Tax Avoidance or Tax Evasion: What's the Difference?

The sad fact of the Canadian tax system is that not everyone abides by the rules. Corporations and wealthy individuals often pay big bucks to tax advisors to play the lucrative tax dodge game.

What's the difference between avoidance and evasion? It is a question we get asked a lot. Here's a quick primer.

1. The CRA defines “tax avoidance” as any taxpayer activity that minimizes tax payable by contravening the object and spirit – but not necessarily the letter – of the law. It occurs when the taxpayer does not provide false information to the CRA, but the provisions of the law are used in a manner that was not intended by Parliament. The taxpayer is deemed to be innocent if it is unclear whether abusive tax avoidance has occurred.

2. “Aggressive tax planning” refers to domestic and international strategies that “push the limits of acceptable tax planning.” When a series of transactions is undertaken not for a genuine business purpose but to obtain a tax benefit, the CRA can invalidate the tax-free consequences of the transaction or series of transactions, and taxes may be owed. There is also the General Anti-Avoidance Rule (GAAR) in our tax law, which is available to the CRA to help deal with unanticipated circumstances. The GAAR provides the CRA with broad powers to challenge tax avoidance activities including those of financial advisors who set up schemes to hide their clients' or employers' money. There is currently a case in Tax Court involving Cameco that involves these strategies.

3. Outright “tax evasion” involves concealing income or assets, or by making false statements to deliberately avoid tax on them. Tax evasion violates the object, spirit and letter of the law. Both tax advisors and taxpayers can be prosecuted because the law specifies that every person who has “made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, … is guilty of an offence." However, up to now, advisors have faced "administrative" penalties instead of the full brunt of the law.

Canada has a system of self-reporting. It counts on adherence to the spirit and intention of the law. But over the years, the Canada Revenue Agency lost its capacity to check on that reporting. Some in the tax industry know that, and have been emboldened to play a game of chicken that has often worked in their favour. It is estimated that we lose at least $8 billion a year to tax evasion and tax avoidance.