Tax Evasion: A Serious Criminal Offence That Can Be Avoided
Dean Blachford, Tax Litigation Lawyer
Valentine Gurfinkel, Law Student
This article explains how tax evasion is prosecuted under the ITA and why criminal defence lawyers should consider partnering with a tax lawyer to help them successfully defend their clients against tax evasion charges.
WHAT IS TAX EVASION
Broadly speaking, “tax evasion” is the wilful non-compliance with the ITA. More specifically, tax evasion refers to a series of criminal offences enumerated under sections 238 and 239 of the ITA. These offences include:
- Not filing a tax return.
- Making, assenting to, or acquiescing in the making of false or deceptive statements on a tax return, including understating your income.
- Destroying books and records to evade paying taxes.
- Manipulating books and records to evade paying taxes.
- Wilfully evading, or attempting to wilfully evade, paying due taxes or any other obligations under the ITA.
- Falsely claiming ineligible tax credits or refunds.
- If found guilty of any of the above offences, taxpayers can be fined up to 200% of the tax sought to be evaded and face up to five years in prison. In particularly egregious cases, the accused tax evader may be charged with fraud under section 380 of the Criminal Code and face up to 14 years in jail. Additional civil penalties may also be assessed.
HOW ARE TAX EVASION OFFENCES PROSECUTED?
Tax evasion cases are prosecuted in provincial courts by the Public Prosecution Service of Canada (“PPSC”), a division within the Department of Justice. The CRA refers files to the PPSC after conducting several internal audits and investigations. Generally, only those cases with a high chance of conviction are referred to the PPSC.
WHAT IS NEEDED TO BE CONVICTED OF TAX EVASION?
To convict an accused of tax evasion under sections 238 and 239, the Crown must prove beyond a reasonable doubt that the accused did commit the offence in question (the actus reus) and did so with the “intentional violation of a known legal duty” (the mens rea). The accused does not need to have intended to act secretively or deceitfully. Courts have even found that neglecting to correct past reporting errors can be a form of tax evasion. Not surprisingly, the Crown has a very high success rate in prosecuting tax evasion cases. In 2016-2017, the conviction rate under section 239 of the ITA was 89%, resulting in $10 million in collected fines and jail terms totaling 50.5 years. These rates are likely to rise as the Federal Government continues to take an increasingly aggressive stance against tax evasion, including setting up a tax evasion tip-line and sharing information on accused tax evaders with policing agencies around the world.
TAX EVASION CHARGES CAN LEAD TO CIVIL PENALTIES
In addition to being charged with tax evasion, the accused may also be charged separately for further civil penalties under sections 162 and 163 of the ITA stemming from the same offence. As subsection 239(3) specifies, the CRA is only prohibited from assessing civil penalties “for the same contravention” that resulted in the criminal tax evasion charge after the criminal charges have been made. The CRA is not prohibited from first assessing the accused for civil penalties and then immediately charging them with criminal tax evasion. Indeed, the CRA’s own internal Criminal Investigation Manual requires its criminal investigators to coordinate with the auditor responsible for civil penalties to make sure “auditors have processed the civil assessment before they [the investigators] lay [criminal] charges.” Consequently, a single contravention can readily give rise to both criminal and civil charges, resulting in hundreds of thousands of dollars in penalties.
RECENT CASE LAW
A few recent decisions illustrate important aspects of tax evasion charges:
- Delaying filing tax returns can be regarded as willful tax evasion. In R v Wilm,13 Mr. Wilm, who did not pay or file taxes for eleven years straight, was found guilty, under subsection 239(1)(d), of “wilfully evading payment of income tax” for the last three of those years. The court dismissed Mr. Wilm’s claim that he always intended to pay taxes and was simply delayed.
- Mixing personal and corporate accounts can precipitate in tax evasion charges. In R v Franc’s Consulting Inc,14 a taxpayer was found guilty of tax evasion, under subsections 239(1)(a) and (d), after she sold off parts of the company of which she was the sole shareholder. The Crown argued that the taxpayer never reported her income from the sale and falsely claimed business expenses. The court agreed, in part because the taxpayer managed all her personal, corporate, and familial financial matters from a single bank account without keeping a record of her transactions. The court concluded that such a mingling of accounts “was an attempt to establish financial corporate record confusion to such a level that no one could be able to figure it out.”
- Mistake of the law is no defence. In R v Mori, Mr. Mori was charged with making false statements on his tax returns and for wilfully evading payment of income tax, under subsections 239(1)(a) and (d), because he did not disclose income he received from a company of which he was the sole shareholder. Mr. Mori tried to argue that he mistakenly believed that section 239 was not applicable in his circumstances because he entered into a “Private (Free Agent) Agreement” with the company. The trial judge dismissed this argument, stating that “Mistake of the law […] does not afford a defense.” The Ontario Superior Court upheld the verdict.
HOW TO PREVENT TAX EVASION CHARGES
The best way to prevent tax evasion charges, and additional civil penalties, is to get in front of them by voluntarily disclosing any past errors through the Voluntary Disclosure Program (VDP). The VDP grants taxpayers amnesty from any interest, penalties, or criminal charges associated with previously undeclared income if they fully disclose and pay tax on it. Where the VDP is not available, taxpayers may still be successful by using evidence and cogent argument to undermine the assertions of actus reus and mens rea.
HOW WE CAN HELP
At HazloLaw – Business Lawyers we have extensive experience successfully resolving disputes with the CRA. We partner with criminal lawyers to help their clients achieve the best results possible as efficiently as possible.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Dean Blachford today. 613-747-2459 ext.310, [email protected]