Are you wondering what tax evasion is in Canada? Tax evasion generally refers to a situation where an individual or business avoids tax by intentionally ignoring Canadian tax law.

This usually includes falsifying records and claims, purposely not reporting income or inflating expenses.

Consequences of Tax Evasion

Tax evasion is a crime and the penalties can be very severe. Under s.238 of the Income Tax Act, penalties for failing to file a tax return when you are required to do so may result in a fine of anywhere from $1,000 to $25,000 and up to 1 year in prison.

Under s.239 of the Income Tax Act, every person who is convicted of tax evasion could face a fine of up to 200% of the amount that was sought to be evaded and imprisonment for up to 2 years.

In addition, being convicted of tax evasion can lead to fingerprinting and a criminal record.

What is Tax Avoidance?

Tax avoidance, on the other hand, is a concept often discussed together with tax evasion but it has totally different legal consequences. Unlike tax evasion which is a criminal activity, tax avoidance occurs when taxpayers try to arrange their affairs to minimize their tax burdens.

The Duke of Westminster Principle elicited from one of the landmark cases in Canadian tax law states that taxpayers are entitled to arrange their tax affairs to reduce the amount of tax payable.

If a tax arrangement uses a potential loophole to reduce tax, it is still legal but the Canada Revenue Agency (CRA) may take a closer look at the arrangement and eventually deny the transactions if it is deemed to be abusive.

However, there is no penalty of fine or imprisonment although typically certain expenses will be disallowed.

The CRA nowadays has a powerful weapon called the General Anti-Avoidance Rule (GAAR) to deny any abusive tax avoidance transactions and it is highly recommended to speak with an experienced Canadian tax lawyer if you have any questions about tax planning.

CRA Has Taken Aggressive Measures to Combat Tax Evasion

In recent years, tax evasion seems to have become an organized crime business and many innocent taxpayers have unknowingly become participants in tax evasion activities.

According to the CRA, between 2006 and 2017, 75 tax scheme promoters from across Canada were successfully convicted of tax offences related to tax schemes and the court has imposed a total of $7.15 million in fines and 936 months in jail.

The CRA has also offered Informant Leads Programs and Criminal Investigations Programs to combat tax evasion both domestically and internationally.

Their offshore information program even awards informants up to 10% of the amount tax recovered on any unreported offshore income.

On June 13, 2017, over 80 tax investigators from the CRA and the UK’s tax authority executed searches in both countries as part of an ongoing investigation of an alleged carousel tax fraud scheme against the Canadian government.

Voluntary Disclosure Helps Avoid Jail

Fortunately for honest Canadian taxpayers, the Voluntary Disclosure Program (the VDP) comes to the rescue. It is designed as a second chance for taxpayers to correct their previous errors on their tax returns or disclose unreported incomes in exchange for penalty or interest relief.

For someone who has committed tax evasion, the biggest relief offered by the VDP is that there will be no criminal prosecution if your application is accepted by the CRA.

Tax evasion in Canada is serious.

However, certain conditions must be met for a VDP application to be accepted:

1. It must be voluntary. That means a taxpayer must initiate the process before the CRA contacts him for potential tax problems.

2. The information provided by the application must be complete. Therefore, a taxpayer must disclose all tax information related to all relevant tax years and it cannot be a partial disclosure.

3. It must involve the application or potential application of a penalty.

4. It must include information that is at least one year past due. If your tax return is less than a year due, you can simply file it although you may need to pay a late-filing fee.

5. It must include payment of the estimated tax owed.

A VDP application will generally fall into two streams – a general program and a limited program.

The general program is preferable as it offers both penalty relief and interest relief while the limited program only offers penalty relief.

Our experienced Canadian tax lawyers will try their best to make sure you qualify for the general program to minimize your tax burdens.

The CRA is not Required to Accept All VDP Applications

The VDP is a great opportunity for someone who has committed tax evasion to come clean and come back to the Canadian tax system. Probably the biggest relief is the peace of mind of knowing that you will not go to jail for tax evasion.

However, whether to accept the VDP application is subject to the CRA’s discretion and each VDP application will be reviewed and decided based on its own merit.

We hope you found this article on tax evasion in Canada helpful.

Jack Wang

Tax Lawyer at Barrett Tax Law

416-907-8429