The Chan family is one of the wealthiest in British Columbia and is known for donating millions to philanthropic causes.

Led by billionaire brothers Caleb and Tom Chan, the family donated $40 million this year to a Vancouver Art Gallery relocation project that will be christened the Chan Centre for the Visual Arts.

But right across the street from the existing gallery, a far different portrait of the Chan brothers is emerging, as they battle the Canada Revenue Agency in the Federal Court of Canada over a decade-long offshore tax dodge.

Numerous internal emails filed in court this summer reveal the Chans' involvement in a KPMG offshore scheme so secret that neither tax collectors nor even their spouses were ever supposed to find out.

The Chan brothers may be the most prominent of several wealthy families whose identities have been revealed over the past few years as being part of the scheme.

The records show the Chan brothers were part of a group of more than 20 wealthy Canadians whose families had at least $5 million to invest in a sophisticated KPMG tax dodge first developed out of the accounting firm's Vancouver office in the late 1990s.

Tom Chan, seen speaking in April 2017, at a performance to mark the 20th anniversary of the Chan Centre at UBC. (Paul Joseph/UBC)

The KPMG offshore tax dodge helped wealthy clients set up shell companies on the Isle of Man, a tiny tax haven in the middle of the Irish Sea. It promised clients they could pay "no tax" on their investments and hide money from their ex-spouses.

Over time, interest income from the overseas investments would accumulate untaxed, and funds would also be sent back to family members or other "eligible persons" as untaxed "gifts."

The CRA says the so-called gifts were masking actual income and, in another tax case against KPMG clients, has called the operation a "sham."

The agency first pursued the KPMG scheme in 2012, but then fought for years in court to have the accounting firm reveal the names of the wealthy Canadians involved.

Brothers cited for philanthropy in Canada and abroad

Born in Hong Kong, the Chan brothers immigrated to Canada in 1987.

Their business empire includes golf courses in B.C. and other real estate holdings. Their combined net worth is estimated at $1.07 billion, according to Canadian Business magazine.

In 1990, Caleb and Tom Chan received honourary degrees from the University of British Columbia after being cited for their philanthropic work, including a $10 million donation to the Chan Centre for the Performing Arts at UBC.

The family's donation to the Vancouver Art Gallery earlier this year was billed as the largest private donation to the arts in the province's history. At the donation ceremony in January, Caleb Chan's son Christian said the family was "honoured to participate in a project [that is of] such vast public benefit while also fitting so well into our family's intergenerational charitable mandate."

The Chans donated $40 million this year to a Vancouver Art Gallery relocation project that will be christened the Chan Centre for the Visual Arts. (Vancouver Art Gallery)

But around the same time, the battle between the Chan brothers and the CRA was beginning to escalate. New documents would soon be filed in federal court that show a pattern of extreme secrecy in their offshore accounts, set up in part to avoid paying Canadian taxes on their Hong Kong family charitable trusts.

In one email from 2002, a KPMG accountant explained the Chan brothers did not want their spouses to learn about their offshore dealings.

"The concern is that the wifes [sic] are not to know about the assets of the husbands," said the accountant's email.

In the Isle of Man, where the shell companies were set up, the response was to "rest assured" that the Chans' partners would not find out.

The documents show tax authorities were also not supposed to find out. The court records show the Chans did not disclose their offshore companies in the Isle of Man during a 2005 audit, even after being required to list all their global assets.

Another email exchange between accountants reveals plans to route communication outside Canada as much as "humanly possible" and through a law firm that might allow the players to "claim solicitor/client privilege."

Despite the secrecy provisions built into the Chans' offshore accounts, the records show CRA discovered their involvement in late 2016 from officials in the Isle of Man.

'Stalling tactics'

The Chan brothers have since engaged in a legal battle against the CRA, hoping to block tax auditors from reviewing an additional 1,000-plus documents in KPMG's possession, arguing that they are protected by solicitor-client privilege.

"These are stalling tactics, they are just trying to buy time," said tax law professor Marwah Rizqy, who has reviewed the Chan court file and studied what has become known as the KPMG Isle of Man tax dodge for several years.

While some of the withheld documents may be legally privileged, tax experts consulted by The Fifth Estate and Radio-Canada's Enquête say the revenue agency faces an uphill struggle getting access to all records from the Chan brothers they're entitled to examine.

"How is the CRA supposed to follow through on its widely proclaimed desire to address offshore evasion and avoidance when the necessary information about wealthy Canadians cannot be obtained or reviewed?" said University of Victoria tax law professor Geoffrey Loomer.

