Tax Evasion and Tax Fraud and How an Experienced Canadian Tax Lawyer Can Help

What is Tax Evasion?

Tax evasion generally occurs when an individual or business fails to comply with tax laws to avoid paying taxes. Common instances of tax evasion include:

• Making a false statement on your tax return or other tax documents such as underreporting your income;
• Claiming expenses or tax credits that you’re not entitled to deduct;
• Participating in the underground economy by not reporting cash sales;
• Use of tax zapper work software by restaurants to underreport their sales;
• Not reporting worldwide income or overseas assets over $100,000.

The rules and consequences related to tax evasion are generally set out in sections238 and 239 of the Income Tax Act and section 326 of the Excise Tax Act. Tax evasion is a serious criminal issue giving rise to penalties that include fines and jail time and it goes without saying that it should be avoided at all costs. Individuals not fully in compliance with the Canadian tax acts should seek the advice of an experienced Canadian tax lawyer.

What are the Differences Between Tax Evasion, Tax Fraud, and Tax Avoidance?

While tax fraud and tax evasion are often used interchangeably, tax avoidance is a different concept. Tax avoidance occurs when an individual or business uses tax planning proper to pay less tax.

To combat tax avoidance, the Canada Revenue Agency actively monitors tax avoidance strategies and consults the Department of Finance to request legislative changes related to what appears to it to be abusive tax avoidance strategies.  It is important to emphasize that tax avoidance is entirely legal and proper.  

What are the Consequences of Tax Evasion and Tax Fraud?

The consequences for tax evasion are severe. Tax evaders can face jail time up to five years, a criminal record, and fines up to double the amount of taxes that they were trying to avoid. Between April 1, 2012 and March 21, 2017, the Canada Revenue Agency convicted 408 individuals and businesses of tax evasion. These convictions resulted in a cumulative $44 million in fines and 3,103 months in jail.

Specifically, subsection 238(1) governs tax offences such as:  

• Failure to file or make a tax return when it was required;
• Disposition of a taxable Canadian property of a non-resident who failed to file a notice to Canada Revenue Agency;
• Administration of a pension plan that did not comply with the Income Tax Act;
• Issuance or expense of a receipt for a contribution to a registered political party or candidate where the contribution didn’t actually occur; and
• Failure to keep proper records when carrying on a business that is required to pay or collect taxes or when reporting electronic funds transfers;

In these situations, there can be a fine of $1,000 to $25,000 and a prison sentence of up to 12 months.

Subsection 239(1) pertains to more serious forms of tax evasion, such as:

• Creation, use, or participation in false or deceptive statements in tax returns and other tax-related statements required by the Income Tax Act or other regulations;
• The destruction, alteration, hiding, or other disposition of a record to evade payment of tax;
• Creation of false or deceptive entries or omission to enter certain particulars in records; and
• An attempt to evade or evade compliance with the Income Tax Act or a payment imposed by the Income Tax Act.

The situations contemplated by subsection 239(1) result in more severe consequences such as a fine of 50-200% of the amount of tax that the taxpayer tried to evade and/or a prison sentence of up to two years.

Section 326 of the Excise Tax Act notes the tax evasion consequences related to excise tax (GST/HST). It includes situations such as:

• Failure to make or file a tax return or to keep the proper record as required by the Excise Tax Act; and
• Interfere with Canada Revenue Agency from seizing, inspecting, or auditing particular documents when they are authorized to do so.

The consequences of section 326 are the same as Income Tax Act section 238, where there is a fine of $1,000 to $25,000 and a possible jail sentence of up to 12 months.

Further, a tax fraud investigator can issue a formal written demand to secure possession of the taxpayer’s books, records, and other information. A tax investigator can also apply to a judge for a search warrant under section 231.2 of the Income Tax Act or under section 487 of the Criminal Code. This search warrant would allow the Canada Revenue Agency to search a taxpayer’s home, business premises, and the office of the taxpayer’s accountant. Canada Revenue Agency can also seize any paper records, computers, or digital storage devices. It is also important to realize that the records of your accountant are not privileged and CRA can and will seize those records.

How can an Experienced Canadian Tax Lawyer Help with Tax Evasion and Tax Fraud?

Anything that a taxpayer charged with tax fraud says to their accountant can be used against the taxpayer by the Canada Revenue Agency. Of course the information a taxpayer shares with a lawyer cannot be accessed by CRA due to lawyer-client privilege whileany records that the taxpayer’s accountant has relating to their file can be seized. An experienced Canadian tax lawyer can further negotiate with the Canada Revenue Agency for the speedy return of any records that they seized during the tax fraud audit process.

It’s important not to engage with the Canada Revenue Agency without proper legal tax help. The Department of Justice legal team that prosecutes tax evaders and tax fraudsters are a specialized team of Canadian tax professionals with endless resources.

If you’ve committed tax evasion but have not yet been contacted by the Canada Revenue Agency, you can avoid criminal prosecutions and fines almost entirely through CRA’s Voluntary Disclosure Program or VDP. The Voluntary Disclosure Program, also referred to as tax amnesty, is a Canada Revenue Agency program that allows non-compliant Canadian taxpayers to correct or make changes to the tax returns they have already filed or to reveal tax information that they previously did not disclose.

Our experienced Canadian tax lawyers can help you navigate the Canada Revenue Agency’s Voluntary Disclosure Program. We can advise on whether you would qualify for the program and defend your rights when dealing with the Canada Revenue Agency. 

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch