Introduction: Enforcement of the Canadian Tax System
As the Canadian tax system is based upon taxpayers self-assessing and self-reporting their income, to protect the integrity and fairness of the system, various enforcement mechanisms are in place to ensure compliance. For those who do not comply with the provisions of the Income Tax Act, the non-compliant taxpayer may be found guilty of an offence under the Act, depending on the degree of non-compliance. Subsections 238(1) and 239(1) of the Act enumerate the types of conduct that can lead to a non-compliant taxpayer being found guilty of a tax offence.
Overview of Income Tax Act Subsection 238(1): Strict Liability Offences
Tax offences set out in subsection 238(1) are strict liability offences. Strict liability offences mean that only the actus reus (the guilty act) and not the mens rea (the guilty mind) needs to be proven. With strict liability offences, the due diligence defence—that one has taken all reasonable measures to prevent the offence from occurring—is available.
Subsection 238(1) tax offences relate to a taxpayer’s failure to file returns or comply with certain other filing, reporting, or withholding requirements under the Tax Act. These include not notifying the Canada Revenue Agency (CRA) that a non-resident person has disposed of taxable Canadian property if required to do so, and not withholding and remitting source deductions from salary, wages, or remuneration if required to do so.
If a taxpayer is found guilty of a subsection 238(1) tax offence, the taxpayer is liable upon summary conviction for a fine between $1,000 and $25,000, or a fine plus a maximum term of imprisonment of 12 months.
Further, since subsection 238(1) offences are tried by summary conviction, according to subsection 244(4) of the Act, charges for summary conviction offences may not be laid more than 8 years after the day on which the complaint arose. Therefore, non-compliant taxpayers who may be liable under subsection238(1) should be mindful of the 8-year limitation period within which the CRA or Crown must lay a charge.
Overview of Income Tax Act Subsection 239(1): Tax Evasion Offences
In contrast to subsection 238(1) offences, subsection 239 (1) offences are what are called “true, criminal” or tax evasion offences. As a true criminal tax offence, both the mens rea (guilty mind) and actus reus (guilty act) must be proven. Further, the accused taxpayer must be found guilty beyond a reasonable doubt. Non-compliant actions that fall under subsection 239(1) include:
- making false or deceptive statements in a return, certificate, statement or answer filed;
- destroying, altering, mutilating, secreting, or disposing of the records or books of account of a taxpayer to evade payment of tax;
- making false or deceptive entries or omitting material particulars in records of books of account of a taxpayer;
- wilful evasion of, or attempts to evade, compliance with the Act or payment of taxes imposed by the Act; or
- conspiring to commit any of the above offences.
If a taxpayer is found guilty of a subsection 239(1) offence, the taxpayer is liable for a fine ranging between 50% and 200% of the amount of tax that was sought to be evaded, or both a fine and imprisonment for a term not more than 2 years.
However, subsection 239(2) provides that the Canadian tax litigation lawyer acting for CRA may choose to prosecute the person charged with a subsection 239(1) tax offence by way of indictment. If found guilty by way of indictment, the taxpayer is liable for a fine ranging between 100% and 200% of the amount of that tax sought to be evaded, and may have to serve a maximum term of imprisonment of 5 years. Unlike summary conviction offences, no limitation periods are applicable to indictable offences. Accordingly, should the Crown elect to prosecute by way of indictment, a non-compliant taxpayer may be charged with tax evasion at any point after the alleged tax evasion first arose.
Pro-Tax Tips: How to Avoid Being Charged with a Subsection 238(1) or 239(1) Tax Offence?
To avoid being charged with a subsection 238(1) or 239(1) offence, taxpayers who are required to, but have not been filing their tax returns or withholding source deductions, may have their experienced Canadian tax lawyer submit a voluntary-disclosure application to correct for omission or errors in their filings before the Canada Revenue Agency contacts them. If the taxpayer’s voluntary-disclosure application is accepted, the taxpayer is relieved from prosecution, and from paying penalties and some of the interest that the taxpayer would otherwise be required to pay. To qualify for the Voluntary Disclosures Program (VDP), a taxpayer must meet certain requirements. Contact our tax law office to speak with an experienced Canadian tax lawyer for guidance on whether the Voluntary Disclosure Program applies to you and what can be done should you find yourself not meeting your reporting, filing, or withholding requirements under the Income Tax Act.
What is the difference between Income Tax Act subsection 238(1) and 239 tax offences?
Subsection 238(1) tax offences are strict liability offences whereas subsection 239(1) offences are criminal, tax evasion offences. For strict liability offences, only the guilty act needs to be proven whereas for criminal offences, both the guilty act and the guilty mind must be proven beyond a reasonable doubt.
What may happen if a taxpayer is found guilty of an Income Tax Act subsection 238(1) offence?
If a taxpayer is convicted of a subsection 238(1) offence, the taxpayer is liable for a fine between $1000 and $25,000, or a fine plus imprisonment for a maximum term of 12 months.
What may happen if a taxpayer is found guilty of an Income Tax Act subsection 239(1) offence?
If a taxpayer is found guilty of a subsection 239(1) tax offence, upon summary conviction, the taxpayer is liable for a fine ranging between 50% and 200% of the amount of tax that was sought to be evaded, or both a fine and imprisonment for a term not more than 2 years. However, if the taxpayer is prosecuted by indictment and found guilty, then the taxpayer is liable for a fine ranging between 100% and 200% of the amount of that tax sought to be evaded and may potentially be imprisoned for a maximum term of 5 years.