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Thinking of Fixing your Books? Don't!

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The CRA has a number of rules, found in the Income Tax Act (“ITA”), and the Excise Tax Act (“ETA”) requiring taxpayers to keep books and records, and to keep them available for audit and inspection for up to seven years after the current year.

The CRA also has a number of quasi- criminal provisions that they can rely on when dealing with situations where taxpayers and their businesses attempt to use false or incomplete records to underreport revenues, income, or GST obligations.

It does not usually go well for the taxpayer when this is uncovered, and the taxpayer can face both criminal fines and civil assessments of taxes interest and penalty. In one recent case, the taxpayer ended up paying twice for this mistake!

The CRA recently announced on May 21, 2019 that Thermo Applicators Inc. (“Thermo”), pleaded guilty in Manitoba Provincial Court to two counts of making false or deceptive statements in their books and records for the 2009 to 2014 tax years. Investigators uncovered that Thermo had underreported its taxable income by over a million dollars, and thus shortchanged the government in roughly $190,142 in income tax and $47,611 in harmonized sales tax (“HST”).

The punishment was severe. The court sentenced Thermo to pay a fine equal to its tax liability of $237,753. In effect, Thermo had to pay the tax twice.

The investigation also uncovered tax evasion on the part of Thermo’s President and Director, Robert Gray, who pleaded guilty to one count of tax evasion in the amount of $109,620 on his 2009 and 2010 personal income tax returns. He, too, had a fine equal to his tax liability imposed. The investigation revealed that Mr. Gray had used Thermo for certain personal expenses including the construction costs for his waterfront cottage in Kenora, a fishing trip for himself and five family members to Northern Ontario, and the construction of a private villa in Pochutla, Oaxaca, Mexico.

Under the ITA and ETA, persons convicted of tax evasion face fines ranging from 50% to 200% of the evaded taxes and up to five years in jail.

According to case law, the purpose of the harsh penalties for tax evasion are denunciation and deterrence. R v JILM Enterprises and Investments Ltd (2004 GSTC 20) states at paragraphs 29 and 30:

The Canadian taxation system relies on selfreporting by taxpayers. The honesty and integrity of those taxpayers is critical to the assessment and collection of taxes. In any selfreporting system, there will be a temptation to take advantage of the system for financial gain.

The sentencing provision of the Income Tax Act and the Excise Tax Act proscribe a significant penalty that will denounce such conduct and deter not only the offender, but others who would behave in a like fashion.

Case in point, when taxpayers take deliberate, planned steps to coordinate tax evasion for their personal gain, the courts will readily impose fines to make an example out of the guilty party and communicate the gravity of the offence to society at large.

But it does not stop there! In addition to fines and possible jail time under the ITA and ETA, if the taxpayer is successfully convicted of criminal fraud pursuant to section 380 of the Criminal Code, they can face up to 14 years in jail.

Despite these stiff penalties, some taxpayers have not been able to resist the temptation to shortchange the government. According to the CRA, for the 5-year period between April 2013 and March 2018, the courts have convicted 307 taxpayers of tax evasion. Those cases involved nearly $135 million in federal taxes evaded and resulted in $37 million in court fines and 2,964 months in jail.

The takeaway from the unfortunate case of Thermo is that taxpayers who are tempted to fix their books in to conceal unreported income should think again and consult experienced tax professionals to deal with their unremitted tax.

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