A taxpayer may receive a letter from the Canada Revenue Agency (CRA) informing that they have commenced a criminal investigation against him/her. Most of the criminal investigations relate to tax evasion, which involves an illegal breach of specific statutory duties such as deliberately concealing or falsifying reported information.
The CRA may be prompted to commence the criminal process in a number of ways. Sometimes an audit by the CRA suggests the occurrence of criminal activities, and sometimes the CRA received information from a third party. Believe it or not, sometimes such information may even come from the taxpayer himself. For example, a taxpayer may have submitted a voluntary disclosure (tax amnesty) application, which was subsequently rejected by the CRA and a criminal investigation commenced based on the information provided in the amnesty application.
Pursuant to subsection 239(1) of the Income Tax Act (the “Act”), the CRA may, upon summary conviction for tax evasion, impose fines ranging from 50% to 200% of the amount evaded, as well as imprisonment term of not more than two years. A taxpayer may also be prosecuted and convicted by indictment, pursuant to subsection 239(2) of the Act. Usually the Crown (represented by the Federal Department of Justice) will be involved in the indictment proceeding, and the maximum jail time in such cases is five years. In addition to the criminal penalties, the CRA may also impose civil penalties under section 162 and 163 of the Act.
Elements for Conviction
Tax evasion is criminal in nature. A successful prosecution will have to prove two elements: the guilty act (actus reus) and the guilty mind or intention (mens rea).
Pursuant to subsection 239(1) of the Act, fines or a term of imprisonment may be imposed if it is proven beyond a reasonable doubt that a person has intentionally performed, or conspired to perform, any of the following activities:
(a) made, or participated in, assented, or acquiesced to the making of a false or deceptive statement in a tax return, certificate, statement or answer filed or made in respect to a taxation year;
(b) evaded the payment of tax by destroying altering, mutilating, hiding or otherwise disposing of a record or book of accounts;
(c) made, or participated in, assented, or acquiesced to the making of a false return or deceptive statement in a record or book of accounts; or
(d) wilfully, in any manner evaded or attempted to evade compliance with the Act or payment of taxes imposed by the Act.
While intention of a person can hardly be proved directly, the court may infer the existence of a guilty intention from all the circumstances and evidence of the case.
Activities constituting tax evasion
A variety of activities may meet the requirements of tax evasion. It has been successfully prosecuted if a taxpayer knowingly makes, acquiesces or is wilfully blind to omissions or false statements. This includes among other things the following:
- not filing a tax return;
- filing a tax return but omitting or underreporting income;
- overstating expenses or losses;
- falsifying documents;
- and arranging for the receipt of income in a jurisdiction or form whereby that income will not come to the attention of the CRA.
Net worth assessment
When no tax returns are filed, or if the books, records or returns are incomplete or unreliable, the CRA may use a net worth assessment (also known as an arbitrary assessment) method to estimate whether the taxpayer has evaded taxes. Under subsection 152(7) of the Act, the CRA may estimate the taxpayer’s net worth increase over a period of time. Absent satisfactory explanation, the CRA will assess the corresponding tax owing. Although the CRA may not prove the exact amount of tax owing, a taxpayer may still be found guilty of tax evasion if it can be proved beyond a reasonable doubt that the taxpayer wilfully evaded or attempted to evade compliance with the Act.
No double jeopardy
The case law has clearly established that, for essentially the same activities, an individual can only be convicted for an offence under one of the subparagraphs in subsection 239(1) of the Act. This is to avoid that the taxpayer be punished twice for the same crime, in accordance with the principle that individuals should not be put in jeopardy more than once for the same offence.
It should be noted that while irresponsible taxpayers are the main target under subsection 239(1) of the Act, other professionals such as accountant may also be prosecuted, if they are intentionally involved in making erroneous tax returns.
Generally unsuccessful defences
Because of the criminal nature of tax evasion and the stigma associated with the individual if convicted, the prosecutor has to meet a higher standard of proof (than civil procedure) in order to successfully prosecute a taxpayer. While potentially numerous defences may be advanced, many of them may not be effective.
Many taxpayers will cite that they did not sign the tax return in question. This argument has been rejected by the court if it can be found that the tax return was complete and sufficient enough to illustrate that the taxpayer intended the return to form the basis of the taxpayer’s tax assessment (The Queen v. Kidd, 74 DTC 6574).
Likewise, saying that the taxpayer experienced alcohol or marital problems during the years in question (The Queen v. Robson, 79 DTC 5198), or that the taxpayer exhibited disorganized and dilatory behaviour (Sturgess v. The Queen, 84 DTC 6525) will generally not be accepted as a valid defence to acquit the accused.
In Regina v. de Wolf, 84 DTC 6033, the taxpayer failed to file his tax returns for four consecutive years and was charged with wilfully evading taxes. The taxpayer argued that he was unable to pay his taxes, and would have filed his tax returns as soon as he was able to pay the taxes he owed. This defence was rejected by the British Columbia Court of Appeal.
Finally, the defence will generally be rejected that the taxpayer’s books and records were kept by an inexperienced person and that the erroneous tax returns resulted therefrom (The Queen v. Horowitz, 71 DTC 5350).
(To be continued)
Disclaimer: The above is provided for general information only and does not constitute legal advice. Readers should consult a competent lawyer when dealing with their legal matters. Jeff Li is not responsible for any actions taken by reliance on the information provided in this article, nor for any consequences associated with such actions.
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