News Article

Tax Fraud – How to Avoid and Prevent It

Posted: March 11, 2013
Posted in: Breaking News, Tax Planning, Tax Fraud, tax evasion

March is fraud prevention month, and therefore it makes sense – in the heart of the tax filing season – to know which is legal and which is a criminal offence: tax evasion or tax avoidance?

The latter – tax avoidance – is legal. Tax evasion is fraud, a criminal offence, and tax pros need to be on the lookout for it to protect themselves and other taxpayers from abuse. 

“Fraud” means a false representation that is made knowingly or without belief in its truth, or recklessly, or without care as to whether it is true or false. In the case of tax evasion, fraud is the act of willfully making false or deceptive statements in a return, certificate, statement or even an answer filed or verbally given to the Canada Revenue Agency, with the intent to willfully evade the payment of your taxes.

You’ll also be guilty if you willfully make deceptive entries or omissions in your books. A person who destroys, alters, mutilates or otherwise willfully disposes of the records or books of account to evade the payment of tax is also asking for criminal prosecution.  The taxpayer’s advisors can also be found guilty and charged.

Trouble is, many Canadians don’t think they are participating in a criminal offence in common neighborhood transactions. Consider this scenario: an estimation for a cottage deck renovation is in progress. The contractor, your friend, says, “The fee is ‘X’ with a receipt, and ‘Y’ (substantially less) for cash…”

Which quote would you take? Many think it is perfectly acceptable to take the Y option, turning a blind eye to their active participation within the Underground Economy. Few consider that their friend, the contractor, who would not report the cash received, is a tax evader. But, in fact, he is. He benefits at the expense of honest suppliers who can’t match the quote and lose out on the job. 

A tax professional acting in the role of financial educator, can help taxpayers understand tax evasion and avoid both criminal prosecution and a criminal record with the following financial consequences on conviction:

 

Offence

Punishment

Failure to make or file a return as required

A fine of not less than $1,000 and not more than $25,000 or both fine and imprisonment for a term not exceeding 12 months.

Tax evasion, including making of false, deceptive statements in a return, certificate, statement or answer, destroying, altering, mutilating, books or records, or otherwise willfully evading tax or fraudulently claiming refunds or credits

A fine of not less than 50% and not more than 200% of the amount of tax sought to be evaded or both the fine and imprisonment of not more than two years.

Prosecution on indictment: any person charged tax evasion may be prosecuted at the election of the Attorney General of Canada to a further penalty—in addition to any other penalty.

A fine of not less than 100% and not more than 200% of the amount of tax sought to be evaded or credits sought to be obtained.

 

In short, when taxpayers get into this kind of trouble, the taxes owing are the least of their problems. The CRA is bolstering protection and fraud surveillance in its practices and policies, and the Finance Minister has stated in his pre-budget discussions that extra resources to find tax evasion schemes will be allocated in the upcoming budget, expected later this month.  

Tax professionals who run across fraud in working with taxpayers who insist on filing fraudulent returns should refuse to prepare the tax returns, as they, too may be charged if they participate in the scheme. CRA has an extensive site on their views on aggressive tax avoidance schemes: click here.

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