ARCHIVED - Tax evasion

NO.: 73-10R3

DATE: February 13, 1987

SUBJECT: Tax evasion

This circular replaces Information Circular 73-10R2 dated April 24, 1978, and deals with tax evasion only.

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Tax Evasion

Introduction

1. The fairness and efficiency of the administration of the federal income tax system depends on the acceptance of two kinds of responsibility - the responsibility of Revenue Canada, Taxation to interpret and apply the law in a uniform and impartial manner, and the responsibility of the taxfiler to make an honest self-assessment each year of the tax payable under the law.

2. Most taxfilers accept this responsibility and pay the tax imposed by the law. Unfortunately, some seek to evade payment of tax fraudulently and special attention must be given to their returns.

3. The tax compliance arm of the Department is made up of four compliance programs, each with its own objectives and audit or investigative techniques to ensure uniformity in the application of the law, to deter those who would seek to avoid complying with it, and to take remedial action against those who attempt to carry out evasion or avoidance activities.

4. The first two of these compliance programs are the regular audit and verification whose work is designed to ensure the uniform application of the law. During the course of their work the officials engaged in these programs are alert to discover evasion or avoidance practices. Where there is evidence of evasion, as described in 8 below, the case is referred to Special Investigations; if avoidance is evident, the referral is to Tax Avoidance.

5. The main purpose of this circular is to describe the activities of Special Investigations and the policies and practices adopted in these operations. The circular also contains an explanation of the Department's policies in applying the penalties provided by section 163 of the Income Tax Act.

6. These policies and practices are equally applicable under the Income Tax Act, the Unemployment Insurance Act and the Canada Pension Plan.

PART I - TAX EVASION

7. The main responsibility of Special Investigations is to investigate significant cases of suspected tax evasion for the purpose of obtaining evidence of any criminal offence that may have been committed and, where such evidence is found, to prepare the case for prosecution in the courts under section 239 of the Act. A further responsibility is to publicize prosecution convictions as a means of deterring other taxfilers from tax evasion and to encourage voluntary disclosures.

8. Tax evasion is the commission or omission of an act knowingly, the conspiracy to commit such an act or involvement in the accommodation of such an act, which can result in a charge being laid in the Criminal Court under subsection 239(1) of the Income Tax Act (refer to Appendix A).

9. Special investigations are carried out in District Offices by highly trained personnel under the direction of a Chief of Special Investigations who in turn reports to the District Office Chief of Audit. These chiefs receive functional direction from the Director General, Compliance Research and Investigations Directorate at Head Office, who is responsible for the Special Investigations program of the Department.

Investigations

10. Special Investigations work is usually generated from information indicating the possibility of an offence, which comes from various sources, such as the following:

(a) Taxation auditors and assessors, as a result of their normal verification of income declared by taxfilers;

(b) Special investigators investigating the affairs of other taxfilers;

(c) Collection officers and other members of the Department as a result of the performance of their normal duties;

(d) Newspaper reports, public records, observation of styles of living, or any unusual circumstances which attract attention;

(e) International joint audits and simultaneous investigations with other tax authorities; and

(f) Informers. All communications received from informers are dealt with in the strictest confidence. Information so received is used or verified in the same manner as any other tax evasion lead. The findings of the Department are never disclosed to the informant, except such as might be revealed publicly in any proceedings in criminal court or through media coverage thereof. It is not the policy of the Department to pay any form of reward or remuneration for information.

11. Information items from these sources are considered leads and are referred to the Special Investigations Section. Leads selected are then assigned to investigators for verification by checking the records of the taxfiler and other parties involved in the transactions. Where it appears evident from this preliminary investigation that a taxfiler has not reported the correct income or paid the taxes owing and an offence as described by section 239 of the Act is indicated, the case is selected for a full-scale investigation. In those instances where the preliminary investigation does not produce a strong presumption that there has been an offence and that it can be successfully prosecuted under section 239 of the Act, the case is disposed of by normal assessment with or without a penalty, as the case may be.

12. Primarily, a special investigation seeks to:

(a) establish whether the taxfiler has wilfully committed tax evasion as described in 8 above, and if so,

(b) determine the true income and taxes applicable, and (c) accumulate sufficient evidence to establish the facts beyond a reasonable doubt in a court of law.

13. To establish that a taxfiler wilfully committed an offence as described in 8 above, an investigator must produce, in court, evidence that the taxfiler had knowledge of the facts constituting the offence. It is a rebuttable presumption that taxfilers have knowledge of records and documents in their possession or under their control. Therefore, an investigator must obtain all documents in a taxfiler's possession or under a taxfiler's control that may afford evidence, and maintain custody and control of them until they are presented in court.

