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Tax Amnesty - Avoiding the Tax Trap!
The following is an excerpt of Chapter 2:I'M NOT A CRIMINAL
A run-in with the Investigation Division, which some say is the equivalent of a tax police, can lead to financial ruin. Typically, the reaction of those being prosecuted for tax evasion is "I'm not a criminal. Why am I in criminal court and being humiliated in the newspapers?" The short answer is that if you have committed tax evasion and are convicted, you are in fact a criminal. The result will be a criminal record. If you want to go to the United States or another country, you may have difficulty crossing the border. The media is called in to report on your trial and conviction because there is a public policy that everyone must know that tax cheats get caught and are punished.TAX AVOIDANCE
Tax avoidance is at the opposite end of the spectrum of tax evasion. Tax avoidance is planning that achieves strict compliance, within the letter of the law. Sometimes it may be outside the intention of the legislation. The legality of avoidance has been commented upon in several important court decisions:In C.I.R.2 v. Fisher's, Executors, for instance, the court stated: "… the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the law, and he may legitimately claim the advantage of any express terms or any omissions that he can find in his favour in taxing Acts. In so doing he neither comes under liability nor incurs blame."
Three years later, the point was canvassed again in Ayrshire Pullman Motor Services v. C.I.R.: "… No man in this country is under the smallest obligation, moral or otherwise, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly so – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue …"
Finally, in the famous Duke of Westminster case, the court firmly entrenched the rule that: "Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax."
IMPROPER STRUCTURING
In our experience, a surprisingly large number of offshore investments and businesses we're asked to review are poorly structured. Their owners do not have the faintest idea they are sitting on a ticking, tax time bomb. Unscrupulous promoters sell what they falsely claim to be properly tax planned offshore packages. These are financially attractive because of the low front-end cost. However, when scrutinized by Canadian tax officials, most will not meet the "smell test". Worse, the offshore lawyers, accountants or advisors that set it up will usually not be around to defend you when there is a challenge by the CRA. As the years go by, it may appear that you are getting away with it. The problem is Murphy's law kicks in when least expected. When the taxman is at your door, it's too late to do proper tax planning.By not reporting offshore transactions or paying taxes on passive international investments, Canadian residents open themselves up both to criminal prosecution for tax evasion and large civil penalties. Before getting caught, the best way out may be to negotiate a Tax Amnesty. As an additional benefit, a good tax settlement allows you to bring your money home. After all, what is the use of having a lot of cash if it sits in an offshore bank or investment account and you can't enjoy it?
POWERS OF TAX COLLECTORS
The CRA is mandated to collect taxes and administer the Income Tax Act. For many years, there has been an income tax sharing agreement between federal and provincial governments, the details of which need not presently concern us. Suffice it to say that the provincial portion of income taxes is collected by the federal government. Most provincial governments collect other levies including sales and corporate taxes. Revenue Quebec collects its own taxes. It also administers the Federal GST even though the CRA has a strong presence in Quebec and could easily do the job itself. The CRA has been given wide legal powers to administer the Income Tax Act and combat tax lawlessness. These powers include the right to enter your home, business or any other location in which books or records are kept. They can also require any person to provide assistance and answer all questions relating to the administration and enforcement of the Income Tax and other acts. Some additional powers include the ability to obtain a search warrant, without advising anyone except the judge who signs the order, authorizing them to seize anything that may afford evidence of the commission of a tax offence. An increasingly active level of exchange of information between Revenue authorities and police forces inside and outside Canada also helps them catch tax evaders.THE TAX POLICE
The CRA and provincial tax authorities are well organized. Leads from many sources, including jealous business competitors, angry spouses, border crossing information and audits of other businesses, are assigned to investigators for verification. Where preliminary review establishes that correct income has not been reported, expenses have been overstated or there was a failure to file, the case will normally be selected for full-scale investigation. In appropriate situations, criminal prosecution is considered. Taxpayers may then be invited to interviews to submit further information and make final representations. At this meeting, the possible criminal charges along with civil re-assessments and penalties are put on the table for discussion. It is natural to want to vindicate yourself or, if you are a tax advisor, your client in the hope they will change their mind. In our experience, silence is usually the best defence.Even when advised of potential criminal charges, taxpayers and their representatives – many of whom are not experienced in tax law – make the mistake of providing further information. Accountants are often caught in this trap. Many accountants have a "tell them everything and they will go away" attitude. Because of their tendency to co-operate with investigators, they can unwittingly open themselves up to negligence claims. Non-lawyer advisors can be forced by tax investigators to testify against their clients. Even general practice lawyers, who do not deal extensively with tax matters, will often co-operate on the mistaken assumption this will result in withdrawal of criminal tax evasion charges against their client. To deal with the tax police in the client's best interest, in depth tax experience is necessary.
