Tax non-compliance: Penalties and process for evasion versus avoidance cases | Eric Ferron
Friday, February 21, 2020 @ 11:39 AM | By Eric Ferron
We understand the concerns raised in the article “A sad story about Mr. X from country Y” about the mental and financial impact on taxpayers under criminal investigation. We know that being investigated can be stressful; it is not the CRA’s intention to cause anyone undue stress or financial hardship. The CRA recognizes that the execution of searches and investigations is intrusive and as such, we take our responsibilities very seriously, carrying them out with the utmost respect for the tax laws we administer, while at the same time respecting the rights of Canadians.
In the article, there appears to be confusion between the civil and criminal legal processes. They are in fact two distinct processes with significantly different impacts on taxpayers.
Civil versus criminal cases
In a civil case, when an audit is conducted and a tax liability is determined, taxpayers may be ordered to pay monies to the Receiver General of Canada. In a criminal matter, investigations are carried out to determine penal liability.
Tax avoidance in civil cases occurs when a person undertakes transactions that contravene specific anti-avoidance provisions. Tax avoidance also includes situations in which a person reduces or eliminates tax through a transaction or a series of transactions that comply with the letter of the law but violate the spirit and intent of the law.
Tax evasion in criminal cases involves deliberately ignoring a specific part of the law in order to evade taxes. For example, those participating in tax evasion conceal income or assets or claim expenses that are non-deductible or overstated. They might also attempt to evade taxes by willfully refusing to comply with legislated reporting requirements.
Tax evasion, unlike tax avoidance, has criminal consequences. Willful failure to follow tax laws will result in serious consequences, including court ordered fines and jail time.
Obtaining proof that an offence has been committed
In criminal cases, the government must prove beyond a reasonable doubt that the offence has been committed. To obtain search warrants, the CRA must strictly adhere to criteria set out in s. 487 of the Criminal Code, which require that investigators have reasonable grounds to believe that an offence has been committed. If the criteria are met, the court may grant the search warrants. The court is independent of the CRA and retains a constitutionally entrenched judicial discretion to refuse.
Reasonable grounds are established using a variety of investigative techniques. The CRA gathers as much evidence as possible about the alleged offence(s) and then analyzes the evidence to determine whether it is relevant, admissible and allows for a reasonable prospect of conviction.
Sources of information that may lead the CRA to take compliance actions include the following:
- Internal referrals within the CRA, including the various audit programs;
- Tips from individuals through the CRA informant lead lines;
- Information received from various law enforcement agencies; and
- Publicly available sources of information, which could include media articles, court decisions, etc.
Pursuing a criminal investigation
After investigating suspected tax evasion, the CRA recommends cases to the Public Prosecution Service of Canada (PPSC), but only where it is believed that the evidence is sufficient to prove the alleged offences beyond a reasonable doubt. The PPSC is also independent of the CRA and serves as yet another layer to ensure fairness.
When a case proceeds, a comprehensive report is prepared for PPSC outlining the alleged offence(s), the facts of the case and recommendations on potential sentences. In making a decision on whether to prosecute, the PPSC must consider whether there is a reasonable prospect of conviction and whether a prosecution best serves the public interest.
Whether or not a file is accepted for criminal investigation and possible subsequent prosecution is based on many factors, including the evidence to establish that the alleged crime has been committed and the likelihood of securing a conviction if charges are laid. For charges to be considered, there must be sufficient evidence to establish that a crime has been committed and that the individual did so with a guilty mind. In all cases, taxpayers are considered innocent until proven guilty.
Eric Ferron is the director general, Criminal Investigations Directorate of the Canada Revenue Agency.
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