Most people file their annual return honestly and only take deductions and credits made available by the Income Tax Act. Unfortunately, some individuals and businesses evade taxes, and there are legal consequences for such actions.
Anurag Gupta, a Toronto business and tax lawyer with the law firm of Anurag Gupta Professional Corporation, says that evaders may face criminal penalties including jail time and fines up to “200 percent of the amount” that the offender may have been trying to avoid.
Ignoring the Law
Tax evasion occurs when an individual or business ignores tax laws to avoid paying taxes. The Canada Revenue Agency explains that evaders may report less income than they actually earn or state that their deduction amounts are higher than allowed.
If a person earns income not documented by an employer, such as cash or self-employment income, and does not report that income to the CRA on his return, he is committing tax evasion.
Additionally, if an individual is required to file a tax return, and fails to do so, that also may be considered tax evasion.
Evasion or Avoidance
Tax avoidance is often associated with tax evasion, but the two actions are different. Avoidance occurs when an individual uses loopholes in the law to pay less taxes.
With tax avoidance, the tactics are technically legal but frowned upon by the legal system as these tactics are “inconsistent with the overall spirit of the law,” reports the CRA.
For instance, Bob owns a family business where his wife works as his secretary. If Bob overpays his wife to lower his household’s tax bracket, this is considered tax avoidance.
Paying the Price
The penalties for tax evasion are directly related to the offense. Section 238 of the Income Tax Act states the penalties for failing to file a tax return if you’re required to do so. This offense results in a fine of anywhere between $1,000 and $25,000 and up to one year in prison.
Section 239 indicates that those convicted of tax evasion could pay anywhere from half to double the amount that they were trying to save by cheating on their taxes. In addition to paying a fine, offenders may face up to two years in prison.
Programs and Prevention
The CRA has taken measures to detect and prevent tax evasion. The Informant Leads Program gathers information on suspected or known tax evaders. Informants can report information online, by mail or by phone.
The Criminal Investigations Program investigates instances of tax evasion and refers cases to the Public Prosecution Service of Canada.
Gupta says that “the CRA has become more aggressive (and) publishes conviction statistics.” Such statistics include the PPSC’s conviction rate of 96 percent during the 2012 to 2013 tax year. Publishing such statistics aids the CRA’s efforts to thwart offenders.
Gupta notes that it is possible for a taxpayer to commit tax evasion out of negligence or a lack of knowledge. Not understanding tax laws, and filing a return that contains mistakes, could cause you to be investigated for evasion.
He explains that professional advice should only come from a well-known, trusted source.
References & Resources