A “missing trader scheme” or “carousel scheme” is a fake supply chain created by a group of GST/HST registrants who work in collusion by repeatedly reselling goods to each other. At one point during the purchase and sale of these goods, at least one of the registrants collects GST/HST but does not remit it to the government. This registrant is the “missing trader” who gives the scheme its name. The following is a step-by-step explanation of missing trader/carousel schemes adapted from the CRA’s 2016-2017 Departmental Results Report:
First, a GST/HST registrant (Company X) purports to import goods, usually operating within a supply chain; no GST/HST is paid;
The goods do not exist, but Company X claims them to be intangible (film rights) or intangible (computer chips);
Company X creates fictitious invoices and bank statements to give the appearance that transactions are occurring and that it is charging GST/HST;
Company X disappears without remitting the GST/HST collected from the phoney transactions (the “Missing Trader”);
The last company in the supply chain claims to export the goods to offshore companies at 0% GST/HST;
Each company in the supply chain network files requests for GST/HST refunds (often for millions of dollars) for taxes “paid” to Company X; and
Stages (1)-(6) can repeat indefinitely.
These schemes are prevalent in Canada, and the CRA continues to improve its processes to detect and prevent GST/HST refund arrangements that bear a resemblance to them.
Carousel Schemes and Precious Metals
The CRA has identified the precious and scrap metals industries as a particularly high-risk target for missing trader/carousel schemes. Taxpayers involved in this industry may participate in these schemes by buying pure gold bullion from commercial suppliers (which is not subject to GST/HST) or by buying scrap metal containing gold (which is subject to GST/HST) and from which pure gold bullion can be refined.
Taxpayers who buy pure gold bullion from commercial suppliers utilize missing trader/carousel schemes by melting the bullion down and adding low levels of impurity. After impurities are added, the formerly pure gold can be sold as scrap metal. Once the scrap metal is sold, the seller will charge, but not remit, and often abscond with, GST/HST. The purchaser of the scrap metal will then claim a refund (such as Input Tax Credits) on the GST/HST paid to the seller.
The purchaser of the scrap metal will then melt the scrap metal down and refine and reshape it back into pure gold bullion. Other bullion purchasers down the supply chain will then purchase the bullion, and the cycle can continue indefinitely.
Carousel Schemes and CRA Issues
It is not uncommon for taxpayers involved in missing trader/carousel schemes within the precious and scrap metals industries to receive reassessments for tens of millions of dollars in unremitted GST/HST and/or disallowed Input Tax Credits. In 2011, for example, Metaux Kitco, one of Quebec’s most prominent gold-trading companies, was reassessed for $85 million in disallowed Input Tax Credits, and was alleged to be one of approximately 125 companies involved in the scheme alleged to defraud the Canadian government of approximately $350 million (see Cody Kessler, Taxpayer Non-Compliance with Input Tax Credit Rules: Data and Policy Options for Canada, Canadian Tax Journal (2020) 68:3, p 784).
Importantly, the “director’s liability” and “derivative assessment” provisions of the Excise Tax Act can place corporate tax liability on the corporate directors personally. This presents a significant risk for individuals involved in missing trader/carousel schemes.
If you or your business are at risk of being involved in a missing trader scheme or carousel scheme, call us today. We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
James Pendergast is an Associate Lawyer at R&A Tax Law. James is entering his third and final year at the University of Toronto Faculty of Law. Outside of academics, James is a chair of the Faculty of Law’s Health and Wellness Committee, volunteers with the Law in Action Within Schools (LAWS) program and was an Associate Editor with the University of Toronto Law Review. This year, James competed for the University of Toronto at the 2019 Donald G. H. Bowman National Tax Moot.
Jason Rosen
Jason Rosen is a founding Partner at R&A Tax Law. Jason provides effective and aggressive representation by taking a proactive, client centered approach for his domestic and international clients alike. Throughout his time in the field, Jason has gained a comprehensive understanding of tax procedures and the dispute resolution process.
What are GST/HST Carousel Schemes?
A “missing trader scheme” or “carousel scheme” is a fake supply chain created by a group of GST/HST registrants who work in collusion by repeatedly reselling goods to each other. At one point during the purchase and sale of these goods, at least one of the registrants collects GST/HST but does not remit it to the government. This registrant is the “missing trader” who gives the scheme its name. The following is a step-by-step explanation of missing trader/carousel schemes adapted from the CRA’s 2016-2017 Departmental Results Report:
These schemes are prevalent in Canada, and the CRA continues to improve its processes to detect and prevent GST/HST refund arrangements that bear a resemblance to them.
Carousel Schemes and Precious Metals
The CRA has identified the precious and scrap metals industries as a particularly high-risk target for missing trader/carousel schemes. Taxpayers involved in this industry may participate in these schemes by buying pure gold bullion from commercial suppliers (which is not subject to GST/HST) or by buying scrap metal containing gold (which is subject to GST/HST) and from which pure gold bullion can be refined.
Taxpayers who buy pure gold bullion from commercial suppliers utilize missing trader/carousel schemes by melting the bullion down and adding low levels of impurity. After impurities are added, the formerly pure gold can be sold as scrap metal. Once the scrap metal is sold, the seller will charge, but not remit, and often abscond with, GST/HST. The purchaser of the scrap metal will then claim a refund (such as Input Tax Credits) on the GST/HST paid to the seller.
The purchaser of the scrap metal will then melt the scrap metal down and refine and reshape it back into pure gold bullion. Other bullion purchasers down the supply chain will then purchase the bullion, and the cycle can continue indefinitely.
Carousel Schemes and CRA Issues
It is not uncommon for taxpayers involved in missing trader/carousel schemes within the precious and scrap metals industries to receive reassessments for tens of millions of dollars in unremitted GST/HST and/or disallowed Input Tax Credits. In 2011, for example, Metaux Kitco, one of Quebec’s most prominent gold-trading companies, was reassessed for $85 million in disallowed Input Tax Credits, and was alleged to be one of approximately 125 companies involved in the scheme alleged to defraud the Canadian government of approximately $350 million (see Cody Kessler, Taxpayer Non-Compliance with Input Tax Credit Rules: Data and Policy Options for Canada, Canadian Tax Journal (2020) 68:3, p 784).
Importantly, the “director’s liability” and “derivative assessment” provisions of the Excise Tax Act can place corporate tax liability on the corporate directors personally. This presents a significant risk for individuals involved in missing trader/carousel schemes.
If you or your business are at risk of being involved in a missing trader scheme or carousel scheme, call us today. We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
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