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Tax Avoidance: Canada-Barbados Tax Deal Loopholes Revealed

Tax Avoidance: Canada-Barbados Tax Deal Loopholes Revealed

 

An exclusive CBC News hidden-camera investigation into the world of offshore banking found professionals in Canada and Barbados willing to help hide business profits in Barbados by exploiting loopholes in a long-standing tax saving arrangement between the two countries.

“My advice to [the Canada Revenue Agency] would be, every time you see a Barbados [company] in the structure, investigate it,” said an individual who used to run one of Canada’s largest offshore companies and also spent time in prison.

For decades, Canadian companies have flocked to Barbados with their cash in order to legally avoid paying Canadian taxes. If a Canadian company wants to expand its business outside of Canada, it can create a subsidiary in Barbados where it can park its international profits. This way, it legally doesn’t have to pay Canadian taxes on those profits.

More than 1,000 Canadian companies, including giants like Petro-Canada and Loblaws, have legitimate offices there. Canadian banks are on almost every corner to serve all the Canadian companies.

As part of the joint investigation with Enquête, the CBC’s French-language investigative program, CBC News hired a private investigator, who is also a restaurant and bar owner in Toronto, to see if he could create an offshore company in order to test the system and to see if his Canadian restaurant profits could be shifted to Barbados.

That way, instead of being taxed at 30 per cent in Canada, he would pay the rate in Barbados — 2.5 percent.

“Unless CRA's got the money to come down and check us out, you'll get away with it. And that's the reality,” said the insider.

In order for that to be legal, his business must have legitimate international sales, which it doesn’t.

The CBC’s undercover businessman met Allan Madan, an accountant in Mississauga, Ont., who offers tax tips online — including the top 20 ways to beat the taxman — and other international tax advice.

In a meeting recorded with hidden cameras, Madan suggested the businessman fly his chef to Barbados to invent recipes there.

“You'd have to have some physical presence on the ground, you know, because who's developing these recipes? Do you know what I mean? Is there a chef or does the chef fly down there and do the work there?”

He said the man would also need an offshore office, one that’s managed and controlled in Barbados by nominee directors.

These directors for hire often know little or nothing about the company.

“I'm not saying we're going to shift all the income, that may not be possible, but maybe, you know, 25 per cent of it,” Madan said.

“So you've done this before, like you've got experience doing this?” the businessman asked.

“Yeah, absolutely, so you don't have to worry,” Madan said.

Madan then referred CBC’s undercover businessman to Andrea Mullin Henry, a Canadian-born Barbadian who also runs a law practice called Crane Chambers in Barbados. The businessman travelled there to meet her.

Mullin Henry, who is still a member of the Ontario bar, also specializes in creating and managing offshore companies in order to protect “hard won assets.”

The undercover businessman told Mullin Henry about the plan to bring down a chef once a year and about possibly having access to a kitchen.

“Yeah, that would work,” Mullin Henry said. “The more that you can show is actually happening here, the safer you are if CRA comes to audit.”

Mullin Henry said the businessman would need the appearance of a presence in Barbados, including an office with a phone and workers.

“You just want to show that there is some type of activity going on there in Barbados. I think that would be a good compromise. You're bringing your corporate chef, they work with the local chef, and it doesn't have to be for that long period, and all of the manuals and the procedures are seen to come from the Barbados office, even if they're actually manufactured in Canada.”

 

‘Creating a façade’

After reviewing the hidden camera footage, the former Canadian offshore banker said, “We're going to have a pretense of developing your recipes down here. We're going to have the pretense of training your staff down here.… We're creating a facade. A bit of theatre for CRA to see that there's some action.”

Mullin Henry declined to be interviewed by CBC News, but Madan defended his advice.

“The work being done in an offshore jurisdiction must actually be done there. And that’s precisely what I indicated. That if there was any recipes developed, if there were chefs, if any testing was being done, that the work be physically done in Barbados,” he said.

“We were discussing high-level ideas and which we could possibly use in offshore structure to legitimately minimize income tax. Until a proper Barbados lawyer is brought in, like I mentioned, and until we put pen to paper, it’s difficult to provide a precise answer.”

In a followup letter to the CBC, Madan said his proposal was a “valid tax saving strategy proven in the court of law.”

But Laval University professor André Lareau, who teaches tax law, said to create a foreign entity “requires employees, requires producing something and a real business.”

