What is Tax Evasion

Tax evasion is when a taxpayer intentionally evade Canadian tax laws to avoid paying their tax liability. Tax evasion can be done in many ways, for example, by purposely not reporting income, falsifying records, or inflating expenses. There are serious penalties associated with tax evasion, such as a hefty fine. There are also possible criminal charges, which will result in a criminal record and even potential jail time. 

Tax Avoidance Distinguished From Tax Evasion

The law distinguishes between tax “evasion” and tax “avoidance.” Tax evasion is illegal and is subject to penalties under Canadian tax laws and prosecution under Canadian criminal law. Tax evasion requires a deliberate violation of the tax laws. For example, deliberately failing to report all taxable income, deducting non-existent expenses, or concealing or falsifying other relevant information will all fall under tax evasion. 

Tax avoidance differs in that it can be legal. Tax avoidance is the ordering of one’s affairs according to the tax laws in such a way as to reduce the taxes that would otherwise be owed. Tax avoidance is concerned with minimizing tax and does not involve deliberate fraud, concealment, or other illegal measures. Tax avoidance will be unlawful only if it offends established judicial doctrines or prescriptive legislation, such as the General Anti-Avoidance Rule (“GAAR“). In all other cases, tax avoidance will be lawful.

Criminal Provisions of the Income Tax Act

Sections 238 and 239 of the Income Tax Act (“ITA“) make tax evasion a criminal offence. Section 238 of the ITA states that it is an offence to fail to file a tax return or break various other ITA provisions. The offences under Section 238 are “strict liability” offences, which have no mens rea (guilty mind) requirement. This means that you can be convicted for these offences by simply committing the unlawful act. There is no further requirement that you deliberately or with intention committed the unlawful act. There is, however, a due diligence defence for offences under section 238. This means that if you prove you acted with diligence, you may be found not guilty of the offences under section 238. 

Section 239 of the ITA states that it is an offence to falsify records or evade compliance or payment of your taxes. These offences require the mens rea (guilty mind) element. This means that you need to intentionally or knowingly falsify records or evade compliance or payment of your taxes in order to be found guilty of the offences under section 239. Therefore, the tax evasion provision under the ITA requires the Crown to prove the taxpayer acted deliberately or intentionally.  

If you are found guilty of tax evasion, you will have to pay a fine of up to double the amount of the tax sought to be evaded. You can also be sentenced to imprisonment for a term not exceeding two years. 

Powers of the CRA 

The special investigations division of the Canada Revenue Agency (“CRA”) investigates cases of taxpayers suspected of tax evasion. Once it collects evidence, it then prepares the case for prosecution. In order for the special investigations division of the CRA to collect evidence from the suspected taxpayer, it relies on the investigatory powers given to it under the ITA. For example, via section 231.2 of the ITA, CRA officials have the ability to demand documents or information from taxpayers. Section 231.1 of the ITA grants CRA officials the power to enter a taxpayer’s business premises without a warrant to inspect the taxpayer’s books and records. If the taxpayer does not voluntarily surrender material to the CRA or the material cannot be found, section 231.3 allows a judge to issue a search warrant authorizing the CRA official the power to search the premises for evidence and seize evidence. 

In instances where the CRA believes that there is sufficient evidence to warrant the taxpayer to be charged with a criminal offence, it will hand over the case to the Department of Justice for criminal prosecution under the Criminal Code of Canada. 

CRA Voluntary Disclosures Program

The CRA’s Voluntary Disclosures Program (“VDP“) is a CRA program that allows Canadian taxpayers to come forward and declare previously undeclared income or to correct past filed tax returns. Through the VDP, a taxpayer can come forward to the CRA and provide the CRA with details regarding mistakes that have been made on past returns or give them information they may have left out in the past. If the CRA accepts the taxpayer’s disclosure, the CRA will not refer the taxpayer for criminal prosecution. The taxpayer will still be required to pay the amount of taxes due plus interest in part or full and penalties. 

Professional Legal Help With the CRA

If the CRA has contacted you regarding undeclared income, unfiled tax returns or another situation that could lead to tax evasion charges, contact our lawyers immediately. In most cases, the CRA is more interested in collecting the money owed to it than referring people for criminal prosecution. Our lawyers are well versed in both tax law and the criminal system and can help to reduce the likelihood of criminal prosecution by the CRA.  

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.

Interest and Penalties

The Canada Revenue Agency (“CRA“) charges taxpayers who fail to pay their tax debts on time daily compounded interest on their outstanding tax debts. The CRA can also charge taxpayers penalties for filing their taxes late. If you are faced with large tax debts and interests and penalties that continue to accumulate, you may feel like there is nothing you can do to change your situation and get out of your tax debt. However, the Canadian government has incorporated provisions in the Canadian tax laws that permit the CRA to reduce or entirely remove interest and penalties in certain circumstances. 

