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Enforcing Legislation

There will always be a small minority of people who will operate outside the public interest, who choose not to comply with their obligations, and who will avoid or evade paying taxes. Their actions have a negative impact on the tax base and adversely affect all Canadians.

Did you know?

As part of our Special Enforcement Program, in 2006-2007, the CRA conducted 1,342 audits of taxpayers suspected of earning income from illegal activities. These audits resulted in the identification of more than $88 million in additional tax owing.

During the same period, our Criminal Investigation program led to 245 convictions for tax evasion or fraud. Courts across Canada imposed close to $13.4 million in fines and more than 35 years of jail sentences. The CRA obtained convictions in 97 percent of cases prosecuted.

Tax Avoidance Versus Tax Evasion

Tax avoidance is when actions are taken to reduce the amount of tax owing in a manner that contravenes the object and spirit of the law.

Tax evasion is the effort to avoid paying taxes by illegal means. Tax evasion usually involves taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities in order to reduce their tax liability.

The CRA uses enforcement methods to target those who choose not to comply. Through our Special Enforcement program, we conduct audits and undertake other civil actions on individuals, known or suspected of, deriving income from illegal activities. Through our Criminal Investigation program, we investigate suspected cases of tax evasion, fraud and other serious violations of tax laws. These investigations, and subsequent referrals to the Department of Justice, often lead to prosecutions that can result in fines and imprisonment.

To maintain the integrity of the tax base, we continue to focus our resources on:

underground economic activity;
aggressive tax planning; and
prosecuting fraud.

Underground Economic Activity

Discouraging underground economic activities ensures a level playing field for all businesses and taxpayers. Addressing the underground economy is important to ensuring the fairness and equity of the tax system.

The underground economy can take many forms including:

failure to report a business activity (for example, working under the table);
failure to report employment income (for example, tips);
mischaracterization of employment income; and
failure to file or register.

The underground economy is heavily concentrated in sectors where cash transactions are prevalent. Our underground economy audits focus on identifying unreported income, primarily in industries where there has been a higher level of non-compliance, such as the construction and hospitality industries.

We also work collaboratively with other members of the Federal-Provincial-Territorial Underground Economy Working Group to reduce participation in the underground economy through research, information sharing, communication, and enforcement.

Hiring a Contractor?

Some taxpayers do not realize that they are exposed to financial and personal risks by not obtaining a detailed written contract between them and their contractor for work such as construction, renovation, or repair work. These risks include

lawsuits and financial loss if there is a work-related injury or damage to the property;
the loss of a deposit or advance payment, or being charged more than expected;
limited options for dealing with poor quality or incomplete work; and
no assurance of warranty coverage or after-sales service.

For more information, visit www.cra.gc.ca/agency/inwriting-e.html.

Aggressive Tax Planning

Aggressive tax planning, which refers to arrangements that “push the limits” of acceptable tax planning, undermines the integrity of the tax system and community confidence in the fairness and equity of that system. Abusive tax schemes, such as tax avoidance arrangements through liberal interpretations of Canada's tax laws, can also give the impression that tax avoidance and evasion are pervasive.

An example of aggressive tax planning is the abuse of international tax havens. A tax haven is a jurisdiction with very low or no taxes, a lack of transparency in the operation of its tax system, or a lack of effective exchange of information with other countries. Although tax havens may be used for legitimate reasons, they also provide opportunities for some taxpayers to avoid or evade paying Canadian tax.

The misuse of tax havens is an important issue in a globalized economy, where money moves instantly and anonymously across national borders. The CRA recognizes that strategic alliances and international cooperation are essential for ensuring that taxpayers comply with tax laws. Canada has treaties with more than 80 countries providing for the exchange of tax-related information. The CRA also participates with other members of the Organisation for Economic Co-operation and Development to develop international rules and responses to unfair tax practices.

In 2005, the CRA created 11 Centres of Expertise across the country to focus on aggressive international tax planning. These centres reflect a more coordinated approach to aggressive tax planning by bringing together expert teams of audit professionals from the areas of international tax, special audits, and tax avoidance.

“The use of tax havens by Canadians and abuse of tax treaties with other countries could divert tax away from Canada, and the amounts at risk could be significant. The progress we observed in the Agency's handling of these challenges is encouraging.”

--Sheila Fraser,
Auditor General of Canada,
February 2007

Joint International Tax Shelter Information Centre

Formed in 2004, the Joint International Tax Shelter Information Centre is helping to identify potential tax treaty abuse. Member countries include the United States, Canada, Australia, the United Kingdom, and Japan.

The Centre enables members to share taxpayer and transaction information, where permitted by tax treaties and domestic legislation, in order to determine if transactions in one jurisdiction resulted in abusive tax avoidance in another.

Prosecuting Fraud

Fraud represents the most flagrant case of non-compliance. Fraud schemes often involve unreported income and fictitious expenses. In cases where enough evidence is obtained to support criminal charges, the CRA refers those responsible for prosecution.

When convicted of tax fraud, individuals may be subject to fines and jail terms. They are also obligated to repay any credits they fraudulently claimed, any taxes owing plus interest, as well as any civil penalties that may be assessed by the CRA. One of our main priorities in recent years is GST/HST fraud. Our GST/HST compliance strategy focuses on improving our enforcement activities and ability to identify high-risk registrants and refund claims before credit returns are paid.