Quebec tax agency hikes charges against Kitco; company rebuts them in detail

By Nicolas Van Praet
National Post, Toronto
Monday, December 9, 2013

http://business.financialpost.com/2013/12/09/...ong-gold-tra...

MONTREAL -- Revenu-Quebec is seeking prison sentences and fines totalling $750 million for Kitco Metals Inc. founder Bart Kitner and directors with several other gold trading firms following one of the biggest tax fraud investigations in provincial history.

Quebec's revenue department on Monday said it filed a total of 1,920 charges against Kitco and 11 other companies as well as their directors and an accountant implicated in an alleged fraud scheme linked to gold processing. Some 120 charges were filed against Kitco and another 120 against Mr. Kitner involving total fines of $454.6 million.

"This is an investigation that's lasted several years and the evidence is significant," said Revenu-Quebec spokesman Stephane Dion. "It's one of the largest investigations we've ever done."

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Kitco forcefully denied the allegations. The company last year filed a lawsuit against Revenu-Quebec seeking $122 million in damages caused to the company and on Monday it said its legal action against the department will escalate as a result of the formal charges.

Mr. Kitner "believes that [Revenu-Québec's] continuous pursuit of this case is an abuse of their authority and has caused substantial harm to Kitco's ongoing operations and development," Kitco said in an emailed statement. "Kitco continues to vigorously contest all aspects of [the department's] actions."

Founded in 1977 by Mr. Kitner, privately-held Kitco is a well-known buyer and reseller of precious metals including gold. It runs a popular website that carries spot prices as well as expert commentary.

The penal code charges stem from a probe by the tax ministry dubbed Project Carat, disclosed in June 2011. While it defended itself from the allegations, Montreal-based Kitco was granted bankruptcy protection that month. Its current creditor protection extension is set to expire in March 2014.

During the June 2011 raid, more than 175 provincial investigators with search warrants descended on several Montreal area businesses, private residences and offices of accounting firms and bankruptcy trustees. Revenu-Quebec alleged some 125 companies in two separate gold trading networks engaged in tax fraud scam on sales transactions worth $1.8 billion. It claimed the firms also avoided paying the federal goods and services tax.

The six-step scam was based on a repetitive cycle of processing pure gold into scrap gold, which is, in turn, sent to a refiner to be transformed once again into pure gold, Revenu-Quebec said in its explanation of the fraud at the time. "The scheme is based on bogus transactions made in order to claim input tax refunds," the ministry said. "No actual commercial activity ever takes place… With each [cycle], fraudulent gains grow and the scheme expands using amounts received from the government."

When the investigation came to light, Kitco said it was being held "unjustly" responsible for the actions of its suppliers. It maintained that position on Monday.

"Among Kitco's lines of business is the purchase of scrap precious metals," the company explained in its statement. "Kitco pays the companies' sales taxes on these purchases and receives tax credits for the corresponding amounts. It is then the companies' responsibility to remit these taxes" to Revenu-Quebec.

Kitco says it sought advice from Revenu-Quebec to make sure that the tax it was paying to companies were being properly remitted to the ministry. It says that starting in November 2005, it sent detailed transaction reports to the ministry every month stating its concerns. The ministry did not respond, despite having received over 60 such reports over a five-year period, Kitco said Monday.

"If [Revenu-Québec] had acted upon the information in Kitco's reports in a timely manner, their tax losses could have been prevented," the company said.

It is rare for Revenu-Québec to ask for prison sentences related to fraud. In fact, it's something that has only recently started and has involved only high-profile files. This past summer, for example, the ministry demanded a prison term for Quebec construction magnate Antonio Accurso as it brought fraud charges against him and his companies.

Mr. Kitner faces a maximum prison sentence of five years under Quebec law and two years under federal law if he is found guilty. But because he faces more than 100 separate charges, a court could decide to lengthen that sentence, Mr. Dion said.

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