Tax Fraud or Tax Evasion & Tax Audit Difference
CRA Investigation for Tax Fraud – Toronto Tax Lawyer Introduction
As income tax lawyers in Toronto our clients are sometimes investigated by the Canada Revenue Agency for tax fraud or tax evasion. So what is a tax investigation and how does it differ from a tax audit? This article will explain the differences between being audited for taxes and being investigated by CRA for tax fraud or tax evasion.
An income tax audit is an examination of a taxpayer’s income tax records, such as bank statements and receipts, by a tax auditor who is examining those tax records to make sure that the tax returns that have been filed are completely accurate and that all income has been reported. A tax investigation is very different from a tax audit and the purpose is to see if tax evasion or tax fraud has been committed as part of a tax scam with a view to bringing tax charges. However a tax investigation may well result from tax audit findings.
What is a Tax Investigation?
An income tax investigation is an examination of a taxpayer’s tax books and records to see if there are grounds for bringing criminal tax charges under the Income Tax Act or Excise Tax Act (for GST/HST). CRA has a separate investigations division to which any suspected tax evasion files are referred, either as a result of a normal tax audit or through third party tax evasion tips. The special investigator can issue a formal written demand and has wide powers of inquiry including the power to demand books and records and information from the taxpayer.
Tax Evasion and Tax Fraud Charges
The most common tax offences charged by CRA are for tax evasion or filing a false or misleading statement under subsection 239(1) of the Income Tax Act or subsection 327(1) of the Excise Tax Act or failure to file a return under subsection 238(1) (Income Tax Act) or subsection 326(1) (Excise Tax Act). Other tax charges typically include other offences related to GST/HST, as well as customs violations such as the failure to declare jewelry or other merchandise or cash at the Canadian border.
Penalties for Tax Evasion and Tax Fraud
The penalties set out in the Income Tax Act are a fine of between 50% to 200% of the tax and a jail term of up to 2 years. There are similar provisions relating to GST/HST tax evasion and tax fraud set out in section 327 of the Excise Tax Act. Furthermore subsection 239(2) of the Income Tax Act allows the CRA tax lawyer prosecutor to proceed by way of indictment instead of by summary prosecution in which case the fines are 100-200% of the taxes evaded plus imprisonment of up to 5 years. These criminal tax penalties are on top of civil penalties plus compounding interest is charged.
Tax Evasion Search Warrants
You may receive a letter notifying you that you are under criminal investigation by CRA. However often the first indication that you are on CRA radar comes when a team of CRA investigators and police show up at your home and office and accountant premises, armed with a search warrant. If you do receive a letter first, it will almost inevitably be followed by a search. A tax fraud investigator can apply to a judge for a search warrant under section 231.3 of the Tax Act (or under s.487 of the Criminal Code). Search warrants are executed by the CRA investigator with assistance by police officers. They will normally search both home and business premises and the offices of the accountant, and they will seize paper books records as well as any computers and digital storage devices. When these records are seized they will normally be held for weeks and sometimes months, causing major disruption to business operations. Our Canadian tax lawyers often negotiate with CRA officials, or apply to court, for a timely return of these records. Accountant records are not subject to privilege (unlike lawyer’s files) and all of the accountant’s files will be seized. If our Toronto tax law firm is retained prior to the search warrant being executed we advise our clients to make copies of all critical business records and computer files and to store them in a secure offsite location that will be safe from CRA seizure.
Tax Evasion and Tax Fraud Prosecution Statistics
Over a five year period, from April 1, 2009, to March 31, 2014 the work of the CRA's criminal investigations led to the conviction of 783 taxpayers for tax evasion involving approximately $150 million in federal tax evaded, and court sentences totalling approximately $61 million in court fines and 2969 months of jail time. Of these tax evasion convictions, 44 had links to money and/or assets held offshore involving approximately $18 million in federal taxes evaded resulting in court fines of approximately $10 million and 538 months of jail time.
Taxpayer Protection in Tax Fraud Investigation
The Supreme Court of Canada held in Jarvis 2002 SCC 73 that where the purpose of a tax inquiry is the determination of a penal liability, CRA tax auditors must warn the taxpayer in order to avoid infringing the Canadian Charter of Rights. So once CRA commences a criminal investigation of a taxpayer they must act in accordance with the Canadian Charter of Rights and Freedoms. Once the “predominant purpose” of an inquiry is investigation for purposes of prosecution rather than tax assessment, the tax audit powers can no longer be used, and if they are, the information collected cannot be used in a prosecution due to Charter of Rights protections in s 7 against self-incrimination and in s 8 against unreasonable search and seizure.
The following tests were set out in the Jarvis decision: To determine when an audit has changed into an investigation, one must look at all factors, including but not limited to:
- Did the authorities have reasonable grounds to lay charges? Could a decision to proceed with a criminal investigation have been made?
- Was the general conduct of the authorities consistent with the pursuit of a criminal investigation?
- Had the auditor transferred his or her files and materials to the investigators?
- Was the conduct of the auditor such that he or she was effectively acting as an agent for the investigators?
- Does it appear that the investigators intended to use the auditor as their agent in the collection of evidence?
- Is the evidence sought relevant to taxpayer liability generally, or only to criminal liability?
- Are there any other circumstances or factors that can lead the judge to the conclusion that the audit had in reality become a criminal investigation?
What Should You Do If You Have Committed Tax Evasion but CRA has Not Yet Contacted You
You can avoid criminal tax prosecution for tax evasion or tax fraud by approaching CRA under their voluntary disclosure program before they contact you. The Canada Revenue Agency wants taxpayers to voluntarily comply with their income tax obligations, so our Toronto income tax lawyers can submit a voluntary disclosure application on your behalf before a CRA investigator contacts you. You will not be charged with criminal tax evasion and you will not have to pay any tax penalties. For more information please visit https://www.canadiantaxamnesty.ca/.
Tax Evasion Assistance from Toronto Tax Lawyer
Our top Toronto tax lawyers fight CRA tax evasion charges and failure to file tax return charges for our clients. At the first indication of possible tax evasion or other tax charges you need to retain one of our top Toronto tax lawyers. A taxpayer should never meet with a CRA investigator without a professional Canadian tax lawyer present. If you are charged with a tax offence the case will drag on for years if not handled by someone who understands both the tax and accounting aspects of your tax prosecution case. As indicated above, the penalties for tax related crimes are serious and severe. There are multiple financial penalties, both civil and criminal, each with compounding interest, backed up with the CRA ability to seize your assets without a court order, and ending up with possible incarceration in jail. Furthermore, tax prosecutions are not handled by the regular provincial Crown attorneys who prosecute drunk driving offences, but by specialized tax teams of federal prosecutors with virtually unlimited resources available and a mandate to extract every dollar they can from Canadian taxpayers accused of tax crimes.