Penalties for income tax evasion can range from heavy fines to imprisonment.
Who doesn’t hate paying their income tax? However, most Canadian taxpayers, including owner-managers, understand that paying their fair share of income tax is simply the price of living in Canada with its many benefits. It is not surprising that those who do pay their share of income taxes are justifiably outraged by those who do not pay, especially if it appears they are able to get away with it.
The cost of delinquency to the people of Canada is enormous.
Tax avoidance, or minimization, is the skilful use of the tax laws to minimize the amount of tax owed. Tax evasion, on the other hand, may be defined as failing to report taxes owed, reporting inaccurately or using some illegal means such as fraud to reduce the taxes owed under the tax laws.
The Cost to Taxpayers
The cost of delinquency to the people of Canada is enormous. Tax Justice Network, a London-based independent organization created in 2003 to monitor tax systems around the world for fairness and transparency, claims the people of Canada lose about $81 billion annually through tax evasion. That’s four times what we spend on defence and almost one third of what we spend on healthcare every year.
In fact, tax evasion is taken so seriously by the Canada Revenue Agency that it has a “Newsroom” www.cra-arc.gc.ca/nwsrm/cnvctns/menu-eng.html where it uses court records to publish press releases announcing convictions for tax evasion. The CRA does this “to maintain confidence in the integrity of the self-assess- ment system, and to increase compliance with the law through the deterrent effect of such publicity”.
Canada loses about $81 billion annually through tax evasion.
The Cost to Delinquents
Punishment for tax evasion can be a fine, jail time or both. Convicted tax evaders must pay the full amount of taxes owing plus interest and any civil penalties assessed by the CRA. Failure to file a tax return can lead to a fine of between $1,000 and $25,000 and as much as 12 months in jail. Making a false or misleading statement on the tax return or wilfully evading paying taxes can bring a fine of between 50% and 200% of the amount of tax owed and a two-year prison term.
The following examples from the 2011 “rogues gallery” is only a small sampling of the kind of violations prosecuted by the CRA.
1. Failure to Comply with a Court Order
In June 2011, the Ontario Court of Justice found a tax- payer guilty of eight counts of failing to comply with a court order to file outstanding personal income taxes for the years 2000 through 2007 inclusive. The taxpayer was fined $8,000 and ordered by the courts to file the outstanding returns.
The taxpayer could easily have avoided the fine and possible additional penalties by meeting CRA’s request to file. When returns are outstanding, the CRA’s policy is to ask the taxpayer to file the missing returns. If the taxpayer ignores the request and fails to file, the CRA then serves a notice demanding the returns be filed. In this case it is apparent that the taxpayer did not comply and therefore charges were laid.
2. Tax Preparers Sentenced
Tax preparers themselves are not immune to scrutiny by the CRA. In July 2011, the courts found a tax preparer guilty on 134 counts of tax evasion under the Income Tax Act and four counts under the Tax Rebate Discounting Act. According to court records the tax preparer claimed or obtained $393,504 in false income tax refunds by filing fraudulent returns for 134 clients. Not only did the tax preparer have to repay the total amount of tax evaded, he had to pay a fine of $393,504 (100% of the evaded amount) plus an additional $2,000 on the four counts under the Tax Rebate Discounting Act. He was also sentenced to house arrest for two years less a day. The preparer was allowed to pay the fine in installments over five years. Failure to comply will result in a jail term in excess of two years.
The courts also found three other persons party to the scheme. Their sentences were as follows:
1. Nine months in jail and a $286,000 fine
2. Three months in jail, six months’ probation and a $36,000 fine
3. Three months in jail and a $36,000 fine.
CRA investigations tie up personnel, clog the courts and cost taxpayers money.
3. Electrical Contractor Fined
An electrical contracting company was convicted of one count of evading GST and one count of income tax evasion. The company had claimed $379,705 in non-business expenses between 2004 and 2006 as well as construction expenses associated with building two cottages for company directors. Input tax credits for GST of $24,007 related to the cottage expenses were also claimed as business expenses. The company was fined $165,822, an amount equal to 200% of the total amount evaded and given one year to pay.
4. Inflated Business Expenses
For the years 2005 through 2007, a taxpayer failed to offset credit notes against purchases, claimed invoices twice, indicated that personal expenses were business expenses and claimed expenses for which receipts or other documents were not available. The cost to this taxpayer was more than $49,000 after charges of tax evasion were upheld by the courts. The $49,000 fine represented 80% of the federal tax evaded. In addition, the taxpayer will have to pay the taxes owed plus any interest or penalties assessed.
5. False Invoicing Scheme Costly for All Involved
Three business associates cooked up a false invoic- ing scheme in which, over a two-year period, invoices from Company A billed Company B for costs associ- ated with building a personal residence for Company B’s owner. Company B was then able to reduce the corporate income by $165,000. As well, the owner of Company B failed to report the benefit received from payment of the construction cost. This resulted in tax evasion approximating $45,000. The courts fined not only Company A and Company B but also the prinipals involved in the scheme. The total amount fined exceeded $105,000. As well, the companies and principals were ordered to repay the taxes owing along with interest and penalties.
If You Think You Might Not Be in Compliance
Chartered accountants deal with the CRA on a regular basis and find that in the normal course of business the CRA is fair when dealing with professionals and their client base. The CRA, like most businesses, would prefer that taxpayers meet their obligations voluntarily because investigations resulting in settlements tie up personnel, clog the courts and, of course, cost taxpayers money. This is why the CRA suggests that taxpayers who have inadvertently failed to report all of their income from prior years may be able to avoid such penalties and potential jail time if they comply before any action is taken by the CRA.
If you think you may not be in full compliance with current tax legislation, ask your chartered accountant about the Voluntary Disclosure Program or visit the CRA website www.cra.gc.ca/voluntarydisclosures.html
BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by The Canadian Institute of Chartered Accountants for the clients of its members.
Richard Fulcher, CA – Author; Patricia Adamson, M.A., M.I.St. – CICA Editor.