A proposed measure in the federal government’s 2025 budget aims to close a long-standing loophole that experts say allowed the Canada Revenue Agency (CRA) to lose millions — potentially hundreds of millions — of dollars to sophisticated tax fraud schemes.
The legislative change follows a fifth estate investigation that uncovered repeated instances in which international crime networks exploited weaknesses in Canada’s tax system through so-called “carousel schemes,” resulting in fraudulent GST and HST refunds being paid out by the federal treasury.
Tax fraud specialist Mike Cheetham, a U.K. expert who has testified before Parliament in Britain, said the proposal represents a delayed acknowledgment of a problem the CRA has known about for years. He argued the losses were preventable and said the agency has a responsibility to safeguard public funds.
The budget proposal would introduce a “reverse charge mechanism,” a system already used in parts of Europe, which alters how tax is collected on certain transactions. Under the mechanism, buyers — not sellers — account for the tax, removing the opportunity for fraudsters to claim refunds on taxes that were never paid.
Carousel schemes rely on chains of shell companies that appear to buy and sell goods repeatedly, often across borders. The final company in the chain then applies for a tax refund, even though no tax was ever remitted. By the time authorities detect the fraud, the companies and the money have typically vanished.
While the CRA says it has no comprehensive method to calculate how much money has been lost, it acknowledged in an email that more than $1.1 billion was “identified” in carousel-related activity between 2017-18 and 2022-23. The agency has also identified $600 million in fraudulent schemes in the telecommunications sector alone between 2020-21 and 2023-24.
A confidential source familiar with the CRA told the media that actual losses could be far higher, estimating the total may reach into the hundreds of millions. The source was granted anonymity because they are not authorized to speak publicly.
Internal CRA records obtained through access-to-information requests show the agency formed a “carousel scheme task force” in October 2023, shortly after the fifth estate began questioning how the losses occurred. Emails also indicate that CRA Commissioner Bob Hamilton was involved in coordinating responses with the Department of Finance.
Although the Department of Finance introduced a reverse charge mechanism years ago in the carbon emissions trading sector, it previously declined to explain why other high-risk industries — such as telecommunications — were excluded. The 2025 budget now explicitly proposes extending the mechanism to telecommunications, stating the change would help prevent carousel fraud and generate an estimated $90 million in federal revenue over four years starting in 2026-27.
Sources say CRA officials have been aware of the vulnerability for more than a decade. In 2017, the agency publicly announced a joint operation with U.K. authorities to dismantle a carousel fraud network, but has since declined to comment on the outcome or whether funds were recovered.
The confidential source said repeated internal efforts were made to push for broader adoption of the reverse charge mechanism, but those efforts stalled without political backing. They also noted that, to their knowledge, no carousel scheme cases in Canada have been pursued criminally, with most remaining in civil proceedings.
Experts warn the proposed fix may still fall short if applied too narrowly. According to sources, meaningful impact will require extending the mechanism to multiple industries known to be vulnerable to carousel fraud.
Cheetham said international crime groups shifted their focus to Canada after European countries strengthened their defenses. He argued that stronger enforcement and criminal prosecutions are essential.
“The answer is to move quickly and aggressively against the criminals,” he said. “The question is why that hasn’t happened here.”
