect of the missing trader’s failure to remit the GST/HST, can contribute to significant tax leakage.

Carousel schemes are continuously evolving and often involve complex networks of multiple entities. This type of scheme can be very difficult to detect as the books and records are often manufactured to look real and can involve immense paper trails of invoices transiting through, at times, hundreds of entities.

When these types of threats or suspicious activities are identified, the CRA has various programs and measures to address them. From early detection and prevention, to audit and criminal compliance measures, the CRA is continuously evolving its methods to ensure it has the right tools to tackle this aggressive non-compliance. 

Despite the challenges posed by these aggressive schemes, there are currently more than 70 files in different stages of litigation before the courts, across a variety of industries where GST/HST supplies are made.

A multifaceted approach

The CRA has made significant investments in the detection and prevention of these aggressive GST/HST arrangements by expanding business intelligence and data analytics tools that identify and address wilful non-compliance. We have enhanced our compliance activities of registrants through reviews, examinations, audits and criminal investigations where appropriate. The ability to respond to threats in real time helps the CRA prevent suspicious entities from infiltrating our filing population, while ensuring everyone meets their filing obligations.

As these schemes are often multifaceted, we are engaged in numerous collaborations with our tax administration partners. Some of these activities include recurring engagements with our international partners to identify emerging risks and best practices, consultation with the Department of Finance, and a close partnership with the Department of Justice to provide support through the audit and litigation process.

To support all Canadians in meeting their tax obligations, we provide guidance on accurate self-assessment and reporting through information available on Canada.ca.

Stopping unwarranted refunds before they happen

The CRA reviews and processes returns as they enter the system and pays out over $50 billion in low-risk GST/HST refunds and rebates each year on approximately 2.5 million credit returns and rebate claims, for 3.5 million GST/HST registrants in Canada. The majority of registrants are compliant or working hard to be compliant, and the CRA plays an important role in ensuring the payment of refunds to these registrants. The CRA’s programs also play an important role in preventing the payment of unwarranted refunds, identifying suspicious behaviour, and referring high-risk returns for further review and examination.

The CRA has dedicated programs that identify, deregister and safeguard GST/HST accounts that are registered as a result of identity theft, as well as programs that verify commercial activity before the initial GST/HST return is filed. This allows us to close suspicious accounts before a return is filed and an unwarranted refund is paid. These programs are based on enhanced risk assessment tools designed to identify and prevent suspicious entities from infiltrating our filing population.

Finding schemes through advanced tools

The CRA strives to prevent payment of unwarranted refunds while promptly issuing eligible GST/HST refunds.

In 2021, the CRA received funding from the Government of Canada to increase its investments in relationship matching and machine-learning tools. We aim to prevent and address carousel schemes as early as possible in our filing population. These ongoing enhancements allow the CRA to identify suspicious transactions and uncover patterns of behaviour earlier and more accurately.

Tackling schemes when they’re identified

Complementary to the CRA’s increased investments in data tools, the focus of our programs is to identify suspicious patterns as early as possible and prevent wilfully non-compliant entities from infiltrating our systems.

The CRA has audit programs that focus primarily on schemes based on suspicious transactions. Funding received from the Government of Canada in 2021, allowed the CRA to staff additional resources dedicated to combatting GST/HST schemes. As part of the approach for this program, a variety of tools are used to conduct audits to verify the transactions and activities of entities that may be participating in a scheme.

The purpose of an audit performed by the CRA is to determine the correct civil tax liability. Throughout the audit process, the CRA uses the inspection and requirement powers of the Excise Tax Act for the purpose of establishing a correct assessment, including the application of civil penalties.

Each year, the CRA identifies approximately $1.5 billion in unwarranted GST/HST refunds and rebates. Since 2017-2018, more than $1.1 billion has been identified through audits that specifically target carousel schemes and networks.

When there is suspicion of criminal activity, referrals are made to the Criminal Investigations Program, so that these cases can also be investigated and prosecuted through a criminal law framework. While both civil audits and criminal investigations will tackle carousel schemes, they are two distinct processes.

Pursuing criminal investigations when appropriate

The CRA’s Criminal Investigations Program (CIP) investigates significant cases of tax evasion, tax fraud, and other serious violations of the tax laws, and where appropriate, refers cases to the Public Prosecution Service of Canada (PPSC).

Various sources of information may lead the CRA’s CIP to initiate a criminal investigation, such as internal referrals from various audit programs. Once a referral is received, it is evaluated to determine if a criminal investigation is viable and appropriate given the totality of all the circumstances.

The CRA focuses on investigations that will have the greatest impact on compliance, and these include the investigation of GST/HST schemes. A criminal investigation involves many steps such as gathering evidence, interviewing taxpayers and witnesses, executing search warrants, and analyzing evidence.

After a case has been referred to the PPSC, they will independently review the evidence and decide whether to initiate and conduct a prosecution on behalf of the Federal Crown.

An evolving landscape

Carousel and missing trader schemes are a global phenomenon that has been prevalent in other value-added tax jurisdictions for a number of years. More recently, the detection of these schemes in Canada has improved. To ensure we are well positioned and responsive to these constantly evolving schemes, we continue our engagement with international partners to share data and intelligence, as well as information and best practices. The CRA will continue to make investments in its processes for early detection and develop and refine our data analytics and risk assessment tools to respond to threats in real time as they emerge. This comprehensive approach allows us to learn from our successes and challenges, and adjust our strategy as needed.

With this deliberate focus on wilful non-compliance, the CRA is able to support a mandate that ensures the tax system is fair for everyone, and those who undermine that principle are held accountable.