Instead, what’s being created is “an illusion,” he said, an attempt to show the tax agency that a foreign business has been created. 

Lareau said there’s nothing illegitimate about money in a tax haven, though you have to know what the source of that money is, and you have to declare the income from it.

But he said someone like Madan could be viewed as an accomplice to someone who’s not following the law.

 

‘Magic curtain’ approach

The undercover businessman also met with Canadian tax lawyer Jonathan Garbutt, who immediately shut down Madan’s ideas.

But instead, in a meeting recorded with hidden cameras, he proposed the businessman use his profits to buy an offshore life insurance policy, a structure he called the “magic curtain.”

“The magic curtain is something that exists in Canada that works, which is a life insurance policy,” Garbutt said.

The plan involved a series of transactions including a loan, bonds, offshore trust accounts and ultimately using business profits to buy an offshore life insurance policy, which isn’t taxed in Canada. And all of this would take place in Barbados.

The structure would ultimately allow the undercover businessman to avoid paying taxes on his Canadian restaurant profits.

In Canada there is nothing that makes a structure like this illegal, but there are provisions that allow the tax authorities to challenge a structure if they feel it violates the spirit of Canadian tax law.

Laval professor Lareau questioned whether this plan is really what the legislature intended when it created the law.

“I think that wouldn't pass the test of the spirit of the law,” he said.

Lareau said the Canada Revenue Agency could disallow the approach, but that the agency would have the burden of proving that it constituted an abusive arrangement.

“To me, it's clearly an abuse. But the agency would have to succeed in convincing a court that it's an abuse.”

In an interview with CBC, Garbutt said he had done nothing wrong.

“I love these structures because they’re front-door tax planning. You walk in through the front door and tell the CRA what they’re doing and they can pound sand if they try to go after us.”

In a meeting filmed with hidden cameras, Garbutt said his role as a tax lawyer is to be the “most devious underhanded son of a bitch in the room and that’s what you’re paying me for.”

He later backtracked a bit, saying that he regretted saying “underhanded,” but stressed that his job as a tax lawyer is to ensure his clients don’t pay one penny more than they are legally required to.

“Like I said, they invent better mousetraps, we invent better mice. That’s the nature of the game.”


Source: CBC News

Posted: October 10, 2013 at 11:47 AM
By: Gordon Galloway
Comments Disabled | Categories: Government & Tax Issues
Minister Shea Highlights New Initiatives to Crack Down on International Tax Evasion

Minister Shea Highlights New Initiatives to Crack Down on International Tax Evasion

 

Ottawa, Ontario, April 9, 2013... The Honourable Gail Shea, Minister of National Revenue, today highlighted important new initiatives introduced by the Harper Government in Economic Action Plan 2013 to strengthen the capacity of the Canada Revenue Agency (CRA) to crack down on international tax avoidance and evasion.

“Our Government has long recognized that international tax evasion is a serious problem,” said Minister Shea. “As announced in Economic Action Plan 2013, our Government is taking strong action to tackle tax evasion. We are committed to cracking down on individuals who avoid paying their fair share of taxes.”

Economic Action Plan 2013 proposes the following measures to combat International Tax Evasion and close tax loopholes to ensure tax fairness for all Canadians:

  • Launching a new Stop International Tax Evasion Program that will allow the CRA to pay individuals with knowledge of major international tax non-compliance a percentage of tax collected as a result of the information provided;
  • Requiring financial institutions and others who currently report information on international electronic funds transfers greater than $10,000 to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to also report those transactions to the CRA;
  • Streamlining the process for obtaining information on third parties in the course of conducting an audit to speed up the process and allow the CRA faster access to information on unnamed individuals for the purposes of civil actions; and
  • Introducing new requirements for Canadian taxpayers with foreign income or properties to report more information, and extending the amount of time the CRA has to reassess those who have not properly reported this income.

The Minister of Revenue has also publicly called upon the International Consortium of Investigative Journalists to provide the CRA with the information they currently hold on individuals with income or property held offshore, including 450 Canadians. This request was supported by a written request from the CRA to the International Consortium of Investigative Journalists as well as to the Canadian Broadcasting Corporation (CBC), which underscored the public interest in confidential disclosure of the information to the Agency. In addition, the Agency is working with the United States and its international partners in exploring other avenues of addressing international tax evasion.

