Top Canadian law firm endorsed controversial KPMG Isle of Man tax dodge

A respected Canadian law firm gave a crucial blessing to an offshore tax dodge using shell companies in the Isle of Man developed by accounting giant KPMG, which the Canada Revenue Agency described as a "sham" and now alleges was "intended to deceive" authorities.

A 17-­page "opinion" letter from law firm Fraser Milner Casgrain  ­— now Dentons — to KPMG is part of a larger package of documents released by the accounting firm last month to the House of Commons finance committee probing its offshore tax avoidance scheme.

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Multiple references to the Fraser Milner Casgrain letter in the documents show that KPMG relied heavily on that legal advice as the accounting giant began marketing its "confidential" tax plan that promised multimillionaire Canadians they would pay "no tax" on their investment income. 

The scheme would operate under the radar for more than decade before CRA auditors caught wind of the controversial setup that the agency, in court documents, called "grossly negligent."

• Read the Fraser Milner Casgrain letter

The parliamentary committee launched its probe of KPMG's offshore practices and its relationship with the Canada Revenue Agency in the aftermath of revelations by CBC News that federal authorities offered a secret amnesty deal to the wealthy tax dodgers caught using the accounting firm's Isle of Man "product."

The Fraser Milner Casgrain letter was prepared by Joel Nitikman, a well known tax specialist, in October 1999 and was recently cited by KPMG national tax partner Greg Wiebe in his testimony before the House of Commons committee as evidence of proper "due diligence" by the accounting firm. 

When CBC News contacted Nitikman last year for comment on his letter, he denied knowing anything about the Isle of Man tax plan. Instead, he said he would launch legal action if CBC News reported he provided legal advice on the KPMG offshore scheme. 

"If you do that I'm going to sue you because I didn't provide the legal opinion," he said, "I didn't provide anything. I have no idea what you are talking about," he replied. "I have no connection to that matter at all."

Reached on the phone on May 25, Nitikman said he could not comment on the now public letter due to solicitor-client privilege. A spokesperson for Dentons told CBC News in an email it does not discuss client files. 

In his 1999 letter to the firm, Nitikman wrote KPMG tax official Barrie Philp, "No person other than you may rely on this opinion without our written consent."

The KPMG Isle of Man scheme centred on whether offshore cash transfers could be called gifts,­ which are non­taxable, compared to income, which is taxable.  After analyzing a complicated set of proposed transactions Nitikman concluded that the "gift" scheme — that avoided paying tax — could conform to Canadian tax law. 

 "The gift, in our view, is not income" Nitikman stated.

Still, Nitikman cautioned that his advice was based on facts provided by KPMG and another law firm in the Isle of Man, a key player in the offshore scheme. If those facts changed, he wrote, then his opinion might also change.

The CRA alleges that KPMG knew all along its wealthy clients did not intend to "gift" their money away and that the entire structure was a "sham" designed deceive the taxman.

As a tax lawyer, Nitikman has provided legal opinions in other tax-avoidance strategies.

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In 2009 a judge ruled against a Barbados-­based offshore scheme for which Nitikman had provided legal advice. The "strategy" the judge wrote, was "so contrary to the object, spirit and purpose, call it what you will, of Canada's taxation laws." 

Nitikman is listed as a member of two committees of the Chartered Professional Accountants of Canada, an umbrella association representing most chartered accountants across the country.

In 2012 he was awarded the Queen's Diamond Jubilee Medal for "outstanding contributions" to the Canadian Tax Foundation, an industry group made up of tax lawyers and accountants.  

Dentons itself is a prominent law firm with a respected tax practice and a regular participant at the Canadian Tax Foundation's annual meetings. Each year Dentons hosts a "Tailgate Party" for tax industry delegates, including numerous Canada Revenue Agency employees and officials.

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