Introduction – GST Tax Evasion & Section 327 of the Excise Tax Act Penalties
Tax evasion occurs when a taxpayer intentionally breaches his or her statutory obligations such as falsifying tax returns and failing to collect and or remit Goods and Services Tax (the “GST”) to the Canada Revenue Agency (the “CRA”) as required by Canada’s Excise Tax Act.
Part IX of Canada’s federal Excise Tax Act governs the GST. It is contrary to the Excise Tax Act to evade or commit tax fraud. Pursuant to section 327 of the Excise Tax Act, tax fraud penalties can be imposed against persons who are found guilty of GST tax fraud or tax evasion.
Subsection 327(1) of the Excise Tax Act provides that on summary conviction of tax evasion, fines range between 50% to 200% of the amount of the tax that was sought to be evaded as well as up to two years imprisonment. In addition, subsection 327(2) grants the Canadian tax lawyer carrying out the prosecution for CRA discretionary powers to proceed by way of indictment in which case fines range between 100% and 200% of the amount of tax that was sought to be evaded plus up to five years imprisonment.
Furthermore, a person who fails to file or make a return as required by subsection 326(1) of Canada’s Excise Tax Act can be fined up to $25,000 or face up to 12 months of imprisonment.
As an alternative to section 327 of the Excise Tax Act, the Canadian tax lawyer carrying out the prosecution for CRA may lay charges of tax fraud under section 380 of the Criminal Code which provides a maximum sentence of 14 years imprisonment. Moreover, under section 487 of the Criminal Code, authorized representatives of the CRA’s Criminal Investigations Program can apply to a judge for a search warrant in certain circumstances including GST tax evasion.
Subsection 327(1) of the Excise Tax Act Tax Fraud Offences
Pursuant to subsection 327(1) of the Excise Tax Act, a fine or a fine and imprisonment may be imposed on a person who:
- Made, participated in, assented, or acquiesced to the making of “false or deceptive statements” in their GST returns or on any documents pertaining to their GST filings;
- Evades the payment or remittance of GST payable by “destroying, altering, mutilating, secreting or otherwise disposing of any documents of a person”;
- Wilfully evaded or attempted to evade compliance of the Excise Tax Act or payment or remittance of tax under Canada’s Excise Tax Act;
- Wilfully obtained or attempted to obtain a tax refund to which the person is not entitled to under the Excise Tax Act by any manner including by way of making “false or deceptive entries”
- Collaborated with another person to commit any of the above-mentioned offences.
Although the exact amount of GST tax evaded is relevant to sentencing, it is generally not an essential element to the offence, as stated in R. v. Porisky. The Canadian tax lawyer carrying out the prosecution for CRA must prove the requisite mens rea or wilful intent to secure a conviction for evasion and or income tax fraud, as stated in the Supreme Court of British Columbia’s leading decision, R. v. Porisky. The case law is consistent with confirming that activities of GST/HST tax evasion require an element of intention from the person avoiding payment or remittance of GST that is owed under the Excise Tax Act, as was the case in the Ontario Court of Appeal decision R. v. DiGiuseppe. As such, in order for the Canadian tax lawyer carrying out the prosecution for CRA to prove a fraud or tax evasion offence under the Excise Tax Act, it must be proven beyond a reasonable doubt that the taxpayer intentionally performed or conspired to perform any of the above-mentioned activities, as stated by the British Columbia Supreme Court in Regina v Reynolds.
Activities that Constitute GST Tax Evasion
Despite the legislative framework, there are ongoing major concerns with respect evasion and tax fraud pertaining to the GST provisions under the Canada’s Excise Tax Act. In Regina v Reynolds, the taxpayer was convicted of defrauding the federal and provincial government of income tax payable on unreported income and failure to remit GST/HST of $121,179. In this case, the taxpayer received a conditional sentence and was required to pay a fine of $121,179 in relation to his conviction for wilfully failing to remit GST/HST.
In R v. Bath and Khangura, Bath was sentenced to 4.5 years imprisonment and Khangura was sentenced to 3 years imprisonment for dishonestly claiming $7,980,122 and $3,164,853, respectively, in GST refunds under numerous sham companies that were not entitled to the GST/HST tax refund.
In R v. Dyck, the accused was sentenced to 3 years imprisonment for income tax evasion and of $166,367 in unpaid GST remittances pursuant to paragraph 317(1)(c) of the Excise Tax Act.
Other activities that constitute GST tax fraud and tax evasion include, but are not limited to:
- registrants billing their customers for GST, collecting the taxes then disappearing without remitting the tax to the CRA;
- registrants agreeing to exclude GST from the purchase price of goods and services, when it should be included;
- customers paying cash for purchased services and goods to avoid paying the taxes; and
- registrants falsely claiming a GST exemption on their purchased supplies.
Consequences of GST Tax Evasion
GST/HST tax evasion and tax fraud create detrimental consequences and financial burdens for taxpayers and the Canadian government. For the taxpayers, GST tax evasion or tax fraud convictions could lead to significant fines imposed by the Courts, interest and penalties imposed by the CRA, imprisonment and a criminal record. For the Canadian government, where registrants falsely claim GST tax refunds or tax exemptions, it is likely that the federal and provincial government will have to bear the full tax loss. Tax fraud activities impact the relationship between the government and the public on which the tax system is built, Regina v Reynolds.
Tax Tips – Tax Evasion
If you are charged with tax fraud or tax evasion, or if you have questions regarding the CRA’s investigation of your GST tax returns, please contact our tax law office to speak with one of our experienced Certified Specialist in Taxation Canadian tax lawyers.