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Tax time 2015: Why tax cheats in Canada are rarely jailed

03/02/2015 05:00 EST | Updated 05/01/2015 05:59 EDT
If you're going to get caught cheating on your taxes, get caught in Canada.

You might have to repay every red, withheld cent — plus fines and interest. But once the Canada Revenue Agency is done with you, there's a good chance you won't also be in prison.

"The government, basically, just wants its money back," says Toronto-area accountant Darryl Hayashi. "They want their taxes, their penalties and their interest. Bottom line."

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And in most cases, they can get that money back through civil proceedings in Tax Court without having to lay criminal charges, which are possible under the Income Tax Act but which the CRA typically only pursues in especially egregious cases or against tax protesters, who try to make spurious legal arguments that the federal government doesn't have the right to collect any tax, from anyone. 

​A conviction for tax evasion — which includes not filing returns, hiding income or making bogus claims — can result in fines and up to five years in prison under the Income Tax Act or the Excise Tax Act. The penalty for fraud, which falls under the Criminal Code, goes up to 14 years.

The CRA convicted 128 people of tax evasion or tax fraud in fiscal year 2013 but only 29 of them, or 23 per cent, were sentenced to jail time. The average sentence in those cases was 22 months. 

The cases involved a total of $32.6 million in lost tax revenue, the tax agency said, and led to an average fine of a little more than $777,000.

That same year, the U.S. had 3,311 tax-related criminal convictions, according to the Internal Revenue Service. That's roughly 25 times more convictions in a country with just nine times the population. And just over 80 per cent of those cases led to jail time.

In the 2014 fiscal year, the CRA convicted fewer people — 98 —  than the previous year, but a higher proportion — 26 per cent — went to jail, averaging sentences of 25 months each.

Crackdowns in Canada, U.K.

The British are moving in a similar direction to the U.S. when it comes to coming down hard on tax evaders. Investigators at the U.K. tax agency, known as Her Majesty's Revenue and Customs, are midway through a five-year campaign to increase tax-related criminal prosecutions fivefold.

Ottawa has also made efforts to crack down on tax cheats and last year opened a tip line aimed at finding unreported revenue hidden by Canadians in other countries. Informants are offered a percentage of any recovered taxes as a reward — if the amount owing exceeds $100,000, excluding interest and penalties.

The CRA says it heard from just over 600 would-be informants during the Offshore Tax Informant Program's first 12 months and that more than 100 of those cases are getting a closer look.

'Everything is documented'

Lawyers say it's harder to convict tax cheats in Canada than in some other jurisdictions in part because of how the CRA conducts its investigations and audits.

The CRA has broad powers to investigate suspected tax cheats. In the process of conducting a civil audit to assess how much tax a person really owes, the tax agency can call up bank records, freeze accounts, compel the release of business, payroll and other records, and root through land registries and other government data.

"You'd be surprised how much can be evidenced from documents, and everything is documented somewhere," says Adam Aptowitzer, a tax attorney in Ottawa.

"And CRA's powers of investigation are practically limitless. They can request any document for anything necessary for an audit — not just about what was reported but also for what wasn't reported."

Hayashi agrees and says he makes no bones about how far the CRA's reach extends when he advises clients. He recalls one meeting with two potential clients — brothers who, it emerged, were hiding a house-flipping business. The CRA had sent them a letter indicating it knew about a $1-million property of theirs and asking for information on any other properties they had.

There were eight others. The brothers asked Hayashi if he thought the CRA knew about them.

"I'm like, 'Are you kidding me? They know about everything,'" he said. "They're giving you a chance to show your credibility."

Got a warrant?

But the CRA faces a hurdle if it wants to use any of that information to pursue a criminal case, which must be made within the limits of the Charter of Rights and Freedoms and gives the alleged tax cheat protection against self-incrimination.

The Supreme Court of Canada ruled in 2002 that "there must be some measure of separation between the audit and investigative functions" of the CRA. When the purpose of an investigation is to determine criminal liability, an "adversarial relationship" between the state and the taxpayer exists because the individual's liberty is at stake, the court said, and hence, charter protections apply and prohibit tax officials from relying on their "powerful inspection and requirement tools." 

That means the CRA must often go back and get a warrant to obtain the very information it had already uncovered in the course of an audit.

"The cases, or case law, on the issue of what constitutes unconstitutional self-incrimination versus proper use of CRA audit and administrative powers has bounced back and forth for years," says Toronto-based tax lawyer Jonathan Garbutt. "Sometimes, the courts have found the CRA's behaviour unconstitutional; sometimes, they have allowed criminal tax evasion charges to go forward."

But historically, Garbutt says, courts have tended to come down in favour of the accused individual's right against self-incrimination and upheld the distinction between the CRA's evidence-gathering powers in audits vs. criminal investigations.

U.S. approach would yield convictions: expert

Police forces, meanwhile, seem uninterested in pursuing tax evasion cases or using tax law in their own criminal investigations, he said. (Although thanks to an amendment passed last year, they can now benefit from the CRA's investigative powers to glean information about certain types of offences such as theft, money laundering or corruption.)

The Income Tax Act is "never used by police or the RCMP," said Garbutt. "I've never heard of it. Just plain never."

This contrasts with the U.S. system, where a special division of the Department of Justice, separate from the IRS, is tasked solely with the criminal prosecution of tax evasion. (The CRA has a criminal investigations division that refers cases to the Public Prosecution Service of Canada.)

"Their objective from the get-go is criminal convictions," Garbutt said. "That's all they care about ... They don't care about the money."

U.S. prosecutors are also quick to fall back on tax law when unable to bring criminals to trial on other charges — the most famous, though dated, such example is the conviction of notorious gangster Al Capone for tax evasion.

"Canada should have a separate bureau inside [the Department of] Justice that, like the Americans, does nothing but go for the throat," Garbutt said.

If it did, tax evasion convictions of drug dealers and other criminals who have an interest in hiding their money from the taxman "would be a slam dunk," he said.

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