Tax evasion: What is it and how to defend (II)

August 21, 2012

 (Continued)

Generally successful defences

There are a number of defences that a taxpayer may use and may be successful against a charge of wilful tax evasion. The most used among these is the lack of required intention (mens rea).  If the taxpayer can prove that he or she was only careless or reckless without knowledge of the facts constituting the offence, the guilty mind requirement will probably not be met. In assessing whether the taxpayer possessed the requisite intent to be convicted of tax evasion, the court will consider a variety of factors, including the taxpayer’s intellectual level, general business knowledge, and previous experiences with tax authorities.

Likewise, if a taxpayer hired and completely relied on a professional to prepare a tax return, which turned out to be faulty and became the basis for the charge of tax evasion, it can be reasonably argued that the tax payer did not have knowledge of the guilty acts. Alternatively, the taxpayer may argue that he or she was only negligent in failing to identify the error(s) in the tax return. In either case, the requisite intention element may probably not be proven, which will lead to the taxpayer’s acquittal.

Finally, common to a general criminal law principle, the taxpayer may have a good chance to succeed if the CRA relied on improperly obtained evidence in laying the charges. There are several lines of defence involving improperly obtained evidence, and abundant cases exist in this area of law. We will only illustrate this principle by a 2007 Ontario Court case R. v. Borg, 2007 ONCJ 451.

In this case the CRA (then CCRA) assigned an auditor in April 1995 to examine the taxpayer’s books and records, exercising the Minister’s auditing powers under the Income Tax Act (the Act). On March 16, 1996, the auditor referred the taxpayer’s file to CRA for special (criminal) investigations. The CRA exercised its special investigation powers under section 231.2 of the Act, and obtained documents from the taxpayer’s accountant and other third parties. Search warrants were obtained later on July 9, 1997 and they were executed on July 10, 1997. The taxpayer was eventually charged with tax evasion on August 20, 1998, under both the Income Tax Act and the Excise Tax Act. Before the trial, the taxpayer brought an application pursuant to sections 7 and 8 of the Canadian Charter of Rights and Freedoms, for the exclusion of all of the evidence obtained by the search warrants and by the auditor because of violation of the taxpayer’s charter rights.

The Ontario Court of Justice granted the taxpayer’s Application. The Court found that on or around May 25, 1995, the auditor discovered the huge sums of unreported business incomes between 1992 and 1993, and from then on the auditor must have subjectively concluded that the taxpayer had committed fraud and tax evasion. The Court reasoned that despite this evidence, the auditor failed to refer the taxpayer’s file to the Investigations Unit until almost 10 months later, and during this interim period the CRA was engaging in a criminal investigation under the guise of an audit.

As a result, not only the evidence obtained by the auditor from May 25, 1995 onwards was excluded, but also the evidence obtained by the execution of the search warrants. In ordering this, the court reasoned that the search warrants would not have been issued in the absence of the information obtained by the CRA auditor subsequent to May 25, 1995.

Factors in sentencing and the aftermath

If a taxpayer is found guilty of tax evasion, either summarily or by indictment, he or she may still ask for leniency from the court. In determining the amount of fines and/or the term of imprisonment, the court will consider several factors and the particular facts of each case, including:

(i) the gravity of the offence (i.e. the amount involved in the evasion);

(ii) the degree of deliberation shown by the offender;

(iii) the offender’s age and character; and

(iv) deterrence to the taxpayer and to other taxpayers.

If a taxpayer’s conduct is not very serious, he or she may ask for leniency. It is possible that the jail time will be waived. The conviction of tax evasion will be reflected in the individual’s criminal record. If the taxpayer has not done the wrong things again, he or she may apply for a pardon after a certain number of years. If granted, the criminal record will no longer disclose the taxpayer’s “past sin”.

 

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.

Related Article:

Tax evasion: What is it and how to defend (I)

Tax amnesty 

Tax law services

 

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