Introduction - Civil vs Criminal Enforcement from the CRA
While the CRA is empowered under the Income Tax Act to conduct both criminal and civil investigation against Canadian taxpayers for potential non-compliance issues, the CRA conducts a relatively small number of criminal investigations against Canadian taxpayers as opposed to civil enforcement actions.
According to CRA's own publication of their criminal enforcement actions, only 21 taxpayers were sentenced to some form of criminal sentencing for tax evasions in the year 2020.
Recently, a Brampton business owner Mr. Tran, was sentenced to a criminal fine of $364,000 and 8 months in jail for criminal tax evasion under the Excise Tax Act. Given the seriousness of criminal tax evasion, it is important for Canadian taxpayers to understand the nature and possible consequences of criminal tax evasion.
Criminal Tax Evasion
Not all tax non-compliance constitutes criminal tax evasion. Since Canada's tax administration relies on individual taxpayers to self assess their amount owing and report their tax amount owing, it is often the case that a taxpayer ends up report his or her taxes in good faith but incorrectly.
For a case of tax non-compliance to constitute criminal tax evasion, the CRA must prove the necessary mental element (mens rea) of the criminal tax evasion offense. For example, under the Income Tax Act, the mental element for criminal tax evasion is defined as:
239(1)(d) wilfully, in any manner, evaded or attempted to evade compliance with this Act or payment of taxes imposed by this Act, or
The mental element can be proven either directly via relevant statements made by the taxpayer about his or her intention to evade taxes, or it can be proven circumstantially when looking at the totality of facts.
Criminal Tax Evasion Penalties Under the Income Tax Act and Excise Tax Act
Both the Income Tax Act and the Excise Tax Act set out criminal penalty provisions for criminal tax evasion. Subsection 239(1) of the Income Tax Act sets the penalty for criminal tax evasion under the Income Tax Act as a fine between 50% and 200% of the tax amount owing, as well as a prison sentence not exceeding 2 years.
Subsection 327(1) of the Excise Tax Act sets out the penalty for criminal tax evasion under the Excise Tax Act as either a fine between 50% and 200% of the tax amount owing, or in cases where the tax owing under the Excise Tax Act cannot be determined, a fine between $1,000 and $25,000. The Excise Tax Act also impose a possible prison sentence for up to 2 years for criminal tax evasion.
In addition to the penalties under the Income Tax Act and the Excise Tax Act, the CRA may charge taxpayers with fraud or other applicable offenses under the Criminal Code.
Tax Evasion in The Tran Case
In the Tran case, the taxpayer was the sole shareholder of an Ontario corporation, 2346011 Ontario Ltd. The CRA investigation concluded that 2346011 Ontario Ltd failed to remit $726,723 in GST/HST during the period of January 1, 2014, to December 31, 2015.
Mr. Tran was charged and pled guilty to one count of criminal tax evasion under the Excise Tax Act.
We can see from the Tran case that while the tax liability of the corporation is separate from the liability of the directors and shareholders of the corporation, individuals with control of a corporation can nevertheless be charged with criminal tax evasion for a deliberate attempt evade the corporation's tax obligations.
Pro Tax Tips - Know Your Charter Rights
While the penalties associated with criminal tax evasion convictions are severe, Canadian taxpayers are afforded procedural rights under The Canadian Charter of Rights and Freedoms. In the context of CRA investigations, the line between a civil tax compliance investigation and criminal tax evasion investigation can often be blurry.
This means it can often be unclear to the CRA as well as the taxpayer under investigation when an ordinary civil tax audit has concluded and when a criminal tax evasion investigation has began. Common procedures employed by CRA during ordinary audits would often constitute violation of the taxpayer's Charter rights when used in a criminal investigation. During a tax audit, the CRA can compel evidence from a taxpayer under the threat of issuing an unfavorable reassessment against the taxpayer. This technique, if employed during a criminal investigation would likely constitute a violation of the taxpayer's Charter rights.
Therefore it is important to retain top Toronto tax lawyers when you are audited by the CRA to ensure the possibility of criminal tax evasion investigations is considered and prepared for. Our experienced Toronto Tax Lawyers can guide you through the tax audit process in order to reach a satisfactory outcome for you as well as ensuring your rights are protected when criminal tax evasion investigation is a realistic possibility. Don't hesitate to call us today to speak us about your tax needs. Your conversation with us will be confidential.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.