The $3.6M fraud case that seems right out of a Seinfeld episode

What must have gone through the mind of the Canada Revenue Agency investigator when he learned of the handwritten expense report submitted by a Nova Scotia company that claimed it had done $117,850 in business with "Vandalee Industries."

Sadly, his first reaction is not noted in the court records. But one thing is certain: that name sounded familiar.

"Based on an internet search, and from my personal knowledge, I know that 'Vandelay Industries' is often a pop culture reference to a fictional company created in the television sitcom Seinfeld," Michael Boudreau wrote in a sworn affidavit two years ago.

The reference to Vandelay Industries, the fake latex manufacturer devised by Seinfeld character George Costanza, is one of the details cited by the CRA investigator in seeking a series of search warrants and production orders related to 10 Nova Scotia companies.

Last November, the CRA charged three sisters and their mother with $3.6 million in fraud offences related to GST/HST refunds, part of what the federal agency alleges was a scheme that escalated in size between 2011 and 2015, and involved a slew of fake invoices, expense reports and sales records.

The nearly three-year criminal investigation, the details of which are revealed in court records, comes at a time when Canadian tax officials say there has been a rise in abusive GST/HST schemes that use fictitious businesses to try to pry illegal tax refunds from the federal government.

So concerning has the practice been that in 2016, the CRA launched a crackdown, hiring new analysts and deploying new software to flag worrisome files for audit. Since then, the agency says, it has managed to prevent more than $399 million in unwarranted GST/HST returns.

While the allegations against the Nova Scotia companies — they have not been tested in court — date from before the CRA enforcement effort, they offer a glimpse into how federal tax investigators approach suspicions of impropriety.

But they also describe a case that, well, sometimes does seem lifted from a Seinfeld episode.

If you've never heard of the cookbook, salad dressing, wig-making, catering and children's fur coat empire run by Georgette Young, her sisters Angela MacDonald and Nadia Saker, and their mother, Lydia Saker, you are not alone.

Yet, according to allegations in search warrant records, the 10 companies under their control claimed to have done $56 million in sales out of a home in North Sydney, N.S., a small business front in the nearby community of Boularderie, a local farm, and a house in Kentville, N.S.

The sales reports were impressive, at least on paper. They included 54,000 cookbooks in six months, hundreds of children's coats sold for $1,000 apiece, and half-million-dollar orders for frozen seafood lasagna, spaghetti and meatball dinners.

All this, according to court records, even though the companies reported no employees and in many cases didn't have bank accounts.

While the businesses claimed exploding sales, they reported collecting little sales tax and were instead seeking large GST/HST refunds. The companies were ultimately paid refunds totalling $276,000, according to court records, and were denied more than $3 million after CRA auditors became suspicious.

Businesses in Canada file GST/HST returns, often monthly or quarterly, reporting how much sales tax they collect from customers. But businesses are also entitled to tax credits for the GST/HST they pay out for expenses needed to operate, credits that cut down the amount of sales tax that must be turned over to the federal government.

In the Nova Scotia case, however, the tax credits being claimed far outstripped the HST purportedly being taken in, and the companies sought large refunds from the federal government.

Ted Sawa, a Dartmouth, N.S., lawyer who specializes in HST law and has previously worked in the federal Department of Justice as a litigator for the CRA, said it is possible for companies to legitimately qualify for GST/HST refunds.

For instance, companies that sell basic groceries, which are charged zero sales tax, will recoup GST/HST for services and property they buy. In other cases, Sawa said, startups or construction companies are spending money but have no sales yet.

"You expect a call from CRA saying, 'Please explain what's going on here,'" Sawa, a lawyer at the firm BoyneClarke, said of refunds.

Court records say many of the sales in the Cape Breton case were initially between the family companies. But as CRA auditors began asking questions, a slew of amended GST/HST returns were filed that detailed sales to outside businesses. They included, according to court records:

• Juliette and John, a salad dressing and cookbook company, submitted records claiming it had sold $1.5 million worth of recipe books in a matter of months.
• Maddie and Bella's, a children's clothing company that claimed to have sold large numbers of fur coats. But when CRA auditors visited the business, they found only three coats and a handful of dresses, scarves and hats in a small storage area.
• Housewives with Heels, a catering business run from Nadia Saker's farm near Sydney, N.S., cited millions of dollars in sales. But when auditors visited, they were told the freezers and equipment had all been sent to the dump.
• Artisan Hair Loss Therapy Inc., which specialized in hairpieces, reportedly did $1.4 million in business in the first half of 2015. While Lydia Saker told the CRA her hair suppliers were in China and Italy, the Canada Border Services Agency had no records of the company importing anything.
• Spaghetti Benders, a restaurant the family ran for about 15 years, reported $435,000 in sales in the three years after the CRA believes it closed.