Voluntary Disclosures Program

One way of reducing interest and penalties is through the Voluntary Disclosure Program, which allows taxpayers to voluntarily come forward and declare previously undeclared income to the CRA. If you are interested in learning about the CRA’s Voluntary Disclosure Program, check out our blog post on the program here.  

Taxpayer Relief Program

Another way of reducing interest and penalties is through the Taxpayer Relief Program. The Taxpayer Relief Program allows the CRA discretion to waive interest and penalties in certain circumstances. The CRA does not have the discretion to alter the principal tax through this program. It is only the interest and the penalties that can be reduced or forgiven through this program.

Qualifications for the Taxpayer Relief Program 

The Taxpayer Relief Program is only available in certain situations. The CRA will only grant interest and penalty relief in certain situations where circumstances beyond a taxpayer’s control prevented them from paying or filing their taxes on time. While the CRA has the discretion to accept circumstances other than the ones below, the Taxpayer Relief Program is generally available under these three circumstances: 

1. Extraordinary circumstances (If the interest or penalties arose due to circumstances beyond the taxpayer’s reasonable control. This could include, for example, death, severe illness, natural disaster, accidents or mental distress)  
2. Significant financial hardship (If the tax debt to the CRA, including its interest and penalties, is causing substantial financial hardship on the taxpayer, or if the taxpayer has shown an inability to pay the tax debt due to financial hardship) 
3. Actions of the CRA (If the CRA’s actions, for example, processing delays or errors, have caused or contributed to the interest or penalties)

Filing a Request for Taxpayer Relief

To qualify for the Taxpayer Relief Program, you must apply to receive taxpayer relief by completing and filing the RC4288 form with the CRA. It is crucial to understand that the CRA wants its tax debts paid in full, including interest and penalties. Interest and penalties have been put in place to ensure taxpayers comply with Canadian tax laws and to encourage taxpayers to pay and file their taxes on time. For this reason, the CRA expects specific proof and a solid case before accepting a request for taxpayer relief and reducing or removing interest and penalties for taxpayers. An application for Taxpayer Relief must correctly set out the grounds under which the relief is being requested. The application must also set out why the relief request is valid, and supporting documentation and evidence must also be provided. 

Professional Legal Help With Taxpayer Relief Program

If you want to be accepted into the CRA’s Taxpayer Relief Program, our lawyers have the skills and experience necessary to give you the best chance of having your application accepted. CRA processes are complex and confusing, and the CRA will seek every opportunity to deny your relief application. Our lawyers will review your specific situation, prepare your written submissions, complete the RC4288 form on your behalf, and represent you against the CRA through the entire process. Contact us today to find out how we can help you successfully apply and get accepted to the Taxpayer Relief Program. 

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.

The Canada Revenue Agency’s (“CRA“) audits mainly focus on those categories of taxpayers who are most likely to have under-reported their income. As employees and salary earners can have their income easily cross-checked against the information returns filed by their employers, it is self-employed taxpayers, corporations, and trusts that are the most likely to be selected for an audit. The CRA describes the primary purpose of its audit programs as “monitoring and maintaining the self-assessment tax system” and maintaining public confidence in the tax system. 

How Far Back the CRA can Audit

The CRA is generally permitted to reassess tax returns for individuals three years from the Notice of Assessment date. For Canadian-controlled private corporations, there is also a three-year limit from the Notice of Assessment date during which the CRA can conduct an audit. For large corporations, this timeframe can extend to four years. For GST/HST, the CRA can audit those returns for up to four years from the specific tax year. So, for example, if you are an individual and receive your Notice of Assessment for your 2020 tax return in May 2021, the CRA is permitted to audit your 2020 tax return until May of 2024. In cases where the CRA suspects fraud or negligence, there is no audit time limit, and the CRA will be able to audit as far back as it wants. 

CRA Audit Triggers

While the CRA can audit anyone, there are various factual scenarios that can make a taxpayer more likely to be the subject of an audit by the CRA. For example, if you are self-employed, you are generally more likely to be audited than someone who is employed. In addition, claiming large numbers of business expenses or having unusual deductions can also make you more likely to be a target of an audit by the CRA. 

Furthermore, certain industries and certain types of businesses are more likely to be audited than others. For example, you are more likely to be audited if you operate a restaurant or are in the construction industry, as many transactions in these industries are conducted in cash. 

The CRA is also more likely to audit a business that reports repeated losses, as the CRA will question why the taxpayer chooses to operate a business with repeated losses and will suspect unreported income. The CRA is also more likely to audit those who own offshore assets outside of Canada. 

