What is tax avoidance? How does it differ from tax planning and aggressive tax planning?
Tax avoidance and tax planning both involve tax reduction arrangements that may meet the specific wording of the relevant legislation. Effective tax planning occurs when the results of these arrangements are consistent with the intent of the law. When tax planning reduces taxes in a way that is inconsistent with the overall spirit of the law, the arrangements are referred to as tax avoidance. The Canada Revenue Agency's interpretation of the term "tax avoidance" includes all unacceptable and abusive tax planning. Aggressive tax planning refers to arrangements that "push the limits" of acceptable tax planning.
Tax avoidance occurs when a person undertakes transactions that contravene specific anti-avoidance provisions. Tax avoidance also includes situations where a person reduces or eliminates tax through a transaction or a series of transactions that comply with the letter of the law but violate the spirit and intent of the law. It was to address these latter situations that the general anti-avoidance rule was enacted in 1988.
How does tax avoidance differ from tax evasion?
Under federal tax laws, taxes may have to be paid, but the laws also provide credits, benefits, refunds, and other entitlements. While in layman's terms tax avoidance and tax evasion would seem to be synonymous, there is a definite distinction under Canadian tax law.
Tax avoidance results when actions are taken to minimize tax, while within the letter of the law, those actions contravene the object and spirit of the law.
Tax evasion typically involves deliberately ignoring a specific part of the law. For example, those participating in tax evasion may under-report taxable receipts or claim expenses that are non-deductible or overstated. They might also attempt to evade taxes by wilfully refusing to comply with legislated reporting requirements.
Tax evasion, unlike tax avoidance, has criminal consequences. Tax evaders face prosecution in criminal court.
What is the CRA doing to combat tax avoidance?
The CRA combats tax avoidance by:
- adapting the way we audit to include reviews for potential tax avoidance issues
- monitoring tax avoidance trends - for example, the CRA now reviews 100% of all tax shelters;
- ensuring timely communications to CRA auditors so they are kept up-to-date about tax avoidance strategies people are using; and
- consulting the Department of Finance on legislative changes related to abusive tax avoidance strategies that are being used.
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