Keeping "it" all in the family?

Senator linked to overseas tax haven pursued by CRA in past for unreported income

By Elizabeth Thompson | Thursday, April  9, 2013

Liberal senator Pana Merchant has been embroiled in disputes with the Canada Revenue Agency for much of her time in the Senate over hundreds of thousands of dollars worth of unreported income, iPolitcs has learned.

Records show that Merchant appealed to the Tax Court of Canada after the CRA audited her taxes from 1995 to 2002 - in some cases stretching back beyond the usual reassessment period. For each year it audited, the agency found unreported income - ranging from $51,335 in 1996 to $485,203 in 2002.

The agency also disallowed several expenses Merchant claimed during that period, ranging from interest on an investment loan to a donation of artwork.

For each of the eight tax years involved in the dispute, the agency also levied penalties under article 163(2) of the income tax act which provides for penalties in cases where "gross negligence" results in making "a false statement or omission in a return."

While the CRA began issuing reassessments to her Merchant's tax returns in 2000, an aide to former Prime Minister Jean Chretien said the agency did not send up any red flags when it was consulted about her being named to the Senate in 2002.

In 2005 Merchant took the battle to the Tax Court of Canada where it raged for five years along with two other cases until all three were settled in 2010.

The Terms of the settlement are not revealed in the court file. Efforts to reach Pana Merchant and her husband, Tony Merchant, for comment have gone unanswered and unreturned.

In her notices of appeal, Merchant maintained that any errors in her tax returns were the fault of her accountant, brokerage reports and her "complex" investment portfolio.

"I was not grossly negligent," she wrote. "At no time did I knowingly attempt to underestimate my income or overestimate expenses."

In its reply filed in Tax Court in one of the cases, however, CRA did not appear to be convinced, pointing out that she had two university degrees and the same kind of under reporting of income appeared each year.

"In reassessing the appellant for the 1995, 1996, 1997, 1998, 1999 and 2000 taxation years, the Minister determined that the Appellant had knowingly, or in circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of false statements or omissions in a return filed in respect of the six taxation years."

Merchant was plunged into the spotlight last week following the revelation by the CBC and the International Consortium of Investigative Journalists (ICIJ) that she was listed as a beneficiary of a secret $1.7 million offshore account set up by her husband, lawyer Tony Merchant, in 1998 in the tax haven of the Cook Islands.

While it is not illegal for Canadians to have offshore bank accounts, it is illegal not to report the proceeds of any such accounts on your income tax return.

Documents obtained by the ICIJ show that Tony Merchant was very discreet about the account from the very start.

"Keep correspondence to a minimum," reads one note in his Cook Islands account. "Do not fax to client. He will have a stroke."

When it came time to pay the fees for the account, Merchant sent cash or traveler's cheques, despite a warning from the bank that it could not guarantee the safety of cash sent by mail.

According to the CBC report, Merchant is one of 450 Canadians with offshore accounts mentioned in a massive leak of millions of pages of offshore bank files to the Washing, D.C. - based ICIJ, which worked on the story over months with top investigative journalists in 40 countries. Reports on the contents of the files and the 130,000 names they contain have been rolling out throughout the world.

The revelation comes less than a month after Finance Minister Jim Flaherty tabled his latest budget, a budget that contained measures to crack down on offshore tax evasion by Canadians including measures to encourage Canadians to inform CRA of suspected tax evasion.

Following the reports about Merchant's offshore bank account, Revenue Minister Gail Shea called on CRA officials "to review any information they receive and aggressively pursue all suspected cases of tax evasion.

Shea also called on the ICIJ and the CBC to turn its documents over to the CRA. Both the CBC and the ICIJ have refused.

However, even if the media outlets turned over the files, the agency could have difficulty using them in court. Because the information came from a hard drive leaked to a reporter, prosecutors could have difficulty proving the origin of the documents to a judge's satisfaction.

Canada has not yet negotiated a tax information exchange agreement with the Cook Islands which would allow the government to ask directly for the files.

News of the existence of the offshore Merchant 2000 U.S. trust account came as a surprise to Calgary tax lawyer Curtis Stewart, who represented Pana Merchant before the Tax Court.

"I read the newspaper the same as you did. It was total news to me."

The Tax Court files show a complicated web of more than a dozen cases involving Merchant, her husband, the company Merchant 2000 and their son Evatt Merchant.

They also show what appears to be a high degree of scrutiny of their tax returns by CRA officials.

"The appellant, her spouse, her children and the various related corporations have been audited continually since the early 1990's," wrote Justice Department lawyer George F. Body in his 2006 reply to Merchant's challenge of her 2001 reassessment.

Stewart said it is not uncommon for CRA to reassess shareholders of an owner-managed company if it reassesses the company's return.

"I would say 90 percent of the owner manager businesses that get audited and reassessed, it includes the shareholders being reassessed at the same time so I wouldn't read too much into that."

Stewart could not reveal the terms of the settlement.

He said in general, not all reassessments hold up.

"The CRA can raise any reassessment it wants, that doesn't mean it is correct ... I would be out of business if they were right as often as they think they are."

elizabeththompson@ipolitics.ca