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Tax Records: Keep, Report, or Face Severe Penalties

by Evelyn Jacks

Tax avoidance and tax evasion – do you know which is legal and which is a criminal offence? It often surprises me how many people are cavalier about breaking the law when it comes to reporting their income and their legal obligation to keep records for the taxman.

I once asked a group of people attending a seminar to consider this scenario:

An estimate for a basement renovation is in progress and the contractor says, ”the fee is X with a receipt, or Y (substantially less) if you pay in cash.”

Which quote would you take?

Many in the audience thought it was perfectly acceptable to take the “Y” option, turning a blind eye to their active participation in the underground economy. Few were outraged by the fact that the contractor, assuming he would not report the cash received, would be doing so at the expense of honest taxpayers.

Consider another common scenario: a babysitter will care for a new baby only if the working mother goes without a receipt, which would require the sitter to report this income.

Is this tax evasion?

The answer in both cases is yes. Tax evasion is the act of making false or deceptive statements in a return, certificate, statement or even an answer filed or verbally given to the Canada Revenue Agency (CRA), with the intent to willfully evade the payment of your taxes. You are also evading taxes if you willfully make deceptive entries or omissions in your books. A person who destroys, alters, mutilates, or otherwise willfully disposes of the records or books of account to evade the payment of tax may also be prosecuted.

The penalties for inadequate bookkeeping can be harsh

Prime candidates are those who carry on a business or who are required to pay or collect taxes or other amounts under the Income Tax Act. If you meet that profile, you must keep records and books of account for at least six years after the end of the taxation year to which those records relate. However, CRA has the right to demand that records be kept longer.

What’s a “record”?

This includes an account, an agreement, an invoice, letters, memos, plans, returns, vouchers, or anything else that contains information, whether in writing or in any other form, including electronic forms. You must retain either in paper or on permanent electronic records all sales invoices, purchase invoices, cash register receipts, formal written contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax returns, and general correspondence.

If books and records are inadequate, the penalties can be a fine of $1,000 up to $25,000 or both a fine and imprisonment for up to 12 months.

You may request permission to destroy records before the six-year period is up by filing a special form – T137. But I don’t recommend it; such a request invites the taxman to consider verifying those records prior to destruction.

It gets worse for tax evaders

Most people don’t know that there are, in fact, several layers of punishment for tax evaders. There are administrative penalties CRA can levy and criminal penalties that can be imposed by the courts. What’s important to note is that both penalties can apply to the same crime.

Take, for example, the gross negligence penalties. Every person who knowingly makes false statements or omissions or who “turns a blind eye” (you know the excuse: “My accountant does it all; I know nothing.”) can be subject to a penalty of the greater of $100 and 50% of the tax sought to be evaded or tax credits sought to be received. This penalty relates specifically to the taxpayer, rather than his or her advisors. In addition, the grossly negligent taxpayer may be subject to late filing penalties if the return did not get in on time and to interest charges on any outstanding balance owing, compounding daily.

Taxpayers who are found to participate in tax evasion will face more penalties if there is a criminal conviction. While in the case of gross negligence, the burden of proof is on the taxpayer, in tax evasion cases, the burden is on CRA to show that there was willful evasion on the part of the taxpayer and that there is no reasonable doubt of the crime.

Those convicted of tax evasion face a series of penalties, the most common of which is a fine of 100% to 200% of the tax sought to be evaded, or credits sought to be gained. This penalty could also be accompanied by a prison term of up to five years.

The good news for those who may have uncomfortable consciences is something called “voluntary compliance.” If you initiate an adjustment of your tax returns to report the correct income and deductions or credits for the tax year, you’ll avoid the major penalties, but not interest. And of course, you always have to pay the tax you properly owe.

Remember, tax avoidance within the framework of the law is legal

In Canada, under our “self-assessment” system of taxation, it is every person’s legal right and duty to arrange affairs within the framework of the law to pay the least amount of tax legally possible. There are volumes of tax preferences and tax planning options the astute taxpayer and his or her advisors can use to benefit from both fairness and equity within our tax statutes.

However, keep in mind that it is a criminal offence to evade taxes, mess with the books, or stick your head in the sand and not file at all.

Take heart, tax season is still several months away. You might want to think about starting that sorting process a little sooner this year and do some tax planning as well. Both could pay off handsomely to help you accumulate new wealth faster.

Finally, take a stand. Those who use the services of evaders lose too. That’s because honest suppliers will not be able to compete without the support of clients who reject tax evaders on principle. And eventually that affects our investments, our jobs, our businesses and our communities.

 

Evelyn Jacks is the author of 30 best-selling books on the subject of personal income taxation, and the President of Knowledge Bureau, Inc., Canada’s leading professional education publisher in the tax and financial services industry, specializing in delivering courseware and information services to knowledge-based practices. For more information call toll free 1-866-953-4769 or visit www.knowledgebureau.com.

This article is written to be of a general nature and neither the author, her company, employees, subcontractors or others associated with The Knowledge Bureau can take responsibility for any results, positive or negative, taken by any persons. While the author received a fee to write this article, she is not in the business of providing advice on investment products and is not registered and licensed to do so, nor does the author have any compensatory relationship, or beneficial ownership regarding the sale of investment products discussed herein


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