LULLED INTO A FALSE SENSE OF SECURITY
We were retained to act as legal, tax counsel in a criminal tax evasion case initiated by the CRA after a series of fact finding interviews. Both the accountant and the client's lawyer, who did not practice tax law, were lulled into a false sense of security by the tax police. Other than in tax matters, both professionals were knowledgeable and competent. They should have known better but they talked. Subsequently, information given to tax authorities was used to assist in the criminal tax evasion prosecution of their client. At trial, we called both the accountant and former lawyer as witnesses. Testimony was given that, when providing information to tax investigators, they were given implicit but unwritten assurances that, in return for their assistance, only civil penalties would be applied against their client. Although nothing was specifically stated to that effect, they clearly understood no criminal charges would be laid. That was why aid was given to the investigators. In his testimony, the lawyer told the judge "I am not stupid. There was a general understanding that if we co-operated, no criminal charges would be laid". After a two year court battle, the court based its decision on an acceptance of their testimony. Happily, we were successful in having all criminal evasion charges against our client quashed.ACCOUNTANTS ACTING AS LAWYERS
The word "accounting" derives from the French word "compte", to count. An "accountant" is defined in the Concise Oxford Dictionary as "a professional keeper and inspector of accounts". Members of the accounting profession compute, adjust and put accounts in order or audit accounts. Tax lawyers, in contrast to accountants, are persons trained to deal with the legalities of tax law. When interpreting tax laws, the legal provisions of the Income Tax Act override accounting principles. However, such principles are often considered by courts during an analysis of tax problems.Lawyers are taught how to argue effectively for the benefit of their clients. They put the best face on even bad cases and are duty bound to use every legitimate means to achieve positive outcomes.
While not professionally qualified to carry out such tasks, some accountants do legal work and offer legal tax opinions. One of the worst situations we ever encountered involved the negotiation by a chartered accountant of a tax settlement with a criminal law component. The client operated bank accounts for a person carrying on criminal activities and obtained taxable benefits thereby. A member of one of the largest accounting firms in Canada foolishly (in our view) decided to act for the client alone without benefit of legal counsel. We concluded he could only have done so by failing to divulge the criminal origin of the money in order to make a deal with the CRA.
Since the first condition for valid tax settlements is to divulge full and correct information, his failure to deal with the criminal source of the funds could void the settlement. Some pressure may have been exerted since, under the circumstances, this information would have proven unwelcome to the criminal who supplied the funds to his frontman (their client). By failing to provide such crucial information, the accountant misled the tax authorities in order to get a settlement. As a result, he exposed himself and his accounting firm to third party liability claims from the CRA. By not working through a tax lawyer, he and other members of the firm put themselves in the vulnerable position of potentially being subpoenaed to testify against their own client in a subsequent civil or criminal trial.
In effect, this individual acted both as a tax accountant and a tax lawyer. If anything went wrong, he could be sued for negligence or conflict of interest by the client. One wonders why anyone in their right mind would take such a risk. Under the circumstances, if there ever is a claim, the firm's professional insurers might even refuse coverage. While competent in their own field, in our experience, accountants do not make good tax lawyers. By trying to act as such, this chartered accountant put his client, himself and his firm in grave jeopardy.
When dealing with Tax Amnesty cases, astute accountants, because of the legal protection offered to them, work together in a strategic alliance with a tax lawyer. The ones who haven't figured this out may discover the benefit of such arrangements after a few successful high-profile claims are decided against accountants.
