$30 million in withheld tax refunds were earmarked for wireless growth
By Ahmad Hathout
MARKHAM – Wired and wireless carrier Iristel is facing the prospect of pausing its wireless expansion plans – if not shutting down services altogether – if it does not get tax refunds it says it is owed by the Canada Revenue Agency.
The Markham-based telecom, which also owns far north operator Ice Wireless, is currently asking the Federal Court to provide it interim relief and the disbursement of at least $62 million out of $80 million it says the CRA is withholding from it because the tax agency alleges Iristel is using international long distance call suppliers that are illegitimate. The audit process was paused due to the Covid-19 pandemic. This was first reported by The Canadian Press.
Iristel president Samer Bishay (above) told Cartt.ca if the company doesn’t receive the refunds, it will likely have to pause its wireless expansion plans. He said the company was slated to use $30 million from the refunds for deployment in Newfoundland and Labrador, expansion in north and east Quebec, and improving capacities in the Arctic.
“Scaling down operations in these remote areas will prove to be detrimental to Canadians living in locations that are already suffering from a huge infrastructure deficit,” Bishay said.
At worst, the company may have to wind down operations, it said in legal filings, potentially leaving a swath of Canadians who rely on the company – the only one in certain areas – without service. Iristel “cannot continue to carry on business and provide these essential services, which are the sole telecommunications services to some areas in Canada,” it said in legal documents.
The crux of the legal battle is in allegations against Iristel’s suppliers. These entities, which are paid to carry long distance telephone traffic, collect GST or HST, which are claimed by Iristel. The CRA has focused its audit on those suppliers and has so far withheld six months – from September 2019 to February 2020 – of those tax refunds on the suspected basis that the suppliers are involved in an alleged “carousel” scheme.
A carousel scheme begins when a seller of goods – in this case long distance minutes – collects GST or HST from the buying intermediary, but does not remit the tax to the government. The original seller, often a shell company, makes out with the tax and becomes, to the CRA, a “missing” link in the supply chain. The intermediary then sells the goods plus tax to an exporter at a slight mark-up, then collects the tax it paid the missing trader from the government. The exporter, which is not subject to tax on goods leaving the country, then collects from the government tax it paid the intermediary. The government ends up having to pay out-of-pocket what the missing link did not remit.
The CRA is alleging Iristel “ostensibly” buys hundreds of millions of dollars worth of minutes from intermediaries before exporting them to “customers who again operate shell companies out of non-existent facilities,” it says in an affidavit of a CRA employee in the case.
Iristel has vehemently denied the allegations and pointed to what it says is a lack of evidence on the part of the CRA to back-up its claims. The CRA has not said Iristel was a participant in any such alleged scheme. The company says nearly 100% of its long-distance business originates from the United States.
“Long distance minutes are well-suited for use in carousel schemes because they are not tangible; they cannot be registered or weighed; they can be purchased, sold and re-sold in seconds, and they can be exported and imported with ease,” the CRA affidavit says.
The alleged fraud is a big problem in Europe and in recent years, in Canada. In 2017, the CRA said the scheme cost millions of dollars over a handful of years and it launched investigations into it.
The Federal Court, which expedited the Iristel matter, is expected to make a decision on the interim relief on June 23rd.
If Iristel is unsuccessful, the matter will likely go through the tax court, which has a much longer queue for hearings. In fact, Iristel brought the matter specifically to the Federal Court in late March on that basis: that the urgency of the situation – especially now with the Covid-19 crisis – will not allow for an essential service such as a telecom to wait for a tax court hearing for money it requires to operate today. The Federal Court agreed with the urgency and ordered it on an expedited timeline.
The CRA brought assessments against Iristel and then put forth a motion in April challenging the jurisdiction of the Federal Court on the grounds that its assessments took the matter outside the court. The motion was denied later that month, based on a finding that no assessment was made for December 2019, January 2020 and February 2020, which amount to about $34 million in unassessed tax refunds.
Iristel has said two days prior to the current suspended audit, the CRA completed the previous period’s audit of the company and disbursed the money owed with no adjustments. According to court documents, in the audit periods between January 2017 and December 2018, the CRA assessed the harm that non-payment of the refunds would do and disbursed the funds while the government completed the audit.
The prospect of having to wait for a tax court hearing presents great challenges to Iristel, which provides services of various sorts to over 7 million Canadians and counts a number of high profile clients, including Zoom, Uber, AT&T, Sprint and Verizon.
One particular issue facing some northern communities is emergency services where none are mandated. Where generally residents can dial 9-1-1 without a SIM card, others in smaller communities in the north, for example, must dial a seven-digit number that require SIMs, often provided by Iristel, Bishay said.
The situation is so dire the company has taken the issue to political channels. The message was carried to the Ontario minister of infrastructure, which culminated in calls with the premier’s office. A briefing note on the matter reached federal Conservative leadership candidate Erin O’Toole, who shared the note with Deputy Prime Minister Chrystia Freeland. Freeland said she would look into the matter, according to a timeline seen by Cartt.ca.
In March, Iristel applied for loans from the export development fund and the business development bank, while also requesting support from the Canada emergency wage subsidy programs. It has yet to hear back from those programs, Bishay said.
