Leaked files reveal CRA returned lakhs of rupees by mistake

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

A seven-figure refund was issued to Carflex Inc., a cash-strapped body shop distribution company in Quebec’s Laurentian region, through the CRA’s automated processes in the spring of 2023.

According to internal records obtained by CBC The Fifth Estate And in Radio-Canada, a $4.99 million transaction went through automatically because it was just short of the $5 million threshold for manual review in this type of tax refund.

A source with inside knowledge of the workings of the CRA said returns are routinely processed electronically without human oversight, even in cases where payments worth lakhs are made which later raise red flags.

“That transaction should be monitored, but it is not, and that is 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.

Had the $5 million threshold been met, CRA auditors would have The tax returns were manually reviewed and potential irregularities may have been spotted, the source said.

A reimbursement of $4.99 million was issued on the basis that CarFlex had underpaid tax on large capital gainsBut auditors later found no record of such payment.

According to leaked records, the payment first attracted the attention of TD Bank, the institution where the money was deposited, not the CRA.

The leaked Carflex documents are the latest example of a number of Example exposed by The Fifth Estate and Radio-Canada, which reportedly shows CRA swindled in paying large reimbursements without basic investigation, affecting thousands of taxpayers raising more questions agency credibility With the public.

CarFlex’s owner, Yvan Drapeau, and his lawyer could not be reached for comment by email or phone.

According to documents filed in court, he has maintained the transactions are legitimate and has fought the CRA’s attempts to freeze his account.

In federal court, the CRA is trying to recover the money, alleging that the company “is not entitled to this refund.”

“CarFlex is the person who overpaid the CRA through suspicious and potentially fraudulent transactions,” agency officials said in court.

Call for external inspection

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

Such limits are used internally by the CRA and are not made public, but according to the source, some fraudsters try to game the system by filing fake returns that fall just below these limits.

“There should be a threshold for an automated process to allow payments,” the source said. “Nobody is really looking at the vulnerabilities of these automated processes.”

The leaked records said agency officials realized there were no existing measures in place to stop the allegedly shady scheme.

Sources close to the CRA told Radio-Canada/The Fifth Estate The government needs to appoint external experts to investigate the security measures of the agency. The agency falls under the responsibility of Finance Minister François-Philippe Champagne.

“The agency itself cannot monitor the police. It cannot do that because it would make things look better to avoid scrutiny,” a source said. “It does not matter who the minister is. This is established administrative practice.”

“There is a need for an external investigation of the CRA from the grassroots level,” another source said.

a tangled web

The federal court is in the midst of unraveling the complex transactions that led to the legal standoff between CRA and Distribution CarFlex Inc.

In a ruling in June, Federal Court Judge Yvan Roy said the CRA would be reimbursed $4.99 million for compensation.All appear to have been “artificially generated.”

After reviewing court records, two tax experts from McGill University in Montreal said the CRA’s automatic fuThe action clearly failed to recognize the fact that CarFlex was claiming a refund for a 2021 tax bill that may not have been paid.

“No one from the CRA, no real person, was looking at this case. It was all done by computer,” said Raphael Clement, a tax lawyer and doctoral candidate who reviewed the publicly available documents with McGill law professor Allison Christian.

“To get a refund, you must first pay (tax),” he said.

CarFlex was a relatively small company, claiming expenses of $380,000 in 2020-21, while revenues were only $242,000, according to court records.

Leaked records show alarm bells first rang at TD Bank in April 2023, when officials noticed that a $4.99 million check issued to Distribution Carflex Inc. was deposited into an account recently opened by a company with the same number.

Records show CarFlex owner Yvan Drapeau had 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 precarious position.”

The CRA wants to interview Jean-François Malo, Drapeau’s business partner in the real-estate transaction. A few days after Drapeau bought the condo, ownership was transferred to a trust called Fiduciary Anne, which court records show is under Malo’s control.

Malo is using client-attorney privilege to avoid answering the CRA’s questions, arguing that the funds related to the transaction were transmitted through a notary.

Judge Roy rejected this argument in a ruling in June, saying “the existence of a client-lawyer relationship has not been established by any means.”

As a result, the judge called Malo to answer the CRA’s questions in the case.

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

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

That capital gain resulted in a $7 million tax charge. However, according to the CRA, CarFlex never paid that amount.

The company then filed tax returns for the 2022 fiscal year, stating that CarFlex had paid $13 million in shareholder dividends. This allowed the company to receive a partial refund of $4.99 million on its 2021 tax bill, according to information presented in court.

Clement said that in his view, “If a human being had looked at the file, they would have known immediately that there was a problem.”