While tax planning is expected and normal, there is a hard line between acceptable planning and conduct that becomes tax evasion. Crossing that line can expose your clients to heavy penalties, criminal charges, and long-term consequences.
In this article, Wealth Professional Canada will cover the four most common forms of tax evasion and other valuable insights. We'll also talk about what happens when your clients stop filing altogether. Scroll to the bottom to see all our news articles on tax evasion.
Tax evasion is a deliberate action to avoid paying tax by breaking the law. It is not about a simple reporting error or misunderstanding. It involves intent. Someone knows what the law requires and chooses to ignore it or work around it using deceit.
In Canada, tax evasion is treated as an offence under these three laws:
Under section 239 (1), a person commits tax evasion if they:
Section 239 (1.1) addresses similar conduct where the goal is to obtain a refund or credit that is not owed, or to increase the amount received beyond what is correct.
A person violates section 327 of the Excise Tax Act if they:
These provisions apply to GST/HST and excise situations, such as fuel-inefficient vehicles and vehicle air conditioners. The same is true for certain petroleum products.
The Criminal Code treats certain tax-related conduct as fraud under section 380. Fraud occurs where someone, through deceit, falsehood, or other fraudulent means, deprives a person or the public of money, property, or anything of value.
Tax evasion that involves serious or organized conduct often leads to fraud charges in addition to tax offences. This means tax evasion can expose your clients to long prison terms and a permanent criminal record, on top of tax penalties and interest.
Overall, these actions are not random errors. They involve false statements and hidden transactions. They can also include manipulation of records. The purpose is to reduce tax, secure money from the government, or both. Check out this video to know more:
Do you know that only one in five Canadians knows the latest tax rules? This lack of awareness can make it easier for both accidental non-compliance and deliberate tax evasion to go unnoticed.
Tax evasion can appear in many forms, but several patterns come up repeatedly. For financial advisors, recognizing these patterns is critical so you can respond when your clients hint at them.
Here are the four most common forms of tax evasion:
Let's discuss them further below:
Manipulating the documents that support a tax return includes:
Under the Income Tax Act and Excise Tax Act, this behaviour is treated as part of an attempt to evade tax or secure improper refunds or credits.
A taxpayer does not need to be the one who physically changes the records. Being aware that false materials are being used and allowing that to continue is enough for liability.
Another common form of tax evasion is leaving income off a return. This involves:
In these situations, the taxpayer knows about the income. The choice not to declare it is deliberate. That intent is what turns a reporting gap into tax evasion.
Instead of hiding income, some taxpayers inflate expenses to shrink taxable income. They do this by:
If the taxpayer knows that the expense claim is inflated but decides to submit it anyway, it falls within the patterns described in the legislation.
Tax evasion also covers situations where someone tries to obtain a refund, credit, or benefit they are not entitled to. Under section 239 (1.1) of the Income Tax Act and section 327 of the Excise Tax Act, this includes:
The law focuses on the extra amount claimed beyond what is actually owed. Fines are calculated based on that excess.
Tax avoidance is not the same as tax evasion, but it still creates risk. Tax avoidance occurs when tax planning reduces tax in a way that goes against the overall spirit of the law. The Canada Revenue Agency (CRA) includes unacceptable and aggressive tax planning in this concept.
The main difference is that tax avoidance is treated as a civil matter. It can result in reassessments, interest, and penalties, but it does not automatically involve criminal charges.
In contrast, tax evasion has criminal consequences. A criminal investigation can lead to prosecution, fines, jail, and a criminal record.
The CRA uses a risk-based approach to focus on those who present the highest risk of non-compliance. Tax evasion and aggressive avoidance often revolve around secrecy and hidden income, assets, transactions, or wealth.
The agency invests in technology, data, and domestic and international partnerships to detect and challenge these behaviours. Watch this video to learn more:
According to a 2024 poll, many see tax evasion and corruption as widespread in Canada.
Serious tax evasion cases are handled by the CRA's Criminal Investigations Program. These investigations can take some time to complete.
The CRA refers the matter to the Public Prosecution Service of Canada when it believes that:
Criminal convictions and other high-profile enforcement actions are made public through enforcement notifications. Subscribers receive information about searches, charges, convictions, and sentencing.
This not only warns taxpayers about tax schemes but also reinforces that tax evasion carries real consequences. With this, encourage your clients to stay compliant and avoid any schemes that seem too good to be true.
There is no grace period for failing to file returns when your clients owe tax. If they have a balance owing, they must file their personal, business, or trust return by the filing deadline.
If your clients miss that deadline and owe tax, the CRA will charge a late filing penalty. If your clients file late again within three years and the CRA has issued a formal demand for a return, a repeat late filing penalty can apply.
In some situations, an information return penalty can also be added. Interest is then calculated on the unpaid tax and on any penalties.
If events outside your clients' control kept them from meeting these obligations, they might qualify for relief from penalties and interest. When they cannot pay an assessed amount in full or on time, they should contact the CRA's collections department to arrange a payment plan.
Tax evasion, tax avoidance, late filing, and fraud might feel far removed from the day-to-day work of a financial advisor. In reality, they intersect with it often.
You are present when your clients talk about cash work, large deductions, cross-border accounts, and "shortcuts" they have heard about from friends or social media.
With a firm grasp of how Canadian law treats tax evasion, you can:
The CRA has shown that it is willing and able to pursue serious non-compliance. Criminal investigations, substantial fines, and lengthy jail terms are not theoretical. They are current outcomes for those who choose to cheat the system.
Aiming to be a good financial advisor? Support your clients in growing their wealth. But if you aspire to be an award-winning financial advisor, you must help protect that wealth from avoidable legal and financial damage.
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