Expense and sales reports and invoices were submitted to justify the GST/HST refunds. But in almost every case, CRA investigators said they could not find any trace of the stores or other enterprises the family companies were purported to have done business with. Even the addresses didn't appear to exist.

They included sales of $400,000 to Upstairs Department Store, at 41 Hissiem St. in North Sydney, up the road, apparently, from Tycoon Book Distributors ($433,125 in sales) and AMM Groceries ($2,534,000 in sales).

"The majority of these transactions are believed to be fictitious and included on the Goods and Services Tax/Harmonized Sales Tax Returns in an attempt to obtain false refunds," investigators concluded.

And then there was Vandalee Industries, which according to court records was twice listed on an expense summary for Kishk Inc., a food company operated by Young.

The services provided? "Management, marketing and packaging," according to the court records.

Young, MacDonald and Nadia Saker did not respond to interview requests. Lydia Saker could not be reached.

The CRA declined to comment on the case and said it would make no one available for an interview.

The agency has a series of measures to try to enforce tax laws. They include charging interest or issuing hefty penalties to scofflaws. Over the last three years, for instance, sheriffs have been ordered to seize and sell property owned by the various Cape Breton businesses run by the sisters and their mother.

But criminal prosecutions are far rarer. In the five years leading up to March 2018, there were criminal convictions involving 307 tax files in Canada, according to the CRA. Just 33 involved GST schemes.

In a statement, the CRA said it revamped its criminal investigation division following a 2014 evaluation. It decreased the number of investigations it opened, and instead targeted "more egregious and complex files."

That led to an 80 per cent drop in criminal prosecutions, however, the overall tax involved has risen by more than 35 per cent, according to the CRA. Offenders are more likely to be jailed, and for longer periods.

The federal government has been stung before by GST/HST schemes.

In one Toronto case, a university student was able to defraud the CRA in 2013 and 2014 of $41 million in what the sentencing judge called an "absurdly easy" scheme involving direct deposit forms. (All the money was recovered by the CRA.)

Since 2016, the CRA said it has put a greater focus on combatting sales tax schemes. Special software combs through data and generates a list "of accounts with risk issues identified by the system based on specified characteristics of the return or the account." The most worrisome are placed in an inventory, and files are assigned to auditors.

"This advanced technology is revolutionizing the detection processes currently in use," according to spokesperson Dany Morin.

Young, MacDonald, Nadia Saker and Lydia Saker are scheduled to appear in a Sydney courtroom on Monday. They each face 10 counts of fraud. They have not yet entered pleas.

The CRA did find some sales and invoices it concluded were legitimate. It was able, for instance, to track down 60 bottles of salad dressing sold for $360 to a small store in North Sydney.

Sometimes, auditors noted, receipts for expenses were in fact for personal items, like women's clothing bought from Nygard, Sport Chek, Suzy Shier and Winners. A property bought in Ingonish, N.S., by Young and her husband was also claimed.

In other cases, according to the CRA, the expenses couldn't be explained. When asked about $523,172 to Peter's Printing, Young didn't know where the business was located, according to court documents. Nor could she say what a company called H.R. MacIntyre did for $460,899. The CRA said it could find no record of either company.

In some cases, Young told the CRA the sales claimed were "estimates." In others, she said outside businesses had been invoiced, but had not yet paid their bills.

Young, who now runs a small charity giving cooking classes to children, at one point told auditors that everything was done in cash, which was kept in her home.

She also appeared to hold some inkling of hope that things would work out in her favour. During two days of interviews with a CRA auditor in 2015, she acknowledged one of the family companies appeared to owe taxes.

But, she said, her only concern was whether "the other family related companies would be receiving their refunds or not."