Articles August 2004

Before we go to the confessional, let’s look at the wages of sin.

I’ve been practicing law for about 10 years and I have not been able to come up with a clear understanding of the CRA’s decisions on when to proceed criminally or civilly in tax disputes. The best I can do is suggest that a little lie will attract a reassessment, while a big lie will attract a criminal prosecution. Different folks have different ideas about what constitutes a big lie. I will go so far as to say that the CRA considers $300,000 worth of lying for profit as a mortal sin; by that I mean that when fraud hits that dollar figure a conviction may draw a jail sentence in addition to a fine.

A conviction for committing $300,000 in tax fraud could reap a criminal fine of up to 200% of the amount defrauded and a jail sentence of up to 5 years.

Also, a criminal conviction basically wipes out any civil defense that might be available. On top of a $600,000 fine and 5 years in jail, the defendant would also face: (1) payment of the taxes, (2) gross negligence penalties equal to 50% of the tax evaded, (3) interest charges, and (4) late filing penalties. Add on a minimum of another $450,000 to the bill. But we are not done yet.

Let’s say that the fraud occurred through a company. The CRA then takes the position that the company lied and the operator of the company lied again. Without getting too complicated, let’s just say that the CRA tries to double all the penalties and charges tax at the corporate and personal level.

Ouch! Tax fraud in the amount of $300,000 could result in a 5 year jail sentence and well over a $1,000,000 in fines, penalties and taxes. And I haven’t even mentioned that a conviction for tax fraud often leads to a conviction for GST fraud.

What’s really scary is that even if you haven’t been caught, you can’t just say I’m not going to commit fraud anymore and be free of any risk. Fraud is not a transient crime like speeding, or running red lights. There is a record of the activity somewhere. One day the CRA might find it.

So what can potential sinners do?

Most obviously, hire someone to plan your tax affairs. In every fraud defense I have been involved in, the taxpayer could have minimised their taxes through proper planning.

The second option available is to voluntarily disclose the fraudbefore the CRA knocks on your door. The CRA realises that the best taxpayer is one who voluntarily complies with our tax laws. The CRA administers a voluntary disclosure program as a carrot for taxpayers who want to re-enter the mainstream of taxpayers. Using this method will likely save criminal charges and result in a reduction of penalties and interest on the tax bill. The CRA allows “no-name” disclosures as part of the process.

The final option is to fight it out in criminal court. This is the most expensive option, but sometimes the only one available. The CRA has a whole department intent on securing criminal prosecutions. So far as I can tell, they do not operate with budget constraints. Taxpayers who are forced to fight need a team of advisors on their side. Usually this team will consist of a tax lawyer, a criminal lawyer and at least one accountant, but it can also include any number of experts from real estate appraisers to mental health experts.

The first two options are always preferable. Martha Stewart could afford an army of advisors and she is still going to jail. Do not feel sorry for her; learn from her mistakes. If you are tempted to sin, see a tax planner or a priest. If you have been sinning and have not been caught, use the voluntary disclosure confessional. If the CRA thinks they have caught you sinning, take a deep breath, keep your mouth shut and get ready to battle for your fiscal soul.

-- J. Andre Rachert

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