Kevin Hong is an Associate Lawyer at Rosen Kirshen Tax Law. Kevin is currently attending Osgoode Hall Law school, completing the tax law stream. Prior to law school, Kevin obtained an Honours Bachelor of Arts in economics at the University of Toronto, where he received a number of awards and scholarships.
James Pendergast is an Associate Lawyer at Rosen Kirshen Tax Law. James is entering his third and final year at the University of Toronto Faculty of Law. Outside of academics, James is a chair of the Faculty of Law’s Health and Wellness Committee, volunteers with the Law in Action Within Schools (LAWS) program and was an Associate Editor with the University of Toronto Law Review. This year, James competed for the University of Toronto at the 2019 Donald G. H. Bowman National Tax Moot.
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An Update Regarding John Scholz
Previously, we wrote about the Canada Revenue Agency (CRA) auditing certain taxpayers who were involved with John Scholz in alleged “strips” of RRSP registered plans resulting in an “advantage”. In essence, the CRA was assessing for “advantages” received from the transfer of taxpayer’s registered plans to Western Pacific Company, the subsequent purchase of Red Hill Capital Inc., and the direct repayment of the value of their registered plan from John Scholz of Northland Services Inc. following the purchase of the shares. Please review our earlier blog post on Joern (John) Scholz and the related audit for a deeper analysis of “advantages” and “Registered Plan Strips” here.
Conditional Prison Sentence and Fine for Tax Fraud
On September 26, 2019, the CRA announced that Joern (John) Scholz, a financial advisor based in Port Carling (and the advisor related to the registered plan strip scheme above) was found guilty of one count of fraud over $5,000 under the Criminal Code. Specifically, Mr. Scholz was convicted for the evasion of federal income tax and goods and services tax/harmonized sales (GST/HST) and subsequently sentenced to a conditional jail sentence of two years less a day.
A CRA investigation revealed that Mr. Scholz operated an investment counselling business where in which he did not report any of the commission fees received from his clients on his individual tax returns for the 2011 to 2013 taxation years.
By failing to report his commission fees, Mr. Scholz did not to report/pay the following amounts:
CRA Appeal of Sentence Successful
On July 13, 2021, the CRA announced that it was successful in overturning the conditional sentence imposed on John Scholz. Instead, John would be sentenced to three years imprisonment. This recent prison sentence determined at the Court of Appeal for Ontario overturns the initial conditional sentence issued on September 26, 2019. Mr. Scholz was initially sentenced to a conditional jail sentence of two years less a day, including 200 hours of community service and 12 months of house arrest. However, it was determined at the Court of Appeal that a prison sentence was warranted as Mr. Scholz’s fraud and tax evasion constituted a large-scale fraud on the taxpayers of Canada.
Additionally, Justice Ian V.B Nordheimer, the judge presiding over the appeal found that the trial judge made the following two errors when handing down the conditional sentence:
Tax Evasion can be a Criminal Offence and Result in Heavy Fines
Mr. Scholz prison sentence is a stark reminder that tax evasion is a criminal offence. Falsifying records and claims, willfully not reporting income, or inflating expenses can result in prosecution and jail time. Furthermore, if a taxpayer is found guilty of tax evasion, both the Income Tax Act and Excise Tax Act have court fines ranging from 50% to 200% of the taxes evaded and up to five years in prison. A conviction for tax fraud under the Criminal Code can result in up to 14 years in prison.
As such, it is critical that taxpayers understand the difference between tax avoidance and tax evasion. Generally, if the arrangement is consistent with the intent of the law, then it is tax avoidance. Alternatively, if the arrangement is inconsistent with the intent of the law, then it is tax evasion. More importantly, it is critical that taxpayers are aware that the CRA will investigate individuals for tax evasion even if they unknowingly relied on dishonest accountants or advisors.
The CRA states that they remain focused on maintaining the integrity of Canada’s tax system and aggressively cracking down on tax evasion and false claims. Unfortunately, this may result in innocent taxpayers who were deceived by their advisors being caught in the cross – fire. Professionals at Rosen Kirshen Tax Law have significant experience representing taxpayers in such cases in front of the CRA and the Tax Court. If you have recently dealt with John Sholz and/or concerned that you may be audited, call us today! We are here to help!
This article provides information of a general nature only. 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 this article. If you have specific legal questions you should consult a lawyer.