The KPMG offshore tax dodge helped wealthy clients set up shell companies on the Isle of Man, a tiny tax haven in the middle of the Irish Sea. (Reinhard Krause/Reuters)

The court records show that as recently as last year, the CRA had not been able to obtain the crucial "general ledgers" from Caleb and Tom Chan's offshore companies. The general ledgers would typically show money coming out of the offshore accounts, and where the money ended up.

In December 2017, Caleb Chan told tax auditors he did not have a copy of the general ledger.

Did company ledgers go missing?

Isle of Man documents previously obtained by The Fifth Estate and Enquête show that the Chan offshore companies were shut down in 2012, and that all "books, documents and all papers" were ordered "destroyed."

Daniel Reid, a lawyer for the Chans, said his clients were not aware of the destruction order and that electronic records still exist. The lawyer did not respond to a question about whether the CRA had been provided the ledgers.

A KPMG flow chart of the secret Chan companies, filed in court, shows that the brothers named themselves, their spouses and their children as the "eligible persons" that could receive the tax-free "gifts."

Reid said that any tax benefits for the Chan companies would have only been for international philanthropy outside Canada, and that no money ever went to family members.

Reid also said that KPMG told them "eligible persons" had to be named, even if they were not going to receive any money.

The internal flow chart, written at the time the offshore companies were set up, stated that donating to a charity was part of the scheme, warning advisors for the Chan brothers that it "must be a bona fide/genuine charity."

Rizqy said it is hard to understand the Chan family position that none of them ever received the "gifts" from the Isle of Man, since they were the ones named as being "eligible" to receive them.

A KPMG flow chart of the secret Chan companies, filed in court, shows that the brothers named themselves, their spouses and their children as the “eligible persons” that could receive the tax-free “gifts.” (Federal Court of Canada)

"They wrote in black and white that there were members of the family who would be able to receive funds from the Isle of Man. And, they never divulged this information to the tax authorities," Rizqy said.

Rizqy said that even if the Chan family did give all of its investment money to charity, their offshore investment income still needed to be declared on their taxes. In Canada, residents are taxed on their worldwide income.

"Whether this was intended for philanthropy or not, we have tax rules," said Rizqy, adding that governments need all Canadian residents to pay their fair share of taxes for social programs and other expenditures. "We cannot be above the law."

Exactly how much money the KPMG tax dodge diverted from the federal treasury remains unknown, but court records and documents in other cases suggest there were tens of millions in undeclared income in a scheme the CRA has alleged "intended to deceive."

KPMG profited from the scheme by receiving annual fees from the clients, and in some cases, a percentage of the taxes dodged. The most successful KPMG salespeople were known internally as "product champions."

'We have a deep love for Canada'

Lawyers for the Chan brothers say that throughout their involvement in the KPMG offshore planning, they were relying entirely on the advice of tax professionals.

In a statement sent to The Fifth Estate/Enquête on Aug. 26, Caleb Chan added their goal was always to ensure the "sustainability" of their charitable giving.

"We have a deep love for Canada and the utmost respect for its laws and institutions. Any suggestion that we would deliberately act counter to this goes against everything that we stand for."

"Our family has faith that our good and genuine intentions, our values, and our contributions to make Canada and the world a better place will ultimately shine through."

The recently opened court documents reveal a major rift developing between the Chan brothers and KPMG. In a "memorandum of fact and law" filed in April, lawyers for the Chan brothers state that senior KPMG executives were "directly involved" in the scheme, including Walter Pela, now the firm's B.C. managing partner.

The memorandum also says that others involved in the "planning, implementing, considering, or unwinding" of the offshore companies included Elio Luongo, the current chief executive officer of KPMG Canada, and Gregory Wiebe, the head of KPMG Canada's tax office.

KPMG disputes those descriptions. In a statement to The Fifth Estate/Enquête, the firm said representatives for the Chan brothers "incorrectly" named Luongo, Wiebe and Pela, and said those three executives had "no involvement in the Chan engagements and/or didn't provide any information, advice and expertise."

This KPMG scheme first attracted the attention of the Liberal-controlled finance committee in 2016. The committee held hearings into the accounting firm and its offshore scheme that promised "no tax" on investments.

Liberal MPs ended up voting to shut down their inquiry prematurely, at KPMG's urging. The accounting firm had argued that a continuation of the inquiry might unfairly prejudice any future court action against KPMG and its clients.

KPMG has said its Isle of Man scheme complied with all laws, but also said it would no longer support this kind of offshore tax planning.

To date, the CRA has settled all court actions related to the KPMG scheme instead of going to trial.

With files from Kimberly Ivany

If you have tips on this story, you can contact Harvey Cashore by email at Harvey.Cashore@cbc.ca, on Twitter @harveycashore or by phone at 416-526-4704.