Tax evasion vs. tax avoidance: How CRA draws the line

Taxes keep the Canadian government running, but they can feel like a heavy burden to some taxpayers, which is one reason people look for ways to reduce what they pay. However, the law makes clear that some ways of avoiding tax can cross the line into tax evasion, with serious legal consequences.

In this article, we'll discuss the gray areas and what separates tax evasion vs. tax avoidance. If you're still uncertain about the difference after reading this article, you can also reach out to a Lexpert-ranked corporate tax lawyer.

What are the differences between tax evasion vs. tax avoidance?

The difference between tax evasion and tax avoidance mainly lies in their legal effects and in which acts are treated as legal tax planning versus illegal evasion. 

Olivier Fournier, partner and the national leader at Deloitte Legal Canada LLP, says that the two are not the same. “The words avoidance and evasion do not belong in the same sentence, other than to say that they are completely unrelated concepts.”

While all tax laws must be followed in good faith, there can be gaps and incentives in those laws that benefit taxpayers. The key is to avoid any additional steps that could be treated as tax evasion.

Under Canadian tax laws, everyone must legally pay their taxes unless they're exempt. Otherwise, they may be charged with tax evasion and criminally prosecuted. However, there are ways to legally reduce your taxes, which are commonly called tax avoidance.

This table summarizes the differences between tax evasion and tax avoidance:

Below, we'll discuss more of these differences. In any case, you can also consult the best corporate tax lawyers in Canada as ranked by Lexpert to prevent committing tax evasion.

Criminal intent as tax evasion's defining factor

“Think of avoidance as a law-abiding citizen driving the speed limit and swerving to avoid potholes. Conversely, one should think of evasion as driving twice the speed limit without a license plate in a stolen car with unregistered firearms,” Fournier says. 

The main difference between tax evasion and tax avoidance is that tax evasion has legal and criminal consequences, while tax avoidance does not. This is largely because of the illegal intent that separates the two:

• tax avoidance: the mere application of financial strategies to minimize your tax liabilities
• tax evasion: comes with the criminal intent to prevent the payment of personal or corporate taxes

Fournier says that a client for tax avoidance is advised by a tax lawyer, while clients for tax evasion are advised by a criminal lawyer. 

This criminal intent is what makes tax evasion illegal and punishable under Canadian tax laws.

Evasion is punishable under Canada's tax laws

Another difference between tax evasion vs. tax avoidance is that one follows the law and the other deliberately evades it:

• tax avoidance: follows Canadian taxation laws and regulations imposed by the Canada Revenue Agency (CRA)
• tax evasion: the fraudulent or direct violation of Canada's tax, such as the Income Tax Act (ITA), the Excise Tax Act (ETA), and the Criminal Code

As such, tax avoidance methods must not defeat the purpose of these Canadian taxation laws, or they risk being reclassified as tax evasion.

Prosecution of tax evasion may even go beyond the national borders. Check out this tweet from the CRA on one international tax evasion case, which was penalized with imprisonment:

Toronto man sentenced for #TaxEvasion after international investors swindled. https://t.co/Eebg0sFKSA #CdnTax pic.twitter.com/XAWTZVS3da

— Canada Revenue Agency (@CanRevAgency) January 6, 2022

Check out our Lexpert 500 Cross Border page for a directory of the leading cross-border lawyers if you need legal help with your international tax concerns.

What are examples of tax avoidance methods in Canada?

