There are groups and individuals in Canada who claim that people can lawfully refuse to pay taxes or file a tax return. Others try to cash in on misunderstandings about tax laws.
In an open and free democracy like Canada, citizens have every right to freely express their opinions on the constitution, taxes, or any other issue. The Canada Revenue Agency (CRA) is concerned, however, that individuals who mistakenly confuse opinions with facts may expose themselves to serious financial and legal problems if this results in their failure to comply with the Income Tax Act and other tax laws.
Remember also that many groups and individuals stand to profit considerably from the perpetuation of certain tax myths. Don't let them profit at your expense!
To help you understand the truth about taxes, the CRA wishes to address some misleading statements and myths about Canada's tax laws and the way they are administered. The CRA also strongly encourages you to always consult with a knowledgeable and trusted advisor before making any significant tax decision.
Myth # 1
Federal income tax is unconstitutional and you can therefore refuse to pay income tax to the federal government, as confirmed by the Supreme Court of Canada in a decision in 1950.
This myth is based on the faulty argument that the Canadian Constitution gives the power of direct taxation exclusively to the provinces. Section 91 of the Constitution says the federal government can raise money "by any mode or system of taxation." Section 92 says the provinces can impose "direct taxes within a province" to raise revenue for provincial purposes. As a result, while federal and provincial taxing powers overlap, the federal government can levy both indirect and direct taxes, including income tax.
The courts have confirmed the power of the federal government to levy direct taxes including income tax. No court in Canada has ever agreed with the idea that the federal government cannot levy income taxes. The often-cited 1950 Supreme Court decision concerning the Lord Nelson Hotel in Nova Scotia dealt with the issue of whether the federal government and a provincial government could delegate authority to each other on specific issues of labour and taxation. The Court did not address the issue of imposing direct taxes or their constitutionality.
In Canada, if citizens feel a law is unconstitutional, they may ask the courts to declare it so. Until that happens, the law applies.
A number of individuals and groups are actively promoting claims that there are lawful ways to declare oneself exempt from tax. Relying on such "advice" could result in action from late-filing penalties and interest imposed by the CRA to fines and imprisonment imposed by the courts -- in addition to having to pay your taxes.
Before paying for such information or participating in such groups, seek advice from a trusted and knowledgeable tax professional or the CRA.
Myth # 2
The income tax system is based on voluntary compliance because the government knows tax laws are unconstitutional and cannot be enforced.
There is no question that voluntary compliance is the cornerstone of Canada's self-assessment taxation system. This simply means that the government expects you to respect the law and comply fully with your tax obligations.
This approach does not imply that the law cannot be enforced if necessary. The Income Tax Act and other laws provide a range of penalties for offences such as tax evasion, failure to pay taxes, failure to disclose income, or refusing to file a tax return. These penalties can include fines, third-party claims, seizures, and criminal prosecution.
On the other hand the Voluntary Disclosures Program (VDP) provides taxpayers with the opportunity to come forward and make a voluntary disclosure before they become aware of any compliance action being initiated against them. Taxpayers availing themselves of the VDP will have to pay the taxes owing, plus interest, but may avoid penalties or prosecution.
Myth # 3
Some individuals claim that they have not filed a tax return in years and that the government has not been capable of forcing them to file a tax return because the Income Tax Act is unconstitutional and unenforceable.
The CRA cannot respond directly to such claims because the confidentiality provisions of the Income Tax Act prevent government officials from revealing information about individual taxpayers. We can only encourage the public to be wary of such claims. Individuals may have in fact filed in past years, or been fined for failing to file. In other cases, the CRA may not yet have acted against an individual who did not comply with their obligation to file.
In some cases, an individual may not be required to file a tax return because they have no taxes owing due to source deductions or because they have no taxable income. However, failing to file a tax return also means an individual may be forfeiting some benefits such the Canada Child Tax Benefit.
Under the law, individuals who fail to file a return as required, or who fail to comply with a court order to file, are liable to a fine of $1,000 to $25,000 and up to 12 months imprisonment, as well as having to pay their unpaid taxes with interest.
The CRA devotes significant resources to providing the information and assistance required by the majority of Canadians who accept their tax obligations and comply with the law. Audit, prosecution, and other enforcement activities are carefully targeted on the small minority of taxpayers who attempt to evade their obligations.
In the 2008-2009 fiscal year, the CRA prosecuted 1,124 individuals for failing to file a tax return and successfully prosecuted 323 cases involving income tax evasion or fraud.
The CRA receives leads from more than 24,000 taxpayers each year, some of which result in enforcement actions. If you know someone who is not meeting his or her tax obligations, you can contact the CRA's Informant Leads Program. More information on this program is available on our Web site at www.cra.gc.ca/leads.
For more information about the CRA's enforcement activities, visit www.cra.gc.ca/alert/
Myth # 4
You can force the CRA to lower or even eliminate taxes by refusing to co-operate with its employees.
The CRA administers and enforces tax laws as passed by Parliament and provincial legislative assemblies. The CRA has no power to impose new taxes, remove existing taxes, raise or lower taxes, or decide how tax money will be spent once it is collected. These powers belong to the elected representatives of the Canadian people in Parliament and in provincial legislative assemblies.
Under our parliamentary system, federal tax policy is developed by the Department of Finance under the direction of the Minister of Finance. Tax measures are put before Parliament in the form of legislation. Any changes in taxation must be passed by the House of Commons and by the Senate in order to become law. The CRA also collects some taxes imposed by the provinces under laws passed by provincial legislative assemblies.
