A Canada Revenue Agency investigation into a "grossly negligent" KPMG tax avoidance scheme involving untold wealthy Canadians has been stalled in court for more than two and a half years, CBC News has learned.

In February 2013, a federal court judge ordered KPMG to turn over a list of (as yet) unidentified multimillionaire clients who placed their fortunes in an Isle of Man tax shelter scheme that the CRA is arguing is a "sham."

The CRA hoped to learn the scope of KPMG's "Offshore Company Structure" in order to identify potential tax cheats, as well as recoup millions in unpaid taxes and penalties.

But KPMG filed a court motion to quash the judge's order. For 30 months, the case known as Minister of National Revenue (MNR) vs KPMG has sat dormant before the court with no signs the top-tier accounting firm has handed over any list of wealthy clients. Neither the government nor KPMG has requested a court date to resolve the outstanding order of Justice Noel.

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Dennis Howlett, executive director of Canadians for Tax Fairness, says the long delay in the case is troubling.

"My big worry is that it may indicate the government is trying to negotiate an out-of-court settlement -- which would be a real shame, because the danger is that would cover up the whole story of what's going on," Howlett told CBC News.

KPMG alleges CRA 'fishing trip'

Dennis Howlett, executive director of Canadians for Tax Fairness, says the long delay in the Canada Revenue Agency's case against KPMG is troubling. (CBC)

Tax authorities first uncovered KPMG's tax shelter program in the Isle of Man, a self-governing territory in the Irish Sea between England and Ireland, after auditing members of the Cooper family of Victoria, B.C., who invested in excess of $26 million.

According to court documents, the family essentially gave away the money to an arm's-length company that invested it and then "gifted" the proceeds back as non-taxable income.

In court, the CRA says the structure was a deliberate "sham" created to "deceive" federal tax authorities.

But when CRA won a court order in February 2013 to force KPMG to hand over a list of all multi-millionaire clients invested in the same Isle of Man plan, the accounting firm filed a court motion to overturn the judge's ruling.

Now, MNR vs KPMG remains mysteriously stalled.

KPMG had argued in court documents that the judge's court order violates clients' legal protections against "unreasonable search and seizure" under the Charter of Rights and Freedoms. KPMG also alleged the CRA is on what amounts to "fishing expeditions" looking for potential tax cheats.

Elio Luongo, Canadian managing partner, tax for KPMG, refused to discuss the case, stating in an email it would be "inappropriate for us to comment on matters that may be before the courts."

"KPMG is committed to treating our clients' private financial affairs as confidential... aspects of this are currently before the courts and accordingly it is inappropriate for us to comment," Kira Froese, KPMG Canada's national manager of communications, told CBC News in an email response to repeated requests for an interview.

KPMG talks behind closed doors

This past spring, after CBC News began asking questions at the Federal Court of Canada, court staff began asking lawyers for KPMG and the Minister of National Revenue about the reasons for the delay.

B.C. resident Marshall Cooper says he was 'drawn into' a KPMG tax-avoidance scheme that saw $26 million of his family's money moved to offshore accounts. There are many more like him, he says. (Facebook)

KPMG lawyer Mahmud Jamal advised the court in letters that "confidential" discussions with the government are taking longer than expected because of the "complexity" of the issues involved. Jamal wrote that the parties hoped to settle the matter without litigation, avoiding "costs and other burdens" on the parties and on the court.

The Chartered Professional Accountants of Canada (CPA Canada) has also sought intervenor status in the court case, amid concerns issues in the case against KPMG were relevant to other firms and other tax avoidance investigations.

In a statement to CBC News, CPA president Kevin Dancey said there's a principle at stake: confidentiality.

"Taxpayers have the right to obtain independent, confidential tax advice so they can understand and comply with Canada's complex tax laws," he said.

CPA Canada, which represents most accounting firms in Canada, has for years been lobbying the federal government for better protection for clients and to limit the materials that accountants have to provide to tax authorities.

CRA spokesperson Philippe Brideau says that it has no plans to afford accountants the same kind of privilege enjoyed by lawyers and their clients.

"The CRA does not support it," Brideau wrote in a statement to CBC News.

Industry watching case closely

A variety of tax experts have told CBC News major accounting firms in Canada are watching the KPMG case closely, concerned about possible precedents, taxpayer privacy and potential exposure to third-party penalties.

"They're nervous," Howlett told CBC News.

"If the government wins this case or gets the evidence they need to pursue another case against KPMG, then this whole house of cards of sham companies and offshore banking is going to come tumbling down."

CBC News consulted a variety of tax experts who say KPMG Canada could face civil "culpable conduct" penalties if the CRA determines the firm helped wealthy taxpayers concoct an illegitimate offshore scheme to avoid paying Canadian taxes.

Under Canadian law, any third party that helps a taxpayer set up a "sham" tax strategy may itself face penalties of 50 per cent of the taxes avoided. In KPMG's case, those penalties could add up quickly, depending on the number of clients that used the alleged Isle of Man tax avoidance structure.

At least one observer says time is running out if the CRA wants to collect all the monies it may be owed.

Michael Hamersley, a former KPMG U.S. lawyer turned whistleblower, says that if the CRA allegations hold up in court, that would show that the government should have acted more promptly.

"The longer this goes, the smaller the chance to capture the full universe of abuse," Hamersley told CBC News after reviewing documents in the case.

With files from Alexandra Byers

For more on this story, watch the documentary "The Isle of Sham" on The National in the days to come.