14. Subsection 231.3(1) of the Act provides the authority to search premises and seize records. Where the facts indicate that a search warrant is necessary to obtain the evidence of a tax offence, informations are prepared by the investigator setting out the details of a prima facie offence chargeable under section 239 of the Act, the documents or things to be searched for and specifying the premises to be searched. If the District Office Chief of Special Investigations is satisfied that there is a strong presumption of criminal fraud, the informations, together with a detailed report, are submitted to Head Office through the Director of the District Office. After reviewing the details submitted, the Director General of Compliance Research and Investigations Directorate or one of the other persons authorized by Regulation 900(5), if in agreement, prepares an application to a judge of a superior court or of the Federal Court for approval of a warrant to search and seize.

15. During the course of a search, documents or things (other than those listed on the search documents) may be seized pursuant to subsection 231.3(5) if any person executing a warrant has reasonable grounds to believe that they afford evidence of the commission of an offence under this Act.

As soon as practicable following a seizure, the documents or things seized must be brought before the judge or a report made to the judge who issued the warrant or if that judge is not available, another judge of the same court. The judge will order that the records be retained by the Minister until the conclusion of the investigation or until they are required to be produced for the purpose of a criminal proceeding.

A judge, of his own motion, or a person with an interest in the document or things on summary application, may on three clear days notice to the Deputy Attorney General of Canada, order that the documents or things be returned to the person from whom they were seized or who is legally entitled thereto if the judge is satisfied that the documents or things will not be required for an investigation or a criminal proceeding or were not seized in accordance with the warrant.

16. Section 232 of the Act provides a procedure with respect to a claim of privilege on specific communications between taxfilers and their solicitors. Where, in the course of a seizure of documents in the possession of a lawyer privilege is claimed by a lawyer on behalf of a client, the departmental officers are not allowed to examine the challenged documents until such time as privilege is waived by the client or a court has ruled that no privilege exists. The challenged documents are packaged and placed in the custody of the sheriff of the district in which they were seized or of a mutually acceptable third person, until the matter is decided by the court.

17. Subsection 231.5 permits the making of copies of documents which have been seized. Subsection 231.3(8) provides that where the taxfiler requires the information contained in the records retained by the Department, that taxfiler is entitled, at all reasonable times and subject to such reasonable conditions as may be imposed by the Minister, to inspect the document or thing and to obtain one copy of the document at the expense of the Minister. In all cases a letter with a copy of the inventory is sent to the taxfiler advising that the records are available for examination during normal office hours. The right of access to records extends to representatives authorized in writing by the taxfiler. Records seized are held until all criminal appeal periods have expired.

18. The reconstruction of a taxfiler's income and the accumulation of sufficient evidence to establish facts beyond a reasonable doubt in a criminal court usually require:

(a) a detailed audit of all of the taxpayer's books, records, and financial affairs;

(b) obtaining testimony of employees, agents, professional advisers, and others who had knowledge of documents and records in the taxfiler's possession or under the taxfiler's control; and

(c) obtaining documentary and oral evidence from persons who had dealings with the taxfiler or knowledge of transactions with the taxfiler.

19. These functions are carried out under section 231.1 which provides the authority to enter premises, to inspect, audit or examine books and records, and to require reasonable assistance and answers to all proper questions.

20. Where the premises referred to above is a "dwelling-house", an authorized person may not enter without the consent of the occupant except where a warrant to enter is issued by a judge, following an application supported by an information under oath by the Minister to a judge, requesting authorization for an authorized person to enter that dwelling subject to such conditions as the judge specifies in the warrant.

21. Under subsection 231.2 a demand for information or production of records can be made by a registered letter or by a demand served personally. Formal requirements under this section are issued by the District Office Director as provided for in Part IX of the Income Tax Regulations and are used to obtain the required information or records from

(a) persons who do not object to providing what is required but who, for reasons of their own, prefer to do so under a formal demand; and

(b) persons or organizations who have already refused to part with the information or document needed or from whom, for some other reason, resistance is anticipated.

22. As a result of case law, the Income Tax Act was amended. If it is desired to obtain information from a third party in regard to unnamed persons, it will be necessary to first obtain authorization from a judge to issue a requirement. Once the authorization and requirement is served, the third party on whom the requirement is served has 15 days to apply to the judge who granted the authorization for a review of the authorization. The judge may cancel the authorization if not satisfied that the conditions in paragraphs 231.2(3)(a) to (d) have been met.

23. Subsection 238(2) provides for fines from $200 to $10,000 or both a fine and imprisonment not exceeding six months, on summary conviction, for failure to comply with the requirements of section 231.2. It should also be noted that where a taxfiler is found guilty of an offence under subsection 238(2) for failing to comply with a requirement, the court may issue an order to enforce compliance.

