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Why You Shouldn't Cheat the Taxman

10/25/2013 12:34 EDT | Updated 01/23/2014 06:58 EST

Making a little income on the side that you're not reporting on your tax return? Worried that the neighbours might find out? Chances are, they're not going to turn you in.

It is hard to meet a Canadian who doesn't complain about taxes. Even though we know the money pays for things we all need, like law enforcement, hospitals and a pension plan, it is still hard to look at your pay stub and see a sizable dollar amount under the federal tax category without cringing.

And there are some taxpayers who decide that not being entirely honest on their tax return is an alternative. We recently asked Leger to survey Canadians about cheating on taxes, and the results were a little surprising. Turns out that we don't seem to think tax cheats are all that bad.

The online survey found only 27 per cent of Canadians were likely tell the Canada Revenue Agency (CRA) if they knew someone was cheating on their taxes. On the other hand, 57 per cent said they would probably look the other way. Though CRA has a snitch line to report your neighbours, it looks like we are not that eager to share information with the taxman.

On the positive side, most Canadians said they play fair, with 72 per cent saying they would notify the CRA if they had been overpaid on a tax refund. It's a curious double standard; we actually hold ourselves to a higher standard than our neighbors.

The survey provides some interesting insights into Canadians' moral attitude toward fudging taxes. About one in five said they knew someone who was cheating on their taxes. Men, at 26 per cent, were more likely than women, at 15 per cent, to know a tax dodger. Men were also more likely to ignore a neighbour's tax transgressions, as were those over age 55, with 60 per cent of both groups saying they'd turn a blind eye.

It seems that Canadians don't see a person who fudges his taxes as generally immoral. The majority of those surveyed didn't feel that just because someone cheated the taxman, they would be more likely to cheat in other areas of life, like on a spouse or on an exam. The exception was expense reporting; 59 per cent saw a connection between fudging taxes and fudging expense claims.

Asked to choose the worst form of cheating, only 11 per cent selected cheating on taxes.

But the fact the neighbours don't mind if you cheat on your taxes doesn't make it a good idea. The CRA takes false tax returns very seriously, and the consequences if you're caught can be grim. It's better to take advantage of the legal avenues to reduce your tax bill, and less expensive in the long run.

If you do have unreported income, you may want to explore the Voluntary Disclosure Program (VDP) guidelines before the CRA comes knocking at your door. If you wait until the CRA calls you, it is too late to use the VDP.

The VDP allows you to approach the CRA and fully disclose any unreported income or issues with your tax return that would result in penalties and interest. It does not mean you will be exempt from paying taxes, but the CRA will consider your case and may decide to waive penalties and interest. Applying to the VDP is not a sure thing. You must be completely truthful and include all income and issues. If the CRA finds you didn't confess everything, your VDP application can be denied.

Remember, the VDP program worked for Brian Mulroney when he failed to report his envelope of cash so there are benefits to using the program. But you cannot start the process if the CRA is already reviewing your return.

And if you are thinking about cheating on your taxes, the CRA does have several checks in place to make sure you are filing correctly. They may accept your return initially but the system may catch it later on. It may not be worth getting a Notice of Reassessment with penalties and interest to save a little bit in taxes.

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