Tax Fraud – How to Avoid and Prevent It

March is fraud prevention month, and therefore it makes sense – in the heart of the tax filing season – to know which is legal and which is a criminal offence: tax evasion or tax avoidance?

The latter – tax avoidance – is legal. Tax evasion is fraud, a criminal offence, and tax pros need to be on the lookout for it to protect themselves and other taxpayers from abuse. 

“Fraud” means a false representation that is made knowingly or without belief in its truth, or recklessly, or without care as to whether it is true or false. In the case of tax evasion, fraud is the act of willfully making false or deceptive statements in a return, certificate, statement or even an answer filed or verbally given to the Canada Revenue Agency, with the intent to willfully evade the payment of your taxes.

You’ll also be guilty if you willfully make deceptive entries or omissions in your books. A person who destroys, alters, mutilates or otherwise willfully disposes of the records or books of account to evade the payment of tax is also asking for criminal prosecution.  The taxpayer’s advisors can also be found guilty and charged.

Trouble is, many Canadians don’t think they are participating in a criminal offence in common neighborhood transactions. Consider this scenario: an estimation for a cottage deck renovation is in progress. The contractor, your friend, says, “The fee is ‘X’ with a receipt, and ‘Y’ (substantially less) for cash…”

Which quote would you take? Many think it is perfectly acceptable to take the Y option, turning a blind eye to their active participation within the Underground Economy. Few consider that their friend, the contractor, who would not report the cash received, is a tax evader. But, in fact, he is. He benefits at the expense of honest suppliers who can’t match the quote and lose out on the job. 

A tax professional acting in the role of financial educator, can help taxpayers understand tax evasion and avoid both criminal prosecution and a criminal record with the following financial consequences on conviction:

In short, when taxpayers get into this kind of trouble, the taxes owing are the least of their problems. The CRA is bolstering protection and fraud surveillance in its practices and policies, and the Finance Minister has stated in his pre-budget discussions that extra resources to find tax evasion schemes will be allocated in the upcoming budget, expected later this month.  

Tax professionals who run across fraud in working with taxpayers who insist on filing fraudulent returns should refuse to prepare the tax returns, as they, too may be charged if they participate in the scheme. CRA has an extensive site on their views on aggressive tax avoidance schemes: click here.