What is Considered Tax Evasion?
Tax evasion is where a taxpayer chooses to avoid paying their real tax liability, and either underpays or pays no taxes at all.
Tax avoidance and tax evasion both involve tax reduction arrangements. However:
- If the arrangement is consistent with the intent of the law then it is tax avoidance;
- If the arrangement is inconsistent with the intent of the law then it is tax evasion.
Tax evasion includes transactions that violate specific anti-avoidance provisions as well as situations where taxpayers reduce or eliminate tax through transactions that comply with the letter of the law but violate the intent of relevant provisions. The latter is done through the General Anti-Avoidance Rule (GAAR).
Tax evasion, unlike tax avoidance, has criminal consequences. Tax evaders face the possibility of prosecution in a criminal court.
What is the GAAR?
Under the Income Tax Act (ITA), Parliament passed the GAAR in order to allow the CRA to prosecute taxpayers who engage is tax evasion that does not violate the letter of the law but violates the intent behind the law.
The ITA states that a transaction that is found to be an “avoidance transaction” will result in a denial of the “tax benefit” that the person would have obtained if not for the GAAR.
In other words, the GAAR applies as a last resort when the existing laws do not explicitly already deny the transaction.
What is an Avoidance Transaction?
Since the GAAR allows the CRA to prosecute people who do not even violate the letter of the law, it is very important to know what sort of transactions could be considered an “avoidance transaction”.
An avoidance transaction will include both a single transaction or a series of transactions that would result, either directly or indirectly, in a tax benefit.
There is an exception if you can show that the transaction was undertaken primarily for purposes other than to obtain a tax benefit.
What kind of Transactions can be Included?
These transactions include:
- Not filing tax returns;
- Excluding sources of income from your returns;
- Excluding amounts of income from your returns;
- Attempting to receive income in a way that would allow the willful exclusion of that income from a tax return; or
- Categorizing a transaction in a way that disguises the real purpose or benefit of the transaction.
What is a Tax Benefit?
It is also very important to know what sort of tax benefit can be included.
A tax benefit will include all of the following:
- Reduction in taxes or other amount payable;
- Avoidance of taxes or other amount payable;
- Deferral of taxes or other amount payable; or
- Increase in a refund of taxes or other amount.
How does the CRA investigate Tax Evasion?
For information on how the CRA investigates tax evasion please click here. This article outlines the difference between an audit and a criminal investigation, your rights when being investigated, what can trigger an investigation, and who is the most likely to be investigated.
What are the Penalties for Tax Evasion?
For information on the consequences that you could face if convicted of tax evasion, please click here. This article outlines the fines that you could face, along with possible jail time.
Can you correct past Tax Evasion?
If you failed to file taxes or made mistakes on your previous returns, and the CRA is not aware of this, you could try to apply to the Voluntary Disclosure Program. For more information on what the Voluntary Disclosure Program entails, please read our articles on the changes that the CRA made to the program. You can find part 1 and part 2 on our website.
If you think you have a CRA tax evasion issue, call us today! We can help! CRA tax evasion could result in fines, penalties, and even jail time. Hiring an experienced tax lawyer to navigate these issues for you is your best way of minimizing potential issues with the CRA.
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.