The scheme was discovered during a joint investigation by the Canada Revenue Agency (CRA) and other government agencies.  Fraudulent personal income tax returns were prepared for 178 prison inmates during the 1999 to 2007 taxation years.  A total of $704,684 income tax refunds were claimed in the aforementioned tax returns.  Bannon also filed fraudulent GST returns under the names of 295 individuals, many of whom were prison inmates, claiming $1.1 million in refunds.  While no refunds were issued for the claims made on the personal income tax returns, $90,217 in refunds were issued for the GST refunds and cheques  totaling $58,217 were cashed.

In his position as the “tax guy” in the prison, Bannon let it be known that he could prepare and file returns for his fellow inmates.  He procured the inmates’ personal information, including name, social insurance number, date of birth and address, however, his “clients” were unaware that he was changing the addresses on the returns to post office boxes that he controlled.

Ms. Paisley willfully, and with full knowledge, submitted fabricated documents claiming two fictitious children which entitled her to Canada Child Tax Benefits (CCTB) for the extra children she claimed.  In reality Paisley is responsible for the care of four children however, the documentation submitted claimed two additional, fictitious children.  Further, she listed her marital status as “single”, when in fact she was in a common law relationship.  As a result of the fraudulent claims, Ms. Paisley received an increased amount in payments of CCTB, Universal Child Care Benefits (UCCB) and Goods and Services Tax Credit (GSTC).  The total amount of benefits and credits received by Ms. Paisley from July 2005 to September 2008 was $45,782.

The CRA reviewed Ms. Paisley’s file in 2008 and subsequently requested verification of marital status as well as information regarding the children under her care.  On September 8, 2008 Paisley submitted falsified documentation from various sources, including her doctor, her landlord, schools and a day care centre which supported the fictitious existence of two additional children. 

Ms. Paisley acted with full knowledge, as she had been an employee in the Canada Child Tax Benefits Compliance Section.  In her position with the CRA she was responsible for verification of entitlement to the CCTB benefits.  

From May 2000 to December 2008 Ms. Forde was employed as a telephone agent with the CRA. She abused her position, fabricating tax returns by accessing individual taxpayer accounts maintained by the CRA. A total of 178 personal income tax returns were prepared and filed, using the personal information of 57 taxpayers, 39 of whom were deceased. Based on these returns GST credits and provincial tax credits in the amount of $85,654 where issued and deposited into bank accounts under the control of Ms. Forde.

Despite the CRA’s monitoring mechanisms, it is clear that during the period in question one employee was able to commit fraud. Fortunately, this particular fraud was discovered and a severe penalty was imposed.

The Sheltami family’s residency status was falsely reported on their 2005, 2006 and 2007 income tax returns.  Based on the information provided in the tax returns, the family received  CCTB of $41,859, UCCB of $6,500 and GSTC of $3,726.  To quality for these benefits the taxpayer’s children must reside in Canada.  With the exception of the months of December 2005 to May 2006, the Sheltami family did not reside in Canada for the taxation years in question.  The fraudulent claim was discovered during an investigation by the Canada Revenue Agency (CRA).

It is possible to correct tax affairs through the CRA’s Voluntary Disclosure Program (VDP).  As long as the CRA has not taken action or initiated an investigation, taxpayers can file outstanding tax returns and report previously undisclosed income.  In VDP cases it is possible to avoid CRA penalties and/or prosecution.  The taxpayer may only be required to pay the taxes and interest owing.

As well as paying fines imposed, individuals or corporations charged with failing to file tax returns must file their returns and pay all taxes owing, plus interest. They may also be required to pay civil penalties as assessed by the Canada Revenue Agency.

There is an avenue available to correct tax affairs. Under the Voluntary Disclosures Program a taxpayer can file outstanding tax returns and/or report any previously undisclosed income without incurring a penalty or suffering prosecution, if the Canada Revenue Agency has not already initiated any action or investigation. Any taxes owing and interest on the outstanding taxes must be paid.

CRA and the RCMP investigation revealed that Mr. Ankomah the operator of Tax Help Centre prepared false personal income tax returns on behalf of 23 of his clients. Mr. Ankomah charged a fee and overstated charitable donation receipts from various charities on his clients’ income tax returns. During the 2003 to 2006 tax years, Ankomah issued $331,716 in fraudulent charitable donation receipts, and in doing so, helped his clients claim over $134,124 in non-refundable tax credits.

Taxpayers that claim false receipts are subject to serious consequences. Taxpayers should understand that the charity has to be registered with CRA and that the donation receipt should equal the funds that were paid to the charity. For example, if you gave $500.00 to a charity and the charity gave you a receipt for $5,000, then you are participating in a fraud in order to obtain non-refundable tax credits. The taxpayer should have known that they are participating in a fraud. The taxpayer will owe the taxes due plus penalties and interest. In addition, if convicted, the court may fine an additional 200% of the tax evaded and sentence them up to a five year jail term. If the taxpayer applies under the voluntary disclosure program before CRA commences and investigation, then penalties and prosecution will be waived.