SECRET JUDGMENTS
Tax officials have the power, without giving any notice, to get a secret judgment in the Federal Court to seize your assets, often the family home. They can also conduct a search and seizure in your home, place of business or elsewhere while being assisted, ostensibly to "keep the peace", by police. This includes "sneak and peek" searches where the target is not aware they have entered the premises surreptitiously and copied documents, or noted locations of items to be seized at a later time.SNEAK AND PEEK SEARCHES
Several years ago the Royal Canadian Mounted Police (hereinafter called the "RCMP") carried out a series of sneak-and-peek visits at business premises owned by a non-resident Canadian in the Turks & Caicos Islands, a well known British tax haven in the West Indies. Even though this tax haven has an official government policy of strict secrecy, local Turks & Caicos police and government officials aided them.Subsequently, tax and other information on this person and his clients were made available to the CRA by the RCMP. Evidence gathered during the search led to the Canadian being criminally charged in Canadian courts. While the search and seizure was probably illegal, evidence gathered in this manner is accepted in Canada. The case is still before the Canadian courts.
OFFSHORE SECRECY IS DEAD
After the 9/11 terrorist attack, powerful anti-terrorist and money laundering laws were put in place. As a result, all tax havens, banks and financial advisors can be forced to open their books and provide client information to onshore authorities. Offshore secrecy is dead! Smart people work on this basis when setting up businesses or investments in international forums. Prudence dictates that you have everything done properly and be prepared for a review.PROVE WE'RE WRONG OR YOU LOSE!
Surprise! When fighting with CRA, you are guilty until proven innocent. The only time this does not apply is when dealing with criminal tax evasion charges.Only in a criminal tax evasion case does the maxim still hold true that a person charged with a criminal offence is presumed innocent until proven guilty. In ordinary civil cases not involving tax, one does not have the reverse onus of being required to prove the other side is wrong or losing if it is not possible. After hearing the evidence, the court usually decides the issue on the balance of probability.
It is different when appearing before the Tax Court of Canada. Here the onus of proof falls on the taxpayer. Legal counsel for the Crown can sit there, fold their arms and do nothing. If you fail to prove the position of the CRA is wrong, you lose. In effect, the scales of justice are not even. The Crown is protected by the presumption that its assessment is correct. Unless you can rebut it, the tax collector wins. Tax Court judges are constrained by what some think is this star-chamber like rule. In the face of such a heavy burden of proof on taxpayers, Tax Court judges try to be as even handed as possible. They often ask probing questions from the bench to ascertain that all the facts are before the court.
The case of Oolup v. The Queen is a good example of how the reverse onus of proof works. After her grandmother died, Sandra Oolup became the Executrix of the estate. While both grandparents were living, they had added Sandra's name to their investment account as joint owner. Sandra saw them regularly and helped manage their affairs. She continued to assist after her grandfather died. Upon her grandmother's passing, Sandra was advised she had inherited the account, worth $200,000. Nevertheless, "for reasons of family harmony", Sandra shared the money with her relatives and kept only $10,000 for herself.
As unfair as it may seem Sandra was assessed on the basis the investment account formed part of her grandmother's estate. Tax authorities said the $10,000. was paid to Sandra for services rendered as Executrix of the estate. At trial, legal counsel for the CRA took the position the investment account was held on a resulting trust by Sandra for the estate. Sandra had the onus of proof before the Tax Court of rebutting the presumption of a resulting trust. In other words, if she could not prove the tax collector's position was wrong, Sandra would lose her case.
After asking numerous searching questions, the judge accepted Sandra's evidence that her grandmother had told Sandra the money was hers when she died. Although it was all hers, she felt uncomfortable keeping it because relatives might conclude only the money had motivated her devotion to her grandparents. The Court was satisfied Sandra had rebutted the presumption of a resulting trust. It decided the account became her property upon her grandmother's death. Since she had received $10,000 as the surviving joint account holder and not for services rendered as Executrix of the Estate, no tax was payable.