Gold dealer in crosshairs of Quebec tax agency

High-profile precious metals trader Kitco Metals Inc. vows to vigorously fight accusations that it took part in an elaborate fraud involving more than 100 companies that allegedly bilked the Quebec government of $150-million in sales taxes on close to $2-billion in transactions.

The Montreal-based trading and research company, which bills itself as one of the largest retailers of precious metals in the world, and another Montreal company, wholesaler Carmen International Inc., are among more than 100 companies and dozens of individuals named in Revenue Quebec allegations of a sophisticated false-billing operation.


Revenue Quebec said more than 175 investigators swooped down on businesses, homes, accountants’ offices and other sites on Thursday, with more than 70 search warrants in hand. The targets included locations in Montreal and several suburbs, north and south shore communities as well as St-Bernard-de-Lacolle, near the U.S. border.

The tax agency alleges that two separate networks used artificial transactions involving a cycle in which pure gold (which is not taxable) was converted into gold scrap (which is taxable), then shipped to a refiner to be once again transformed into pure gold.

The transactions were allegedly used to make phony claims for refunds on sales taxes on the gold that was rendered into scrap. None of the allegations have been proved in court.

Revenue Quebec alleges that Kitco played a key role in moving the gold through the various stages of the cycle.

But Kitco said in a news release that it never participated in a tax fraud and has never carried out any fictitious transactions.

The company said it buys precious-metals scrap and pays the suppliers sales taxes on these purchases, for which it receives a tax credit. Kitco said that is up to the suppliers to pay back the sales taxes to Revenue Quebec and that if some of those suppliers have not remitted the taxes paid to them, then the tax agency is unjustly holding Kitco responsible.

An employee at Carmen International said there would be no comment on the matter.

Revenue Quebec said in a news release that it has a duty to be “intransigent with those who flout fiscal rules and can proceed with penal proceedings against them.” Fines of between 125 per cent and 200 per cent of the taxes evaded can be imposed, as well as prison terms of up to five years, it said.

Sharlene Dozois, Kitco’s marketing director, said in an interview that the search-and-seizure action taken by Revenue Quebec agents recently was completely unexpected. “We were in ongoing negotiations to settle [sales-tax related issues],” she said. “These had been ongoing for some time. We were co-operating with them every step of the way,” she said, declining to provide details of the talks.

Kitco said it will be better able to fight for its good name after having been granted court approval Friday allowing it to continue operating under the purview of receiver RSM Richter Inc. in the event that assets were seized.

One of Kitco’s key partners is the Royal Canadian Mint, which refines scrap gold for the company. Kitco, in turn, is a major distributor of the Mint’s products.

“We’re aware of the allegations. We are monitoring the situation by-day-day,” Mint spokesman Alex Reeves said Friday. “We have had a relationship with Kitco for over 30 years. It’s an important distributor of our gold and silver bullion products.”

According to Revenue Quebec, the alleged scam worked this way: Supplier A sells a quantity of pure gold to refiner B. Pure gold is not subject to sales tax, so there is no impact on provincial sales tax. Refiner B melts the gold into scrap, which makes it subject to tax.

Refiner B then sells the scrap back to Supplier A. The scrap is subject to sales tax, so the refiner adds the provincial tax to the bill. But Refiner B does not remit the sales tax to Revenue Quebec. Supplier A requests a tax refund from Revenue Quebec for the sales tax paid to Refiner B. Supplier A then sends the scrap gold to again be transformed back to pure gold.

The tax agency outlined the allegations in a detailed court document of more than 100 pages. It said the investigation into Kitco’s operations covered a period from 2006 to 2010.