“These new measures will provide the CRA with additional tools to combat tax cheats,” said Minister Shea. “Our Government is serious about cracking down on those who attempt to cheat the system. Since 2006, our Government has introduced over 75 measures to improve the integrity of the tax system for the benefit of all Canadians.”


Source: Canada Revenue Agency 2013

Posted: April 5, 2013 at 12:07 PM
By: Gordon Galloway
Comments Disabled | Categories: Government & Tax Issues
Interest Rates for the Second Calendar Quarter (2013)

Interest Rates for the Second Calendar Quarter

 

Ottawa, Ontario, March 15, 2013… The Canada Revenue Agency (CRA) today announced the prescribed annual interest rates that will apply to any amounts owed to the CRA and to any amounts the CRA owes to individuals and corporations. These rates are calculated quarterly in accordance with applicable legislation and will be in effect from April 1, 2013 to June 30, 2013. The rates below remain unchanged from the previous quarter.

Income tax

  • The interest rate charged on overdue taxes, Canada Pension Plan contributions, and Employment Insurance premiums will be 5%.
  • The interest rate to be paid on corporate taxpayer overpayments will be 1%.
  • The interest rate to be paid on non-corporate taxpayer overpayments will be 3%.
  • The interest rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans will be 1%.

Other taxes, duties, or charges

The interest rates on overdue and overpaid remittances are as follows:

Tax and DutyOverdue remittances
 Corporate taxpayersNon corporate taxpayers
Goods and Services Tax (GST) 5% 1% 3%
Harmonized Sales Tax 5% 1% 3%
Air Travellers Security Charge 5% 1% 3%
Excise Tax (non GST) 5% 1% 3%
Excise Duty (except Brewer Licensees) 5% 1% 3%
Excise Duty (Brewer Licensees) 3% N/A N/A
Softwood Lumber Products Export Charge 5% 1% 3%

For information on the prescribed interest rates of previous calendar quarters, go to www.cra.gc.ca/interestrates.


Source: Canada Revenue Agency, Mar 2013

Posted: March 29, 2013 at 11:53 AM
By: Gordon Galloway
Comments Disabled | Categories: Government & Tax Issues
How to Uncover Employee Fraud

How to Uncover Employee Fraud

 

Small business owners lose hundreds of thousands of dollars each year due to embezzlement and employee fraud. SMB accounting adviser Esther Friedberg Karp shows how to spot the danger signs and avoid being taken to the cleaners.

A former bookkeeper of a Sussex N.B. corner drugstore lands in jail for stealing $250,000 from her employer. Another bookkeeper for a rural group that brought electricity to Alberta farms pleaded guilty to paying herself 20 times her normal wages and pilfering nearly $100,000 from the co-op’s coffers. In Saskatoon, an employee with access to a company’s direct-deposit payroll system earns 18 months in jail for overpaying herself 48 times within a span of four years, bilking her company of no less than $334,000.

It doesn’t matter how big or small your business is, lax security and lazy accounting practices are an invitation for insider embezzlement, according to Ester Friedberger Karp, a Toronto-based professional small and medium-sized business adviser. Karp is president and owner of CompuBooks, a business consulting, computer training and business process re-engineering firm.

“There are countless small businesses across the country that have gone under or at least have been driven to the brink because they have blindly entrusted the all aspects of their cash flow and accounting to a single person,” Karp told ITBusiness.ca.

Although business can also fall prey to outside fraudsters, Karp said, it is not uncommon that perpetrators turn out to be family members involved in the business or employees that had been given nearly “unchecked” access to the company books and cheques.

Karp said SMB operators, even if they are frequently hamstrung by tight budgets and staff shortages, can avoid being fraud victims by boning up on the basics of bookkeeping, implementing practical security procedures and learning how to use the accounting software. “One of the big mistakes of business owners is to install the accounting software, forget about it and handover the whole responsibility of the company books to another person.”

Many of today’s accounting software products, Karp said, have security features that business owners can easily activate to help in preventing or detecting possible fraud.

