Canadian criminal tax evasion sentencing

Civil vs Criminal Enforcement from the CRA

In 2020, only 21 taxpayers received some form of criminal sentencing for tax evasion, notes David J Rotfleisch, CPA, CA, JD, founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm.

While the Canada Revenue Agency 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 evasion in the year 2020.

In December 2020, a Brampton business owner, a Mr. Tran, was sentenced to a criminal fine of $364,000 and eight 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 reporting 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

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.

Penalties Under the Acts

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 two 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 two 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.

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.

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 disclosures and tax dispute resolution including tax litigation. Visit www.Taxpage.com and email David at david@taxpage.com.