QUICK TAKEAWAY
Tax Evasion involves falsifying records, hiding income or inflating expenses to avoid paying taxes to the government. It is primarily dealt with under the Income Tax Act and the Excise Tax Act and can result in fines, interest, and prison sentences of up to five years upon conviction. Tax fraud, which involves using fraudulent means to defraud a person or the public of money or anything of value, is an offence under the Criminal Code and can result in up to 14 years in prison upon conviction. The Canada Revenue Agency may conduct an audit or launch a criminal investigation to detect tax evasion.
Table of Contents:
What is Tax Evasion?
Tax evasionInvolves falsifying records, hiding income or inflating expenses in order to pay less tax occurs when a person or a business falsifies records, hides income or inflates expenses. The Canadian Revenue Agency (CRA) has many tools at its disposal to detect this activity. If the CRA suspects revenue is not being declared, an audit may be ordered, which could be followed by tax evasion charges.
The Criminal Code does not directly address tax evasion as it is an offence under s.239 of the Income Tax Act and s.327 of the Excise Tax Act. However, tax fraudInvolves using deceit or fraudulent means to defraud a person or the public. could be prosecuted as fraud under s.380 of the Code. Like tax evasion, tax fraud involves using deceit, falsehoods and any other fraudulent means to defraud a person or the public of money or anything else of value.
Audit vs. Criminal Investigation
The CRA may order an audit to verify that information provided on a tax return is correct. Generally speaking, audits are considered a civil matter and people may be ordered to pay a sum of money to the Receiver General for Canada to remedy their tax situation.
In a criminal investigation, the CRA will launch an investigation to gather evidence to determine if there has been tax evasion, tax fraud or other violations of the law. If investigators believe there has been some serious financial impropriety, they will bring that information to the Public Prosecution Service of Canada, which evaluates whether the laying of a charge is in the public interest and whether there is a high likelihood of a conviction.
What is the Penalty for Tax Evasion?
According to Tax Evasion: Understanding the Consequences published by the CRA, 140 taxpayers were given more than $17 million in court-imposed fines between April 1, 2017, and March 31, 2022. Jail sentences totalling 119 years were handed down to those who attempted to avoid more than $72 million in taxes.
In the 2021-2022 fiscal year, the CRA noted that tax evasion prosecutions resulted in an 88 percent conviction rate with $3.3 million in court-imposed fines. There were more than 30 investigations ongoing as March 31, 2022, the agency noted, conducted in conjunction with other law enforcement agencies.
According to the Income Tax and Excise Tax acts, those convicted of tax evasion:
- must pay the full amount of taxes owing, plus interest and any civil penalties assessed by the CRA;
- may be fined up to 200 percent of the taxes evaded; and
- may be given a prison sentence of up to two years if the charge is treated as a summary conviction and up to five years if it is prosecuted as an indictable offence.
If you are convicted of fraud over $5,000 under the Code, you face a maximum sentence of up to 14 years in prison.
What are my Defences to the Charge of Tax Evasion?
The best defence against a charge of tax evasion will depend on the circumstances and the evidence. But here are two common defence strategies.
It was an honest mistake
To be convicted of tax evasion the Crown prosecutor must prove that you committed a criminal action (actus reus) and that you knew (mens rea) that what was being done was illegal. You may not have meant to evade taxes, but simply misunderstood what was required of you.
Your Charter rights were violated
While the CRA has broad powers when it comes to searching financial records, there are limits. The Charter of Rights and Freedoms protects the privacy of individuals and businesses, including the right to be secure against unreasonable search or seizure.
In 2002, the Supreme Court of Canada ruled in R. v. Jarvis that "there must be some measure of separation between the audit and investigative functions" of the CRA. While the purpose of any tax evasion investigation is to determine criminal liability, the Court noted that since an "adversarial relationship" exists between the taxpayer and the state, “all Charter protections that are relevant in the criminal context must apply.”
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Loretta Lori Ann Edlund, Lawyer
Glossary of Legal Terms
Tax evasion
Involves falsifying records, hiding income or inflating expenses in order to pay less tax. Charges may be laid under the Income Tax Act and the Excise Tax Act.
Tax fraud
Involves using deceit or fraudulent means to defraud a person or the public. Charges may be laid under the Criminal Code.