The Commencement of the Audit

The audit process starts when the CRA issues a letter to the taxpayer, stating that the taxpayer is subject to an audit. The CRA will generally specify the date, time, and location of the audit. The audit can take place in the taxpayer’s place of business, residence, or at a CRA office. The audit can also take place at the office of the taxpayer’s representative. 

The CRA generally provides a list of documents for the taxpayer to make available for inspection in the audit letter. The CRA can request all books, business records, bank statements, invoices, and any other documents from the taxpayer, which would be required to justify the taxpayer’s claims on their tax return for the year or years under audit.  

Audits are also sometimes commenced with a formal “requirement” for information, which will cite a relevant section of the Income Tax Act (“ITA“), which requires you to legally comply with the request. The CRA will produce particulars of the documents and information that it wants the taxpayer to provide, along with a deadline for doing so. 

Powers of the CRA During an Audit

Sections 231.1 to 231.6 of the ITA provide the inherent rules for the CRA during an audit. Under section 231.1, CRA auditors have the power to inspect and examine the taxpayer’s books and records and enter the taxpayer’s business premises without a warrant. The CRA auditor also has the right to require the cooperation of the taxpayer and third parties and require the owner or manager of the business premises to provide “all reasonable assistance.” The CRA auditor also has the right to make a copy of any document required for the audit. 

Under subsection 231.1(2), if the audit is conducted at the “dwelling-house” of the taxpayer (i.e. the personal residence of the taxpayer), prior consent has to be given by the occupant. Otherwise, a legal warrant will be required for the CRA to enter the residence. If the CRA needs information from third parties or any individual not directly linked to the audited party, the CRA must get judicial authorization to get the information. 

Under section 231.7, failure to comply with the CRA on any of their lawful requests for information under the ITA can result in a compliance order issued by a judge. Failure to comply with the CRA’s requests after that order can result in fines and penalties ranging from $1,000 to $25,000 and even imprisonment. 

Professional Legal Help With Your CRA Audit

If the CRA audits you, it is important that you understand your rights and obligations as a Canadian taxpayer. In addition, it is important to know that the CRA will be relentless in finding hidden tax dollars during the audit process. For these reasons, it is crucial to have professionals on your side during the audit process. Our lawyers can assess your situation, help you prepare for the audit, represent you against the CRA, and provide you with the best chance of success. 

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.

Administration of Taxes by the CRA

The Minister of National Revenue (the “Minister“) is the administrator of tax in Canada. However, in practice, the Canada Revenue Agency (“CRA“) performs nearly all of the Minister’s functions.

When a taxpayer files a tax return, the CRA will ensure that all of the taxpayer’s required documentation has been submitted. When this process is complete, a notice of assessment is issued by the Minister to the taxpayer.

Once a notice of assessment is issued, some tax returns will undergo a more careful examination, and the CRA will select certain tax returns for an audit. As employees earning a salary can have their incomes verified through cross-checks against the information filed by their employers, it is self-employed individuals, corporations, and trusts that are more likely to undergo an examination or audit.

After the examination or audit, a notice of reassessment is issued by the CRA. The period for the reassessment of individual tax returns is three years from the date of mailing of the original assessment and four years for corporations (other than Canadian-controlled private corporations). After this period, the CRA cannot reassess a taxpayer except in cases of taxpayer misrepresentation or fraud.

There is a ten-year limitation period for the collection of unpaid taxes by the Minister. Under section 224 of the Income Tax Act (“ITA“), the Minister can collect unpaid taxes by garnishing the taxpayer’s wages without getting a court order. Similarly, under section 225 of the ITA, the Minister has the power to verify whether a taxpayer’s taxes have been paid and direct the taxpayer’s chattels and goods to be seized without getting a court order.

A taxpayer who disagrees with a notice of assessment can contact the CRA and informally resolve the dispute. If the taxpayer is unsuccessful in resolving the dispute informally, the taxpayer can initiate an appeal from an assessment or reassessment by serving a notice of objection on the Minister. The deadline for serving the notice of objection and initiating the appeal is the later of one year after the filing due date and 90 days from the mailing of the notice of assessment for individuals, and 90 days from the mailing of the notice of assessment for corporations. The Minister has the discretion to extend these deadlines.

There is no prescribed form for the notice of objection; however, according to subsection 165(1) of the ITA, the objection must set out “the reasons for the objection and all relevant facts.” Once the taxpayer initiates the objection, the Minister will confirm, vary or vacate the assessment or reassessment.