Xenon is primarily a spider that downloads a web page, then traverses its links and downloads those as well, ad infinitum. In this respect, the spider can create huge datasets of web material. It is not clear how effective Xenon has been in generating tax leads. CRA confirmed participation in the use of the Xenon software.

Xenon is smart about link selection and context and uses a slow search paradigm. Google might hit thousands of websites in a second. With the Xenon program, it may take minutes, hours or even days to do a slow search. The slow search prevents the crawler from creating excessive traffic on a website, or drawing attention in the sites’ server logs. The spider can also be configured and trained to look at particular economic niches. This would be useful for compiling lists of businesses in industries that traditionally have high rates of non-filing. For example, weight control yields a tremendous volume of hits which in turn would provide CRA a list of companies that sell services or products.

Xenon’s extraction module interfaces with national databases containing information like street and city names. The software will use the data to automatically identify mailing addresses and other identity information present on the websites it has crawled. The program then matches in bulk to national tax records. If you are on the web including Facebook, Twitter, Linkedin or any other sites with your name listed it maybe possible, with the Xenon software, for CRA to find you.

If you are in an industry that historically has been offside with GST, CRA can use the software to locate you. For example, some physiotherapists charge GST while others do not (excluding billings to OHIP). All CRA has to do is use the spider program to develop a database of physiotherapists across the country and compare the results to GST and tax filings. CRA’s lead will come right from the physiotherapists own website. In other words, they will use your own website against you. It requires nothing more for them to use certain key words to compile a list of individual and companies that may be offside.

I am anticipating with newer versions of Spider, CRA will have the ability to easily find non-filers wherever they are. If CRA finds an individual or a company that has not filed, the penalties can be excessive. Why wait until CRA finds you first. By applying under the voluntary disclosure program before a CRA investigation begins, then there will be no penalties or prosecution. The taxpayer would only be responsible for the income taxes and the interest.

The CRA investigation determined that the company used different methods to reduce taxes, including corporate officers claiming personal expenditures as business expenses. Scherba claimed costs relating to renovating his home, landscaping services, furniture and electronic purchases, golf membership fees, sporting goods and family vacations. The son- in law of Scherba claimed boat repairs, towing, dockage fees, flooring costs and electrical work for the home, insurance, clothing and sporting goods as expenses charged to the company. When a shareholder and their families claim personal expenses as business expenses in a company, CRA will add back these expenses and will increase the corporations taxable income. They will also add back to the shareholder the benefit derived by the company paying for their personal expenses. For example, if a corporation paid $100,000 in personal expenses and claimed them as a business expense, CRA on an audit would add the $100,000 to the taxable income of the corporation and a another $100,000 to the taxable income of the shareholder. Therefore, the corporation and the shareholder will be taxed on a total of $200,000 plus penalties and interest. It is very costly to claim personal expenses in a corporation.

If Mr. Scherba and the 952768 Ontario Limited applied under the voluntary disclosure before a CRA investigation began, then they would be exempt from penalty or prosecution. They would only be liable for the income taxes and the interest.

CRA’s investigation revealed that Mr. Burse did not report his income earned from the delivery of newspapers. During the course of the audit, Mr. Burse did not disclose to the auditor a bank account where the majority of his income was being deposited. The CRA investigation revealed that $71,737 was not reported in 2003 and $70,715 was not reported in 2004.

Mr. Burse was fined $13,942 which represents 50% of the federal tax evaded and was ordered to pay within 30 months. If Mr. Burse filed a voluntary disclosure before he was audited, there would have been no penalties or prosecution. He would only have to pay taxes and interest.

• who have not filed their personal tax return, trust return or corporate tax return or who have failed to report income. This includes foreign pension income that was never reported.
• who have not filed GST returns. Input tax credits may be claimed after four years for those who did not remit source deductions for employees.
• who have filed, but whose return includes mistakes or inaccuracies, for example, claiming too much in expenses.
• who have made fraudulent claims.

Other situations that might apply include people not reportinig income earned off-shore or from a cash basis. In situations like these, the chartered accountant may use a “No-Name” disclosure which allows the taxpayer to keep their identity unknown to the Canada Revenue Agency for 90 days without prosecution while the information is being submitted to the government. The taxpayer can correct any mistakes and submit a complete disclosure without interference from the government. After 90 days, the file is considered closed.

Overall, the system works well because it benefits everyone and it is not adversarial. There is a 10-year limit on eligibility for the Voluntary Disclosure program but the key is that the taxpayer must apply for amnesty before the government starts investigating for tax irregularities.