Canadian Court Allows Extradition Of Tax Shelter Promoter

In 2007, David L. Smith, a tax lawyer and CPA, was indicted for tax and conspiracy charges along with another tax planner and four Ernst & Young, LLP, partners, for having designed and sold tax schemes to E&Y’s clients as well as cheating on his own taxes and failing to report his foreign bank account.

According to court records in the New York criminal case, federal prosecutors alleged that four members of Ernst & Young’s group for “high-fee tax strategies” led an effort to design and market tax shelter transactions used by wealthy individuals to eliminate, reduce or defer tax liabilities on annual income that generally exceeded $10 or $20 million. Smith’s four other co-defendants were found guilty of all charges in a 2009 trial, although two of the four had their convictions reversed on appeal. Smith never showed up to court.

Instead, Smith decided in 2007 to flee to British Columbia. When the United States government tried to force him to return to New York to face his charges, Smith hired a Canadian lawyer to defend him against extradition.

In 2010 Ernst & Young agreed to pay $123 million to settle allegations its employees helped wealthy clients dodge more than $2 billion in taxes as part of a scheme that spawned criminal charges

The firm admitted in a civil nonprosecution agreement that some of its employees and partners allowed about 200 high net-worth clients to engage in illegal tax shelters between 1999 and 2004. E&Y prepared tax returns that showed false tax losses and later defended some clients during IRS audits. The $123 million represents the fees E&Y earned from those engagements.

The US-Canada extradition treaty only permits extradition to the United States where the defendant is charged with a crime that’s also a crime in Canada. The analogous Canadian law prohibits fraud on the public or a person. Smith’s lawyer claimed that Smith was charged with defrauding the IRS, which isn’t a person or “the public.”

The Canadian court didn’t buy that the IRS isn’t a “person” or a proxy for “the public,” because, as it pointed out, the IRS collects tax revenue for the government, and in Canada it is illegal to defraud “her Majesty in Right of Canada,” meaning the government of Canada. Tax fraud is illegal in Canada as well, so Smith could be extradited to the United States on tax fraud charges.

However, Smith can appeal the extradition order to the British Columbia Court of Appeal, and then to the Supreme Court of Canada which can take many, many years for a well-financed defendant to be extradited from Canada to the United States.

Since three of his five co-conspirators were convicted and Ernst & Young his former firm agreed to pay $123 million to settle with the IRS, Smith probably prefers to remain in Canada, as his odds remaining free in the US don't look good.