What Is Tax Fraud—And What Are the Consequences?

What constitutes tax fraud?

Tax fraud occurs when a taxpayer lies or uses other forms of deceit to avoid paying their legal tax obligations. If this sounds similar to tax evasion, that’s because it is: In Canada, whether a tax crime is considered tax fraud or tax evasion hinges not so much on the specific illegal activities that make up the crime but rather on how the Canada Revenue Agency (CRA) decides to proceed with the charges against you.

So if you’re charged under the Criminal Code, you’re in the tax fraud zone. But if the CRA decides to go down the Income Tax Act offences route, you’re looking at tax evasion.

Both tax fraud charges and tax evasion charges are based on illegal acts committed by a taxpayer to avoid paying taxes. The main difference? The penalty you receive upon conviction. You guessed it: A charge of tax fraud under the Criminal Code can result in a much higher maximum punishment, making it a better fit for more serious cases.

And here’s an interesting fact: The terms “tax fraud” and “tax evasion” don’t actually appear in the Criminal Code or the Income Tax Act. Instead, the rules of Canadian tax crime can be found in the Income Tax Act’s offences section—section 239(1)—which lists the following illegal tax-related acts:

• Falsifying information: fudging the numbers or facts on your tax return.
• Destroying records: playing seek-and-destroy with your tax documents and the office shredder.
• Conspiring with others: teaming up with other individuals, like your spouse, to cheat the tax system.
• Making false entries/omissions: deliberately leaving out or twisting important information.
• Intentionally evading: actively trying to dodge your tax liability or compliance obligations.

Some examples to understand CRA tax fraud

Let’s illustrate with some possible scenarios for what constitutes Canadian tax fraud.

Intentional underreporting of income:

• Emily works full-time for a marketing agency but also maintains a personal social media account. She finds herself achieving influencer status, pulling in an impressive $100,000 in brand sponsorships. When tax season arrives, she decides to keep this amount under wraps and only reports her employment income of $80,000.
• Alex runs a home-based cupcake business that’s become a minor hit with the kids in his neighbourhood. This tax year, his bakery generates $40,000 in sales. But when Alex files his tax return, he opts to downplay his success and report only $35,000 in sales.

Making false claims:

• Sarah, a graphic designer working for a marketing agency, decides to claim a $5,000 charitable donation. But here’s the catch—she never actually made this donation. Instead, she uses her design skills to forge a donation receipt to include in her tax return.
• Raj owns his own consulting business and decides to renovate his office space. The actual cost of the renovations is $50,000—a perfectly legitimate business expense. But Raj sees an opportunity to reduce his tax bill further by claiming $250,000 for the renovations, increasing his business expenses by a substantial amount.

In each of these scenarios, if the CRA catches on, the taxpayer could be charged with tax evasion under the Income Tax Act—or, if the CRA decides the illegal act is serious enough (here’s looking at you, Emily and Raj, in particular), they could be charged with tax fraud under the Criminal Code.

What is tax evasion vs. tax avoidance?

As you can see, tax evasion in Canada is a no-go, as it involves clear-cut, illegal actions, such as underreporting earnings or falsifying statements.

Tax avoidance, though, is a trickier beast. With avoidance, you’re cleverly staying within the letter of the law to minimize your taxes—but it’s a little too clever, because it breaks the spirit of the law (setting you up to be caught by anti-avoidance rules).

Let’s consider Daniel, for example. A savvy stock market investor, Daniel uses a series of paper transactions to buy and sell stocks through different entities he controls. This creates artificial capital losses which he then uses to offset his capital gains, effectively reducing his overall tax liability. It’s a scenario that the CRA could decide is abusive tax avoidance that runs afoul of the anti-avoidance rules.

So what’s your safest bet? Effective tax planning: making the most of the tax credits and benefits you’re entitled to in a way that’s totally above board and in line with what the tax laws intended.

What are the consequences of tax fraud?

Getting creative to avoid paying your taxes in Canada could lead to some serious fallout. The punishment for tax fraud under the Criminal Code? The answer’s an eye-opener: you’d be looking at the possibility of imprisonment for up to 14 years.

And the conviction for tax evasion under the Income Tax Act is no mere slap on the wrist: Not only will you need to pay the taxes you owe (including interest and any other financial penalties—ouch!), you could also face a fine of up to 200% of the amount evaded, plus up to five years of jail time.

Impact of tax fraud on immigration status

But it’s not just your freedom and finances that are at risk—the penalties for tax fraud and tax evasion can put your dreams of living in Canada on the line, too.

Here’s the deal: While the criminal charge itself won’t instantly make you inadmissible, a conviction could change everything. That’s because under immigration laws, if you’re convicted of tax fraud under the Criminal Code, you’ll be inadmissible, which means you’ll receive a removal order—whether you’re a permanent resident or a temporary resident.

There’s a bit of wiggle room when it comes to a conviction for tax evasion under the Income Tax Act. In that case, your status will hinge on:

• For permanent residents—the term of imprisonment you’re sentenced to.
• For temporary residents—whether or not the CRA chooses to pursue the charges against you by way of indictment.

Do’s and don’ts of tax filing

As a newcomer, navigating tax season correctly is crucial to ensure you avoid the slippery slopes of tax fraud and tax evasion. Here’s a list of practical do’s and don’ts to help you meet your tax-filing obligations the right way:

• Do keep accurate and complete financial records. This is particularly important for business owners, in order to avoid any hint of self-employed tax fraud or payroll tax evasion.
• Don’t underreport your income (or inflate your business expenses, if you work for yourself). It’s not just bad practice—it’s a fast track to tax trouble.

• Do claim legitimate deductions and credits, but be sure you research what’s allowable for your specific situation.
• Don’t overlook any secondary sources of income, such as freelance work, even if it’s minor.

• Do ensure your personal information is up-to-date and accurate on all your tax filings.
• Don’t miss tax-filing deadlines. Late filing can result in penalties.

• Do check—and double-check!—your tax returns for errors before submission.
• Don’t overlook the benefits of using tax-preparation software, such as TurboTax, for streamlining the process and reducing the likelihood of errors.

• Do stay informed about any changes in tax laws that could affect your tax filings.
• Don’t misinterpret tax laws and regulations. When in doubt, it’s always better to ask a tax expert.

With these tax-fraud guidelines—less glamorous (but more impactful, we hope!) than any heist movie plot—you’re now equipped with everything you need for a successful tax season.