24. The taxfiler will be interviewed by the investigator during the course of the investigation and will be given ample opportunity to make explanations or representations. A taxfiler will often prefer to have legal and accounting advisors present during interviews.

25. Under subsections 231.4(1) and 231.4(2) of the Act, the Minister can authorize any person to hold an inquiry. After this authorization, the Minister will forthwith apply to the Tax Court of Canada for an order to appoint a hearing officer before whom the inquiry will be held. Under subsection 231.4(3) the hearing officer has all the powers conferred on a commissioner by sections 4, 5 and 11 of the Inquiries Act. These powers permit the hearing officer to summon witnesses, to enforce their attendance and to require them to produce documents and answer questions under oath. This procedure is used in Special Investigations cases where persons who are considered able to give evidence concerning transactions or practices constituting tax evasion are reluctant to furnish voluntary explanations or are so closely related to the taxfiler under examination, by family relationship or business association, that they will not for fear of recriminations or financial loss, give information unless compelled to do so.

26. Subsection 231.4(5) entitles a person giving evidence to be represented by counsel and, upon request, to receive a transcript of that evidence. This transcript is not available to any other person except officers of the Department.

27. If, upon termination of the investigation, it is concluded that the evidence accumulated would not support a prosecution, the taxfiler will be advised by personal interview or in writing that the case will be dealt with by reassessment, with penalty under section 163, if warranted. When prosecution is being considered, the District Office will invite the taxfiler to an interview in order that the taxfiler may submit whatever further information and make whatever representation desired. At the meeting, the taxfiler will be advised in general terms of the charges being considered and of the items for which reassessments and section 163 penalties only are being considered. The amount of information so given, however, will not be such as to endanger the Department's case before the courts. If the taxfiler declines the invitation to this interview or if mutual arrangements cannot be made for a suitable alternative date within a reasonable time, the District Office will forward its report on the case along with its recommendations, to the Department of Justice, which is the Department responsible for the conduct of prosecutions for the offences set out in the Income Tax Act.

28. This case report sets out the details of the investigation, the evidence accumulated, and any relevant information obtained at the last interview with the taxfiler. If the taxfiler so requests, any written submission the taxfiler wishes to make will also be sent to the Department of Justice for their consideration. The report and submissions are reviewed by officials of the Department of Justice and if they are satisfied that there is sufficient evidence to warrrant prosecution, appropriate charges are then laid.

29. No change in the intended course of action for prosecution will be considered at this stage. The laying of charges by the Department of Justice will not be delayed unless further facts are produced which were not considered by the District Office prior to it making its recommendation.

Prosecutions

30. It is the policy of the Department to refer every case to the Department of Justice where an investigation has produced evidence that is considered to warrant the preferring of criminal charges. Referrals to the Department of Justice are based on considerations relating to the facts and evidence of the commission of offences and account is not taken of the prominence, influence, or position in the community of the person or persons concerned.

31. Any representations received by the Department that the taxfiler should not be prosecuted on compassionate grounds, such as reasons related to health or age or both, will be brought to the attention of the Attorney General of Canada who may consider them in exercising discretion as to whether or not to prosecute. Where the taxfiler has been co-operative during the investigation and paid the full tax liability, the Crown will ensure that this fact is brought to the attention of the Court, which may take it into account when considering sentence.

32. When a case is proceeded with by summary conviction, the hearing may be held before a justice or provincial court judge in a court having jurisdiction where the taxfiler is a resident, conducts a business, or is found, apprehended, or in custody. Under section 239, the taxfiler, if found guilty, is liable to a fine ranging from 25 % to double the tax that was sought to be evaded. In addition, the judge may impose a prison term of up to 2 years.

33. The court normally sets alternative terms of imprisonment for failure to pay the fine by a date determined by the court and if payment is not made to the court by that time, the taxfiler can be taken into custody and imprisoned until the term specified has been served.

34. In cases where, in the opinion of the Department, circumstances warrant consideration of more severe action, it will be brought to the attention of the Department of Justice to consider proceeding by indictment or to seek an appropriate jail sentence, in addition to any fine.

35. A prosecution for tax evasion can, at the election of the Attorney General of Canada, be proceeded with by indictment.

36. Under indictment, the taxfiler faces a mandatory term of imprisonment for each charge on which the taxfiler is convicted, of not less than 2 months and not more than 5 years.

37. A corporation can be prosecuted under section 239. An officer, director, or agent of a corporation who acquiesces or participates in the tax evasion of the corporation is also a party to and guilty of the offence and can be charged for the same offence under authority of section 242 of the Act.

