Isle of Man tax dodge could violate Income Tax Act, KPMG insiders cautioned

Sales agents and tax executives inside KPMG, one of the largest accounting firms operating in Canada, debated the possibility that its Isle of Man tax dodge could violate the Canadian Income Tax Act, a series of emails and reports from within the firm reveal.

KPMG, known as one of the Big Four accounting firms, ran the controversial tax avoidance scheme for high net worth clients for more than a decade before it was eventually detected by auditors for the Canada Revenue Agency in 2012.

The CRA has argued in court documents that the scheme, which involved the creation of shell companies based on the Isle of Man, was "intended to deceive" authorities and was a "sham."

KPMG handed over hundreds of pages of confidential, internal documents to the House of Commons finance committee last month as part of a parliamentary probe into the scheme.

Despite the concerns raised by unnamed tax accountants at KPMG, the offshore tax scheme was eventually given the green light and was marketed across the country to wealthy Canadians as a way to pay "no tax" on investment income and maintain "confidentiality."

"As is the case with all our tax plans, it fully complied with all applicable tax laws," Greg Wiebe, a senior tax partner and former global head of tax for KPMG, told the finance committee in May.

KPMG execs raise concerns over scheme

The committee is also looking into why federal authorities offered an amnesty without penalty last year to the wealthy KPMG clients caught using the offshore tax dodge. Details of the offer, which the CRA demanded be kept secret, were leaked to CBC News in a brown envelope.

Perhaps one of the most significant documents to emerge from the stack of confidential KPMG materials is a simple, half-page template titled "Declaration of Gift." In the declaration, clients with more than $5 million vow to give away their money "absolutely and irrevocably" to a company on the Isle of Man.

But did they really give away their money or did they just pretend to do so on paper?

The CRA alleges there never was a real gift and that the plan all along was to bring the millions of dollars hidden offshore back into Canada, without paying any taxes on it.

It appears that some KPMG executives were concerned about that possibility, too.

One executive who raised a red flag, whose name has been removed from the submitted documents, appears to be member of KPMG's anti-tax avoidance group, which was reviewing the Isle of Man tax scheme.

The executive writes in a January 2001 email, that a "majority" of the members of the group were concerned federal tax authorities might find out about undeclared money coming back to Canada. In that event, it would be "plausible" for the CRA to argue that the Income Tax Act was "violated," the email says.

• KPMG template for the 'Declaration of Gift' for clients
• Report from KPMG internal group reviewing the Isle of Man tax scheme
• KPMG tax 'sham' used by at least 25 wealthy Canadians, document says

Still, the KPMG executive writes, the revenue agency would not be able to challenge the tax plan without proof that the money had made its way back into Canada.  

"It would be difficult for [the CRA] to criticize the transactions unless they have evidence of the moneys (sic) coming back," the email says.

The email also says that even if the CRA did eventually find out, "many taxation years could be statute barred." In other words, the email suggests, too much time might have passed for the agency to do anything about it.

Key names deleted from documents

Despite the volume of materials provided by KPMG to the committee, a close read reveals that significant details have been removed.

The KPMG documents omit key names of individuals previously identified as being involved in the Isle of Man scheme, including Serge Bilodeau, a prominent senior associate at KPMG in Montreal.

"I don't know what you're referring to," Bilodeau told CBC News recently when asked about his involvement. "I'm sorry, I don't want to talk about it."

• KPMG executives may be summoned to Ottawa in offshore probe
• KPMG official tells MPs firm no longer in tax-shelter business

KPMG documents filed in court — but not provided to the finance committee — show Bilodeau had signed up two multimillionaire clients in the first year of the Isle of Man scheme alone and that KPMG labelled his work a "success story."

There is also no mention of Mark Meredith, a KPMG lawyer said to have been involved from the beginning in helping to create the scheme, and Derrold Norgaard, the KPMG tax partner who helped set up Isle of Man shell companies for the prominent Cooper family in Victoria.

Both Meredith and Norgaard are named in court documents as being involved in the KPMG scheme.

• COURT DOCUMENT | ​Memo from KPMG national tax partner Paul Hickey to employees (Bilodeau referenced)
• COURT DOCUMENT | CRA response to Richard Cooper's Notice of Appeal (Meredith and Norgaard referenced)

In a letter to the finance committee, KPMG lawyer Mahmud Jamal defended the decision to censor the documents to protect the privacy of those not involved in developing and marketing the Isle of Man tax scheme.

In a statement, KPMG referred CBC News back to Jamal's comments, reiterating that "the firm as a whole, rather than individual partners, was responsible for the development and marketing of the OCS (offshore company structure) plan."

Wayne Easter, the chair of the finance committee, says the committee has yet to decide whether KPMG will be ordered to provide the documents without the deletions.

"We've made no call on whether we should say they shouldn't be censored. We just accepted them as is for the moment," Easter told CBC News.

A close read of the KPMG documents provided to the finance committee reveals there might be many other relevant Isle of Man records still tucked away in the accounting firm's filing cabinets.

One document from Aug. 31,1999, refers to an undisclosed KPMG internal memo written on June 23, 1999. Another piece of correspondence from Feb. 2, 2000, appears to be responding to a Jan. 17, 2000, memo, which was also not provided to the committee.

Various tax experts will be testifying before the committee on Tuesday as it continues its probe into KPMG's Isle of Man file.

Read the KPMG documents:

• PACKAGE 1 | Draft letters for KPMG clients, summary of KPMG's offshore company structure, letters of legal opinion from law firm Simcocks and Fraser Milner Casgrain   
• PACKAGE 2 | Example of 'Letter of Wishes,' proposed script for KPMG advisers when meeting with clients, analysis of offshore company structure
• PACKAGE 3 | 'Offshore Company Update,' internal emails and memos, KPMG privacy policy

Send confidential tips on this story to investigations@cbc.ca or call Harvey Cashore at 416-526-4704