Common types of fraud

There are many variations of ways that unscrupulous employees defraud their employers. Here are some of the more common types:

  • Fake vendor – Perpetrator creates a fictitious vendor (often with a name that resembles one already doing business with the company), open a bank account under that name and pay bogus bills to that fake account.
  • Ghost employees – An employee with access to company payroll establishes an account for a non-existent worker. The employee then proceeds to pay this “ghost employee” a regular salary and perhaps even some bonuses. This could carryon un-detected for years in larger firms.
  • Salary padding – A company accountant or bookkeeper can alter payroll so that they receive higher salaries or bonuses. This can remain unnoticed for quite some time as long in outfits where the person cutting the cheque and doing the audits are one.
  • Creating a shadow company – An employee can create a bank account with a business name similar to your company’s name, for example if your business is InterLink Service the bogus company can be InterLink Service Inc. The perpetrator just adds Inc. to the “pay to” field of cheques received by your business and deposits the cheque to bogus company’s account.

Bookkeeping security and accounting software

Karp of CompuBooks, said that samples above and many other types of fraud can be avoided by implementing simple and practical security measures.

“I realize that most SMB owners already have a lot on their plate. But they need keep a keen eye on their financials because cash flow makes or breaks a business,” she said.

Karp said SMB owners should:

  • Learn the basics – Apply for courses in basic bookkeeping so that you have an idea of what the figures in your ledgers mean.
  • Know who you’re hiring – Conduct due diligence on checking the background of people you hire especially those who will be handling money, cheques, accounts payable and accounts receivable.
  • Don’t delegate everything – Don’t just purchase an accounting software and then hand over everything to your bookkeeper, but institute checks and balances. For instance, the person writing out the cheques shouldn’t be the same person conducting the auditing or reconciliation. Karp said a large number of frauds go undetected because only one person handles disbursement and auditing.
  • Make sure cheques are locked up – Don’t leave cheques lying around. If possible have them locked up in a drawer near you and make sure you are aware what’s being paid.
  • Audit regularly – If your business does an audit only once a year, then you may be in trouble. Accounting systems and software should be updated with current data regularly and in shorter intervals (daily if possible) to ensure that data is fresh. This way discrepancies and possible fraud could be detected earlier.
  • Turn on security features – These days even the most rudimentary accounting software has some form of security features. According to Karp these features should at least include a way of telling: what changes were made, who made the changes and when. Other systems can flag discrepancies. “These way you have an electronic audit trail of what was going and who may be responsible for any questionable entries.”

There’s one dead giveaway for fraud, Karp said, that may not need any technology to detect. When a person handling the business’s finances or accounts repeatedly refuses to take any vacation, it could be a sign that something is afoot.

“Of course it’s not always the case. But if could be that that person is trying to prevent others from spotting accounting discrepancies by making sure he or she only sees the books up close,” Karp said.


Source: Nestor Arellano, ITBusiness.ca 2010

Posted: March 15, 2013 at 11:18 AM
By: Gordon Galloway
Comments Disabled | Categories: Bookkeeping Best Practices Government & Tax Issues
Fraud Prevention Month

Fraud Prevention 

Ottawa, Ontario, March 6, 2013… March is Fraud Prevention Month across Canada and around the world, and the Canada Revenue Agency (CRA) is reminding Canadians to protect themselves against fraud.

Fraud comes in many different forms and it is important that Canadians are aware of fraudulent schemes out there to best protect themselves against fraud. Remember that the CRA will not send information about your personal refunds or benefit payments by email, will not ask for personal information by email, and will not leave any personal information on an answering machine. Canadians who receive an email or a phone call of this nature should not respond to it and should call the CRA right away.

If you think you have been a victim of fraud, the CRA urges you to notify your financial institution and the local police.

Fraud Prevention Month also offers an opportunity for the CRA to remind Canadians that some individuals are selling tax scams that have serious legal consequences. No matter how tempting it might be to believe that you don’t have to pay any taxes, Canadians are urged to remember the old adage: “If it sounds too good to be true, it probably is.”

While Canadians do their part to protect themselves against fraud, the CRA will continue to provide the highest level of security to protect Canadian taxpayers’ information and to build on our proud tradition of employee integrity and professionalism.

The Harper Government remains focused on four priorities, as outlined by the Prime Minister, that Canadians care most about: their families, the safety of our streets and communities, their pride in being a citizen of this country, and their personal financial security. Ensuring that Canadians are well informed to prevent fraud supports Canadian families and their personal financial security.

For more information on how to protect yourself against fraud, please visit http://www.cra-arc.gc.ca/fraudprevention.

FRAUD: Recognize It. Report It. Stop It.


Source: Canada Revenue Agency

Posted: March 8, 2013 at 08:36 PM
By: Gordon Galloway
Comments Disabled | Categories: Government & Tax Issues

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