Leaked files reveal CRA refunded millions by mistake

More than two years after paying out $4.99 million in allegedly bogus refunds, the Canada Revenue Agency is stuck in Federal Court trying to figure out where the money went and how to get it back.

The seven-figure refund was paid through automated CRA processes in the spring of 2023 to Distribution Carflex Inc., a cash-strapped auto body shop in Quebec's Laurentian region.

According to internal data obtained by CBC. fifth estate and Radio-Canada, the $4.99 million transaction went through automatically because it just missed the $5 million threshold for manual review for this type of tax refund.

A source familiar with the CRA's work said returns are routinely processed electronically without human oversight, even in cases where millions are paid out, which could raise red flags later.

“There should be close scrutiny on this deal, but there isn't, and that's the problem,” the source said.

CBC is not disclosing the identity of the source, who is not authorized to discuss the internal workings of the CRA or specific tax files.

If the $5 million threshold were reached, CRA auditors would have to conducted a manual review of the tax return and may have noticed potential irregularities, the source said.

The $4.99 million recovery was paid on the basis that Carflex paid taxes on the large capital gains.but auditors later found no record of such a payment.

According to the leaked records, the payment first came to the attention of TD Bank, the institution where the money was deposited, rather than the CRA.

The Carflex document leak is the latest example of numerous cases discovered fifth estate and Radio-Canada, which show that the CRA was allegedly deceived pay large compensations without carrying out basic checks, affects tens of thousands of taxpayers and raising questions about agency authority with the public.

Carflex owner Ivan Drapeau and his lawyer could not be reached for comment by email or phone.

They defended the transactions as valid and resisted the CRA's attempts to freeze their account, according to documents filed in court.

In the Federal Court, the CRA is seeking to recover the money, arguing that the firm was “not entitled to this recovery”.

“Carflex is a company that caused CRA to overpay through transactions that were questionable and potentially fraudulent,” the agency said in court.

Calling an external investigation

The issue is the CRA's use of thresholds that determine when a manual review is required before a refund is paid.

These thresholds are used internally by the CRA and are not published, but some scammers try to game the system by filing bogus returns that fall just below these thresholds, the source said.

“There must be a threshold in place for the automated process to allow payment,” the source said. “No one is really looking at the vulnerabilities of these automated processes.”

The leaked recordings say agency officials realized there were “no preventative measures in place” to prevent the allegedly suspicious scheme.

Sources connected to the CRA told Radio-Canada/fifth estate that the government needs to hire outside experts to study the Agency's security measures. The agency is under the authority of Finance Minister François-Philippe Champagne.

“The agency cannot control itself. It simply cannot, because it will simply make things look better than they really are in order to [avoid] checks,” the source said. “It doesn't matter who the minister is. This is ingrained administrative behavior.”

The CRA “needs to conduct an external investigation from the ground up,” another source said.

Tangled Web

A federal court is now unraveling the complex transactions that led to the litigation between the CRA and Distribution Carflex Inc.

In his decision in June, Federal Court Judge Ivan Roy said the CRA's award to the company amounted to $4.99 million.everything seemed “artificially created.”

After reviewing court records, two tax experts from McGill University in Montreal said the CRA's automated systemThe National Commission apparently overlooked the fact that Carflex was seeking a refund of a 2021 tax bill that would not have been paid.

“There was no single real person from the CRA who reviewed this case. It was all done by computers,” said Raphael Clément, a tax lawyer and doctoral student who reviewed the public documents with McGill law professor Allison Christians.

“To get a refund, you must pay [taxes] first,” he said.

Carflex was a relatively small company, reporting expenses of $380,000 on revenue of just $242,000 in 2020-21, according to court records.

The leaked data shows that alarm bells first rang at TD Bank in April 2023, when officials noticed that a $4.99 million check issued by Distribution Carflex Inc. had been deposited into an account recently opened by the numbered company.

Records show Carflex owner Ivan Drapeau has already withdrawn $1.5 million to purchase a $2 million condominium in Montreal.

After TD Bank alerted the CRA, the remaining funds were frozen.

Drapeau immediately objected, saying in an email to TD that “the bank should not be able to seize my assets without notice and put me in a dangerous situation.”

The CRA wants to interview Drapeau's business partner in the real estate deal, Jean-François Malot. Days after Drapeau purchased the apartment, ownership was transferred to a trust called Fiducie Annie, which Malo controls, court records show.

Little invokes client-attorney privilege to avoid answering the CRA's question by asserting that the funds associated with the transaction were transferred through a notary.

Judge Roy rejected that rationale in his decision in June, saying “the existence of a client-attorney relationship is in no way established.”

As a result, the judge called on Malo to answer the CRA's question on the matter.

In response to questions from CBC and Radio-Canada, the agency declined to comment specifically on the Carflex case but said it was prepared to use “all available measures to ensure compliance.”

According to information submitted to the CRA court, the alleged scheme began with the company reporting capital gains of $32.9 million on its 2021 tax return without providing any supporting documentation.

This capital gain resulted in a tax liability of $7 million. However, according to the CRA, Carflex never paid this amount.

The company then filed a tax return for fiscal year 2022, saying Carflex paid $13 million in dividends to shareholders. This allowed the company to receive a partial refund of its 2021 tax bill of $4.99 million, according to information presented in court.

Kleeman said he believed “if a person were to look at the file, they would notice the problem pretty quickly.”