How is tax avoidance different from tax evasion?
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How is tax avoidance different from tax evasion?
Everyone looks for ways to minimize the amount of tax they pay to the government. Some tactics, such as directing income into an RRSP or splitting income with your spouse, are perfectly legal forms of tax planning.
But other methods to reduce your tax burden may be regarded as either tax avoidance or tax evasion. While the latter is always illegal and can result in criminal charges, tax avoidance can result in administrative penalties depending on the circumstances. Unfortunately, the line between lawful tax planning and abusive tax avoidance can be blurred.
What is tax avoidance?
According to the Canada Revenue Agency (CRA), tax avoidance includes “all unacceptable and abusive tax planning … aggressive tax planning refers to arrangements that ‘push the limits’ of acceptable tax planning … in a way that is inconsistent with the overall spirit of the law.”
The agency explains that tax avoidance occurs when a person undertakes transactions that contravene specific anti-avoidance provisions.
“Tax avoidance also includes situations where a person reduces or eliminates tax through a transaction or a series of transactions that comply with the letter of the law but violate the spirit and intent of the law,” it states.
An example of tax avoidance would be if you own a business employing your spouse. If you overpay your spouse to lower the firm’s taxable income, that could be considered tax avoidance.
What is tax evasion?
Examples of tax evasion include:
- falsifying records and claims;
- purposely not reporting income;
- inflating expenses;
- claiming a fraudulent refund or benefit;
- making false or deceptive statements in a return, certificate or statement; and
- destroying, altering, secreting or disposing of records to evade tax payment.
Tax evasion is an offence under s.239 of the Income Tax Act and s.327 of the Excise Tax Act. Both tax advisors and taxpayers can be prosecuted because the acts specify that every person who has “made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation … is guilty of an offence."
How does tax avoidance differ from tax evasion?
Tax avoidance results when actions are taken to minimize tax within the letter of the law, even though those actions contravene the object and spirit of the legislation. Tax evasion typically involves deliberately ignoring a specific part of the law. For example, those participating in tax evasion may under-report taxable receipts or claim expenses that are non-deductible or overstated.
Tax evasion has criminal consequences including incarceration. Tax avoidance is dealt with through fines and demands that you pay the amount owed.
What if I want to refile my tax return to correct tax avoidance?
The CRA allows people to correct previously filed returns through the Voluntary Disclosures Program (VDP). Relief is granted on a case-by-case basis to people who voluntarily come forward before the CRA knows or contacts them about it.
Once the new return has been assessed, you must pay the taxes owing, plus interest (in part or in full). You will also be protected from prosecution.
“It is important that the relief provided under the VDP be fair and not reward individuals or corporations looking for a way to avoid paying their fair share of taxes,” the CRA notes. “To be fair to all, the CRA grants a higher level of relief to those who are correcting an unintentional error than to those who intentionally avoided paying their taxes.”
What is the anti-avoidance rule in Canada?
The General Anti-Avoidance Rule (GAAR) is a section of the Income Tax Act that gives the government broad powers to investigate transactions that it deems to be against the spirit of Canadian tax law.
If abusive tax avoidance is established, the GAAR will deny the tax benefit created by any abusive transaction. The CRA may deny any deduction, exemption or exclusion in computing taxable income, or may recharacterize the nature of any payment or other amount to deny the tax benefit that would result from an avoidance transaction.
The GAAR is intended to ensure that the taxpayer’s freedom to engage in certain forms of tax planning does not extend to misusing or abusing the tax rules.
What is the penalty for tax evasion?
If you are convicted of tax evasion:
- you must still pay the full amount of taxes owing, plus interest and any civil penalties assessed by the CRA;
- you may be fined up to 200 per cent of the taxes evaded; and
- you face up to five years in prison.
A conviction for tax fraud could result in a 14-year prison sentence. Tax fraud is an offence under s.380 of the Criminal Code. Like tax evasion, it involves using deceit, falsehoods and any other means to defraud a person or the public of money or anything else of value.
The CRA notes that between April 1, 2018 to March 31, 2023, there have been 144 convictions for tax evasion with more than $24 million in fines handed out. Sixty-three people were given custodial sentences totalling 111.7 years after they collectively tried to evade $34 million in taxes.
Is tax evasion taken seriously in Canada?
According to the CRA’s How We Combat Tax Evasion and Avoidance, for the five years from April 1, 2017, to March 31, 2022:
- the courts convicted 140 taxpayers for tax evasion of more than $72 million in federal tax combined; and
- These convictions resulted in sentences totalling almost $17 million in court fines and 119 years in jail.
“When comparing the last five fiscal years to the previous five, there has been an increase in the average amount of federal tax evaded per conviction,” the CRA states. “For example, the average evaded tax determined upon conviction is 73 per cent higher than what it was previously ($299,000 from April 1, 2012, to March 31, 2017, compared to $517K from April 1, 2017, to March 31, 2022).”
It adds there has been a marked increase in the number of people incarcerated for tax-related crimes.
“Nearly half of taxpayers were imposed a jail sentence by the courts, as opposed to only a third during the 2012 to 2017 fiscal years,” the CRA states. “In addition, between April 1, 2017, and March 31, 2022, the average fine increased by 14 per cent compared to the previous five-year period, rising to an average of $122,000.”
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