Tax avoidance is the strategy of reducing your taxable income or your tax due through legal and acceptable means. Canada's tax laws may also refer to tax avoidance as:

• effective tax planning, or
• tax reduction arrangements

For these acts of "avoiding" taxes to not fall as "evasion," it must:

• meet the specific provisions of Canadian tax laws
• must be done in line with the intent of these tax laws

Although Canadian tax laws require everyone to pay their taxes, they also provide certain entitlements that can fall under tax avoidance. These include:

• tax credits, benefits, refunds, exemptions, and deductions
• using investments in tax-advantaged accounts
• by legally planning your personal or your corporation's tax liabilities

We'll explain these aspects below:

Credits, benefits, refunds, exemptions, and deductions

With the help of a corporate tax lawyer, you can make the most out of the system of tax credits and deductions, such as through corporate tax planning. Here are other examples of tax avoidance measures:

• donations: donations or donation investments to registered charities can reduce your tax liability, because it will convert your taxable income into non-refundable tax credits
• claims or credits: you can use as many tax credits and deductions if warranted, such as moving expenses, medical expenses, disability tax credits, and family, childcare, and caregiver tax deductions
• business tax credits: these are also legal ways to avoid taxes, and are offered at by federal, provincial, and territorial levels; for instance, the CRA offers the Small Business Deduction (SBD) and the Scientific Research and Experimental Development (SR&ED) tax credits

Investments in tax-advantaged accounts

These tax-advantaged accounts include:

• Registered Retirement Savings Plan (RRSP)
• Tax-Free Savings Account (TFSA)
• Registered Education Savings Plan (RESP)

These are all tax-advantaged accounts that can lower your tax burden when used properly.

What constitutes tax evasion in Canada?

Also described by the CRA as unacceptable or excessive tax planning, tax evasion is a crime committed by those who intentionally and fraudulently evade the paying of taxes. Tax evasion is punishable under the following tax laws:

• s. 239, ITA
• s. 327, ETA
• s. 380, Criminal Code

More on these offences are discussed below. You can also watch this video from the CRA which shows how it prosecutes tax evasion cases:

Head over to our list of the Lexpert-ranked best corporate tax law firms in Canada if you want to learn how to structure your tax affairs without risking tax evasion.

Tax evasion under the Income Tax Act (ITA)

Under the ITA, tax evasion is committed when you:

• make false statements in your tax return or in other legal documents
• make false entries, or omitting relevant information, in your records or books
• destroy, alter, or intentionally hide your records or books
• claim a tax refund or credit through falsification
• willfully evade paying your taxes
• conspire with another person to commit any of these acts

The ITA also has a provision called the General Anti-Avoidance Rule (GAAR). Here, the CRA will deny any tax benefit if they establish that you used abusive tax avoidance schemes.

Tax evasion under the Excise Tax Act (ETA)

Acts constituting tax evasion under the ETA may be committed similarly to those mentioned under the ITA, as applied to excise taxes. In addition, it may also be committed by using an electronic device or software for the suppression of sales in one's books or records.

Tax evasion under the Criminal Code

Also known as tax fraud, tax evasion in the Criminal Code is committed by defrauding the government through deceit, falsehood, or any other means regarding your tax obligations. Some examples of tax fraud through falsification of information in a tax return include:

• overstating your expenditures
• under-reporting or omitting an income source
• failing to file your tax return, as mandated by law

Other forms of tax evasion

Tax evasion may also be committed through different forms, such as:

• offshore non-compliance
• tax protesters
• promotion of tax evasion schemes

Penalty for tax evaders in Canada

The following penalties are imposed when you are convicted for tax evasion under Canada's tax laws:

• payment of tax laws: if convicted, you or your corporation must still pay the taxes you owe to the CRA, regardless of whether the tax evasion charges succeed
• interest on taxes: the taxes that you owe will increase due to the interest, civil penalties, and fines of up to 200% of the taxes owed
• imprisonment: imprisonment of up to five years may also be imposed; for tax fraud under the Criminal Code, the prison term can be up to 14 years

Tax evasion vs. Tax avoidance: Importance of distinguishing the two

The line between aggressive tax planning and tax evasion often appears narrow in practice. With the help of tax lawyers, you can organize your tax affairs within the bounds of the law. If you are concerned about your corporate tax liability, consider consulting a Lexpert-ranked corporate tax lawyer for confidential and informed legal support.

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