Published: March 12, 2020
Last Updated: October 21, 2022
You commit tax fraud and tax evasion by not reporting all of your worldwide income, or by fraudulently claiming expenses or tax credits that you are not entitled to deduct. Canada’s Income Tax Act and Excise Tax Act set out various offences with penalties that include jail time as well as fines of up to 200% of taxes evaded. Tax evasion activities can also result in charges being laid under the Criminal Code of Canada, and there are several areas of overlap between the tax acts and the Criminal Code.
CRA has a separate investigations division to which any suspected tax evasion files are referred, either as a result of a normal tax audit or through third party tax evasion tips. The special investigator can issue a formal written demand and has wide powers of inquiry including the power to demand books and records and information from the taxpayer. A person who refuses to comply with the requirement to provide information is subject to prosecution under section 238 of the Income Tax Act or 326(1) of the Excise Tax Act, which each provides for fines of up to $25,000 and imprisonment of up to 12 months. These provisions are also applicable to a taxpayer who does not file tax returns. Prosecution for failure to file tax returns can therefore result in a jail term.
A tax fraud investigator can apply to a judge for a search warrant under section 231.3 of the ITA (or under s.487 of the Criminal Code). Search warrants are executed by the CRA investigator with assistance by police officers. They will normally search both home and business premises and the offices of the accountant, and they will seize paper books records as well as any computers and digital storage devices. When these records are seized they will normally be held for weeks and sometimes months, causing major disruption to business operations. Our Canadian tax lawyers often negotiate with CRA officials, or apply to court, for a timely return of these records. Accountant records are not subject to privilege (unlike lawyer’s files) and all of the accountant’s files will be seized.
Tax evasion and tax fraud are established by subsection 239(1) of the Canada tax act. Penalties are established for making false statements in income tax returns or false entries in books and records, as well as for evading taxes, or for conspiring to commit those offences. The penalties set out a fine of between 50% to 200% of the tax and a jail term of up to 2 years. There are similar provisions relating to GST/HST tax evasion and tax fraud set out in section 327 of the Excise Tax Act. Furthermore subsection 239(2) allows the CRA tax lawyer prosecutor to proceed by way of indictment instead of by summary prosecution in which case the fines are 100-200% of the taxes evaded plus imprisonment of up to 5 years.
If you are served with a Canada Income Tax related search warrant, or if you have been charged with tax evasion or with tax fraud, or think that a CRA audit or a tax investigation may lead to tax prosecution or tax charges, you should immediately contact one of our experienced Canadian tax litigation lawyers for assistance.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
Frequently Asked Questions
Tax evasion is a deliberate attempt by an individual or business to deceive tax authorities with respect to the tax obligations of that individual or business. Tax evasion or tax fraud, unlike legal tax avoidance, has criminal consequences and tax evaders can face tax prosecution and prison time in addition to fines and penalties.
Tax evasion and tax fraud are interchangeable terms referring to any deliberate attempt made to defeat tax law through misrepresentation or misreporting tax liabilities. Tax evasion, or tax fraud, can and should be distinguished from legal tax avoidance, which includes transactions designed to minimize tax within the letter of the law while potentially contravening the object and spirit of the law. Tax evasion or tax fraud, unlike legal tax avoidance, can result in criminal tax prosecution and tax evaders can face tax prosecution and prison time in addition to fines and penalties.
The CRA has a number of analytical tools and legal powers at its disposal. For example, the CRA has powers to obtain records from financial entities concerning bank transactions and FINTRAC records of wire transfers involving transfers of more than $10,000. The CRA can also demand extensive records from businesses that supply commercial contractors (for example, Home Depot). With respect to cryptocurrency, the CRA can issue third-party requests to cryptocurrency exchanges for information on any individual who has traded more than $20,000 in cryptocurrency. Where corroborating evidence is not available, the CRA also has indirect tax audit verification methods like net worth assessments and other projection methodologies that can be used to assess income across all manner of businesses (including taxi/ride-sharing services and restaurants, among many others). Under Canada’s tax treaties, as well, the CRA has additional powers to compel foreign governments and financial institutions to cooperate with tax evasion investigations and to disclose assets owned by Canadians.