38. Where income of a corporation has been understated in circumstances amounting to tax evasion and there has been an appropriation of part, or all, of the amount involved by, or to the benefit of, a shareholder, both the shareholder and the corporation will be taxed on the applicable amount and, in addition, each may face criminal charges.

39. The Department takes a very serious view of persons who commit an offence described under section 239 by counselling or advising other persons in planning or carrying out tax evasion and of persons who conspire or participate with other persons in the planning or execution of such practices. In cases where evidence of these offences can be obtained they will be referred to the Department of Justice.

40. It is the Department's policy to issue reassessments including applicable penalties under section 163 prior to prosecution proceedings. In cases where the facts at issue are substantially the same as those in a prosecution pursuant to section 239, subsection 239(4) provides for a delay in processing appeals filed against assessments until all criminal proceedings have been terminated.

41. Subsection 163(1) provides for a penalty of 50% of the tax sought to be evaded where a taxfiler has wilfully failed to file a tax return in an attempt to evade the payment of tax. Where a taxfiler knowingly or under circumstances amounting to gross negligence has failed to comply with the duties and obligations imposed by or under the Act with the result that the tax payable was reported to be less that it should have been, subsection 163(2) provides for a penalty of 25 % of the amount of tax understated.

42. Subsection 239(3) prevents the application of a civil penalty under section 163 for the same evasion for which a taxfiler has been convicted in a criminal court, unless the penalty was assessed before the information or complaint giving rise to the conviction was laid.

43. Subsection 225.2(1) provides that, where it may reasonably be considered that collection of an assessed amount would be jeopardized by a delay in the collection thereof and the Minister has, by notice served personally or by registered letter, so advised the taxfiler and directed the taxfiler to pay forthwith the amount assessed, the Minister may take immediate collection action including garnishment and seizure of assets. Where the Minister has directed a taxfiler to pay an amount forthwith, the taxfiler may apply to a court for a determination of the question whether the direction was justified in the circumstances.

Publicity

44. The Department believes and has some evidence to support the view that publicity in all news media on the cases convicted in court not only helps to maintain confidence in the integrity of the self-assessment system by the large majority of taxfilers, but also provides the means of obtaining increased compliance with the law through the deterrent effect of such publicity on taxfilers who might be tempted to indulge in tax evasion and through the probable incentive on other tax evaders to make a voluntary disclosure. (See Information Circular 85-1 for details.)

PART II - SUBSECTION 163(2) PENALTIES

45. The policy of the Department regarding the application of a penalty under subsection 163(2) of the Act is stated in 40 above. Such a penalty is not, however, limited to cases involving proven tax evasion.

46. Where an income tax return is filed in which it appears on examination that there has been an understatement of tax and the circumstances are such that it is not considered to be a case where a conviction for tax evasion should be sought, the taxfiler or the taxfiler's agent is advised of the Department's reason for viewing the tax as being understated. After the taxfiler has been given an opportunity to reply, the return is again reviewed to see whether it appears that the understatement of tax was known to the taxfiler when the return was filed or, alternatively, was caused by gross negligence on the part of the taxfiler.

47. If it is decided that one or the other of the above factors was present, a letter is sent informing the taxfiler that the imposition of a penalty is being considered and inviting representations against the application of the penalty.

48. When these representations are received, the full circumstances of the case are reviewed at a more senior level. If it is decided that the understatement of tax was the result of an innocent mistake or a misunderstanding of the law and that reasonable care was taken to file a correct return, a reassessment is issued without application of penalty. If, on the other hand, it is decided to apply the penalty, the amount is 25% of the understatement of tax attributable to the offence as provided by subsection 163(2).

APPENDIX "A"

CHARGING SECTIONS OF THE INCOME TAX ACT FOR TAX EVASION

SEC. 239

(1) Every person who has

(a) 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,

(b) to evade payment of tax imposed by this Act, destroyed, altered, mutilated, secreted or otherwise disposed of the records or books of account of a taxpayer.

(c) made, or assented to or acquiesced in the making of, false or deceptive entries, or omitted, or assented to or acquiesced in the omission, to enter a material particular, in records or books of account of a taxpayer,

(d) wilfully, in any manner, evaded or attempted to evade, compliance with this Act or payment of taxes imposed by this Act, or

(e) conspired with any person to commit an offence described by paragraphs (a) to (d), is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to

(f) a fine of not less than 25% and not more than double the amount of the tax that was sought to be evaded, or

(g) both the fine described in paragraph (f) and imprisonment for a term not exceeding 2 years.

Comparable sections exist under the Unemployment Insurance Act (Subsection 88(4)) and the Canada Pension Plan (Subsection 42(4)).