Tax Evasion
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.
