Feeling Lucky? CRA tax evasion convictions on downward trend

On Sept 7, 2017, the Honourable Diane Lebouthillier, Minister of National Revenue, released the latest CRA statistics on tax audits and prosecutions, from April 1, 2016 through March 31, 2017. 

Minister Lebouthillier, a social worker by profession and a likely witness to those who have struggled financially, has set up a microsite about tax cheating, with the opening graphic a person behind bars.

This was part of an announcement released in April 2016. Her ministry has in its crosshairs offshore tax evasion and aggressive tax avoidance.

For we tax junkies, the CRA statistics make interesting reading, but they are also frustrating because there is a lack of consistency from year to year. Information released this year is not identical to prior years, which makes tracking trends difficult. However, some trends are very clear.

First, some interesting information without trends. There were 111,712 audits completed in the past fiscal year. The report also says there was $12.5B in fiscal impact, without specifying if the fiscal impact is just from the audits or from the other enforcement mentioned.

 I do not recall ever seeing total audit statistics before. The 2014-2015 CRA report to Parliament, released in December 2016, has breakdowns of some audits, such as GST audits (70,421) or underground economy audits (6,540), but did not release total audits. The info does not state if the total audits were both GST and income tax or just income tax. Given the fact that there were some 70,000 GST audits alone, I suspect the 111k number represents just income tax.

Now, to the juicy stuff: prosecutions and a continuation of a clear downward trend. In 2012-13, there were 128 cases which resulted in convictions for tax evasion or tax fraud. For 2014-15 there were 95 tax evasion convictions. The number of convictions falls to 50 for 2015-16 and to 37 for the latest year. 

For those of you who like all the details, here is the full August 2017 report. And here is the chart of Criminal investigations actions, charges, and convictions, by province.  

So, what do you think? Are Canadians becoming more scrupulous in their tax compliance or is there a problem with CRA enforcement of tax evasion prosecutions? 

In the September 7, 2017 news release the Minister boasts, yet again, that “the Government of Canada is taking important steps to combat tax evasion and aggressive tax avoidance, funded by historic investments of close to $1 billion in Budget 2016 and 2017.”

And in an April 11, 2016 news release, the CRA stated that they were on track “to identify $1 billion in income that would otherwise have been hidden, an increase almost 400 per cent over the last six years.”

So, what is the reason for the precipitous decline in tax evasion convictions? I really don’t have an answer.

I can relate that anecdotally I am aware of cases where the CRA has decided not to refer files for prosecution that, had I been a CRA auditor, I would have judged the files showed prima facie grounds for investigation.

Now, I may not have all of the relevant facts in these cases, since they were not necessarily my firm’s files (meaning us advising accounting firms and not directly retained by taxpayers), but I think a lack of training on the part of the tax auditors is part of the problem. 

I know a lack of training is a major cause for us having to file objections on files that are clear losers for the CRA. These files cause our clients to spend what I consider unnecessary dollars to challenge a bad CRA audit decision. I suspect that tax evaders are the beneficiaries of the same lack of training.

Which leads me to my last point and a recent bugaboo of mine: the proposed voluntary disclosure changes. If you are a tax evader, with unreported income or unreported offshore assets, and you come in for legal advice about the new VDP program, and are told that you will only qualify for limited relief, what will you decide? 

Of the 26 million personal tax returns filed, not to mention corporate and trust returns, 37 taxpayers were convicted of tax evasion. Would you come forward under the VDP and face taxes plus penalties plus interest, or would you throw the dice?

Are you feeling lucky? Your odds are pretty good.

David J. Rotfleisch, CPA, CA, JD, is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosure, and tax dispute resolution including tax litigation. Visit www.Taxpage.com or email david@taxpage.com.