The CRA and its employees are subject to the law. If you feel the CRA has failed to respect your rights or has acted without authority, you have a right to redress through the courts.
Myth # 5
The Income Tax Act applies only to corporate entities and not to "natural" persons or human beings. The Common Law rights dating back to the Magna Carta make all taxes on individuals voluntary.
These myths have been rejected by Canada's courts. For example, on August 31, 2000, the Ontario Superior Court of Justice issued a ruling rejecting arguments that the Income Tax Act applies only to corporate entities and that all taxes are voluntary.
The judge said, "I find that a 'person' as defined in s. 248(l) of the Income Tax Act includes both a natural person and an artificial person. It follows that the applicant is a 'person' and a 'taxpayer.' … His obligations include the filing of annual income tax returns and the payment of any income tax owing under his returns."
The judge said, "In my view, there is no support in 'the common law, (also known as) the rule of law' for the extremely broad proposition that all taxes are voluntary."
A number of individuals and groups are actively promoting claims that there are lawful ways to declare oneself exempt from tax. Relying on such "advice" could result in anything from late-filing penalties and interest imposed by the CRA to fines and imprisonment imposed by the courts -- in addition to having to pay your taxes.
Before paying for such information, or participating in such groups, seek advice from a trusted and knowledgeable tax professional or the CRA.
Myth # 6
Some individuals claim to be exempt from GST/HST. Some carry a card to "prove" their claim.
GST/HST legislation does not provide tax exemptions for any individuals, and any card claiming such an exemption is a fraud. However, individuals with Indian status under the Indian Act may not be required to pay GST/HST on the purchase of goods and services under certain conditions. (For details, see Publication B-039 GST/HST administrative policy - Application of the GST/HST to Indians.)
Some consumers think that falsely claiming an "exemption" is an effective protest against taxes or a government. In fact, any resulting discount they receive is at the expense of the vendor. Vendors must remit tax on all taxable transactions, even if they have mistakenly failed to collect the GST/HST from an individual falsely claiming an exemption.
You may sometimes be led to believe that you are not paying GST/HST because a vendor may promote a sale by advertising "Pay no GST" or other similar claims. The vendor in these cases discounts the price so that the final, tax-inclusive cost is the same as the advertised, pre-tax price.
You can make tax-free withdrawals from your self-directed RRSP.
If you use your registered retirement savings plan (RRSP) as security for a loan, the value of the RRSP will be added to your taxable income. Similarly, if you use your RRSP to purchase shares of a private corporation, and the shares are not a qualified investment under the rules, then the value of the shares will be added to your taxable income.
Some promoters of financing schemes may promise you that they can make tax-free withdrawals from your RRSPs. Typically, the arrangement involves using your self-directed RRSP to purchase shares of a private company. The funds used to purchase the shares are then loaned back to you at low or no interest.
These schemes are often promoted with claims such as, "Take advantage of your RRSP now -- no tax to pay," or "I will loan you $5,000 to $250,000 over five years if your RRSP is locked in." If you respond to these kinds of advertisements, you risk losing your retirement savings and the tax benefits of the RRSP.
You should always consult with a trusted and knowledgeable tax advisor before taking part in any scheme that promises a tax-free withdrawal of RRSP funds. Administrators and trustees are asked to advise clients that there may be tax consequences if non-qualified investments or loans are secured with an RRSP.
The CRA uses email to conduct "e-audits."
The CRA has been made aware of what appears to be an email audit scam currently going on in the United States. Although the CRA is not aware of any confirmed cases of such scams in Canada, we would like to alert Canadians to act prudently should they receive a similar email.
Here's how a similar scam might work in Canada: A taxpayer would receive an email using "Canada Revenue Agency e-audit" as the subject line, giving the appearance that it was sent by the CRA. The recipient/taxpayer would be instructed to fill out a questionnaire and return it within 48 hours to avoid penalties and interest. The fraudulent questionnaire would require the taxpayer to provide his or her social insurance number, bank account numbers, and other confidential information. Once the scam artist has this confidential information, the taxpayer is a potential victim of fraudulent activities.
The CRA does not notify taxpayers about pending audits by email, nor does it conduct "e-audits." Taxpayers should never respond to a request for confidential information without first confirming the identity of the requestor and assuring themselves that the requestor is legally permitted to request such information.
The CRA is committed to safeguarding the confidentiality of all taxpayer information. Because the Internet is not a secure medium of communication, the CRA does not use it to communicate with clients unless the taxpayer has first provided permission.
If you receive such an email, please contact your tax services office.
Winners of sweepstakes and lotteries in Canada have to pay fees and taxes to the CRA before claiming their prize.
You do not have to pay the CRA any taxes or fees of any kind on lottery and sweepstakes winnings in Canada. Any unsolicited email, letter, or phone call telling you otherwise is a scam. Do not, under any circumstances, send money to someone making such a pitch to you. Instead, immediately contact your local police department or the Royal Canadian Mounted Police.
You should never respond to a request for funds or confidential information without first confirming the identity of the requestor and assuring yourself that the requestor is legally permitted to make such a request.
The CRA is committed to safeguarding the confidentiality of all taxpayer information. Because of certain security concerns, the CRA does not use the Internet to communicate with clients unless you have first provided permission to do so.