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Government Spending, Debt and Taxation

Tax Avoidance and Evasion: Chasing the Tax Dollars

Sylvain Fleury, Mark Mahabir

Issue | Like taxpayers in other jurisdictions, some Canadian taxpayers engage in tax avoidance, which is generally legal, or tax evasion, which is illegal.

Synopsis | Tax revenue is an important source of income for governments, and while tax avoidance is generally legal, tax evasion is not. Tax avoidance and evasion through the under- or non-reporting of income has led to various federal measures designed to obtain information about domestic and foreign income earned by Canadians.

Timing | With deficit-reduction as a priority, recent trends suggest that governments may more frequently undertake tax-shelter-related audits and reassessments to generate more revenues.

To protect the integrity of Canada’s tax base, taxpayers must report and pay their taxes on both domestic and foreign income. This principle applies to individuals, trusts and corporations who are “Canadian residents” under the Income Tax Act.

Taxpayers, however, can minimize their tax burden in various ways. One is “tax avoidance,” which involves using specific transactions to lower the amount of tax payable as a result of a technical reading and application of the law; in some cases, the tax benefit may later be denied by the courts. Another is “tax evasion,” which is always illegal and involves the non-declaration or falsification of tax-related information.

Canada’s Tax Base

In 2009–2010, federal revenues totalled $218.6 billion. Tax revenues contributed 82% of this total, or $180.2 billion.1 With a combined value of close to $134 billion, personal and corporate income tax constituted the major source of tax revenue.

Because both tax avoidance and tax evasion reduce revenues, the Canada Revenue Agency (CRA) monitors compliance using various measures. In the annual report it submitted to Parliament in January 2008, the CRA indicated that it had issued 14,600 reassessments related to $1.4 billion in additional taxes.2

Penalties for tax evasion include fines between 50% and 200% of the amount of tax evaded and/or imprisonment for up to two years.3 However, the CRA’s Voluntary Disclosures Program allows taxpayers to correct inaccurate or incomplete tax-related information, or to disclose information they omitted to report to the Agency, in some cases without facing prosecution or fines.

Number of Voluntary Disclosures Processed and Tax-Shelter-Related Audits Conducted by the Canada Revenue Agency, 2006–2010 Fiscal Years
Voluntary disclosures processed by the Canada Revenue Agency have increased from 8,244 in the 2006-2007 fiscal year to 12,506 in the 2009-2010 fiscal year. Please note that these figures include disclosures of GST and HST information. Audits performed by the Canada Revenue Agency on taxpayers involved in tax shelters have increased from 14,600 in the 2006-2007 fiscal year to 45,890 in the 2009-2010 fiscal year.
Source: Canada Revenue Agency, Annual Report to Parliament, various years.

Canada’s Tax System

Various factors in Canada’s tax system contribute to making avoidance and evasion easier:

Foreign Income

As described below, the reporting of foreign income is one area where compliance is difficult to ensure.

Individuals, trusts and corporations can claim a Canadian tax credit for foreign taxes paid. As well, corporations can earn foreign income without paying taxes in Canada, provided the foreign jurisdiction has a tax treaty with Canada.

Canadian individuals, corporations, trusts and partnerships are required to report whether they own foreign property with a total value exceeding C$100,000 in a given taxation year. In addition, certain financial intermediaries must report inbound and outbound capital transfers of C$10,000 or more, as well as other activities, to the Financial Transactions and Reports Analysis Centre of Canada.

The avoidance or evasion of taxes through deposits of income in undeclared foreign bank accounts, the transfer of capital and/or the earning of foreign income may involve jurisdictions that have been classified by the Organisation for Economic Co-operation and Development (OECD) as offshore financial centres. These centres may be used for purposes that are legitimate, such as to accumulate income for investment in another jurisdiction, or illegitimate, such as to conceal assets and income.

To date, banking secrecy laws in foreign jurisdictions, including offshore financial centres, have hampered the CRA’s efforts to determine the foreign income on which Canadian taxpayers should be paying taxes. At the 2009 G20 summit, leaders agreed that these nations and other jurisdictions should conclude tax information exchange agreements.4 To date, Canada has signed 11 such agreements.5

Conclusion

The CRA’s tax-shelter-related audits tripled from 2006–2007 through 2009–2010 (see figure). In the future, the CRA’s activities may continue to be hampered by constraints related to the context of Canada’s tax system. The advent of tax information exchange agreements with other jurisdictions may, however, provide the CRA with more information to determine the taxes payable on the foreign income of Canadian residents.

Further Reading

  1. Receiver General for Canada, Public Accounts of Canada 2010.
  2. Canada Revenue Agency, Canada Revenue Agency Annual Report to Parliament 2006–2007, p. 59. Reassessments can occur as a consequence of the Voluntary Disclosure Program and/or audits by the Canada Revenue Agency.
  3. Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), s. 239.
  4. Group of Twenty, Declaration on Strengthening the Financial System, London, 2 April 2009.
  5. Department of Finance Canada, “Canada Signs Agreements to Combat Tax Evasion,” News release, 17 November 2010.

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