Tax Court of Canada 

A taxpayer who disagrees with the Minister’s decision to confirm, vary or vacate the assessment or reassessment has the right to appeal the Minister’s decision to the Tax Court of Canada (“TCC“). The taxpayer must initiate the appeal within 90 days from the day of the mailing of the Minister’s notice of objection decision.

There are two different procedures at the TCC: the informal procedure and the general procedure. Taxpayers can use the informal procedure for cases where the amount of tax and penalties at issue is $12,000 or less, and the amount of loss in issue is $24,000 or less, or only the payment of interest is the issue.

Informal Procedure

Under the informal procedure, a taxpayer may be self-represented or represented by an agent (who does not need to be a lawyer). Furthermore, under the informal procedure, the TCC is not bound by the legal rules of evidence, there are no particular forms of pleadings or other formalities required, and judgement is generally rendered within 60 days. The TCC’s decision is final under the informal procedure, and the taxpayer has no further right of appeal available. Nevertheless, the decision will still be subject to judicial review by the Federal Court of Appeal, which permits review of decisions on the basis of errors of law, violation of natural justice or material errors of facts.

General Procedure

Under the general procedure, the proceeding will be more formal, the legal rules of evidence will bind the TCC, and a non-lawyer may not represent the taxpayer. Furthermore, there is no time limit for the TCC to render its decision, and the TCC may be award costs against the taxpayer. The general procedure is used in all other cases that the informal procedure cannot be used and also in cases where the amount of tax or loss in issue is the same or less than the prescribed amounts for the informal procedure, but the taxpayer has not selected the informal procedure.

Further Appeal

Taxpayers can appeal the decision of the TCC to the Federal Court of Appeal and from there to the Supreme Court of Canada. 

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer. 

“Residency” as a Basis for Taxation 

Residency is the principal connecting factor used for Canadian tax purposes. It underscores the social and economic connections between a person and the taxing authority, which is why Canada uses residency status to imposes tax liability on the worldwide income of “every person resident in Canada.” A non-resident person, on the other hand, is only liable to pay tax on income earned in Canada.

Definition of “Person” Under the Income Tax Act 

The Income Tax Act (“ITA”) defines a “person” to include a corporation and a trust while defining an “individual” as a person other than a corporation. For tax purposes, individuals are treated differently from corporations and trusts in many respects. For instance, while individuals are taxed at progressive rates, corporations are taxed at set fixed rates, with the exact rate dependant on the type of corporation and income they earn. The courts have also set out different tests for determining the residency of individuals, corporations and trusts.

Common Law Test of Residency

In Canada, the leading case on the question of residency is Thomson v. Minister of National Revenue, which sets out the test to determine residence:

To be a resident, there must be “a continuing state of relationship between a person and a place…”

To determine whether there is a continuing state of relationship between an individual and a place, several factors are important and must be examined. Ultimately, this residency test is highly factual, and there is no bright-line test; instead, what is required is a holistic analysis of an individual’s mode of life.

The courts have listed many factors used in their determination of this question, but no one factor is conclusive. Case law following the Thomson case has established several factors. For example, some factors to look at are:

• Whether the individual has a dwelling place in Canada
• Whether the individual has a spouse/common-law partner in Canada
• Whether the individual has dependents in Canada
• Whether the individual is employed in Canada
• Whether the individual has a spouse and/or dependents/child in Canada
• Whether the individual has a Canadian bank account
• Whether the individual is a Canadian citizen

In addition to these factors, the following represent some of the principles that have developed from common law, which go to determining whether an individual is a resident or not:

• The intention of the taxpayer, while relevant in determining their residence, is not determinative.
• A taxpayer can be resident in more than one country at the same time.
• A taxpayer must be a resident of at least one country at any given time.

“Deemed” Full-Time Resident 

As mentioned, the ITA also contains specific provisions that will deem a person to be a resident of Canada in certain circumstances. One of these provisions is paragraph 250(1)(a) of the ITA, which deems an individual to be a resident of Canada if they have “sojourned in Canada” in the year for a period of 183 days or more.

A sojourner has been defined by the courts to mean an individual who is physically present in Canada, but whose presence in Canada is unlike that of a resident as his or her presence in Canada is on a more transient basis than that of a resident. For example, an individual who is a resident of another country and comes to Canada on a vacation or business trip is a sojourner. If this sojourner stays in Canada for a period totalling 183 days or more during the year, paragraph 250(1)(a) will deem this individual to have been a resident of Canada for that year, and this individual would be liable to pay tax on his or her worldwide income.

International Tax Treaties

Canada has also entered into a tax treaty with certain countries. If a taxpayer is determined to be a resident of two countries, the relevant tax treaty between the two countries will allocate the jurisdiction to tax the taxpayer to one of the two countries.

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.