Evasion or Avoidance: A Crucial Difference

The old adage, "an ounce of prevention is worth aSeptember 13, 1988 §245(2) provides a general
pound of cure" is particularly true when you areanti-avoidance rule ("GAAR") which was designed to
dealing with the tax man.prevent abusive tax avoidance. It is an anti-avoidance
Although this article assumes that the readerprovision of last resort: Canada v. Imperial Oil Ltd.,
taxpayer is a Canadian resident, is subject to the[2004] 2 C.T.C. 190 per Coram at §30.
Income Tax Act ("ITA") and will be dealing with the"Tax minimization is legal and acceptable; abusive tax
Canada Revenue Agency ("CRA") similar principlesavoidance is not": Vern Krishna, The Fundamentals of
may cautiously be applied to other common lawCanadian Income Tax, 7th ed. (Toronto: Carswell,
jurisdiction like the U.S.A. and England.2002) at 868.
Taxing statutes are some of the most complexPut this into vernacular CRA is saying that if you're
written documents known to mankind; so expertclever enough to come up with a plan Parliament
accounting and legal advice is needed to avoid theirdidn't think of (that is, one that doesn't offend a
many pitfalls.specific anti-avoidance provision), it costs the
This article is designed to alert the reader to thegovernment too much money in tax revenues, and
concerns that should to be addressed beforeCRA thinks you did only to avoid paying taxes, they
structuring, or restructuring, your business affairs orwill try to claw it back. Whether the courts permits
engaging in a tax reduction strategy you heard wasthis, will depend on the facts.
'great.'If the scheme considered in the Duke of
Evasion Versus AvoidanceWestminister was used in Canada today it "would
Evasion is an offence under §239(1)(d) of theprobably be caught" by GAAR: Hogg, Magee and Li,
ITA and unlike the enforcement provisions creatingPrinciples of Canadian Income Tax Law, 4th ed.
civil penalties (§§162 - 163 ITA), or(Toronto: Carswell, 2002) at 584.
regulatory offences (§238), evasion is a trueGAAR, however, is not a criminal provision in the ITA.
criminal offence: R. v. Knox Contracting Ltd., [1990] 2The Offence Of Evasion: §239(1)(d) ITA
S.C.R. 338 at 346-348 and R. v. Klundert (2004), 242As with all such questions it is necessary to begin
D.L.R. (4th) 644 per Doherty, J.A. at §32.with the statutory language: "every person who has
Avoidance is structuring your affairs to minimize or... (d) wilfully, in any manner, evaded or attempted to
defer taxes without violating the provisions of theevade compliance with this Act or payment of taxes
ITA, however, is not a crime (Hickman Motors Ltd. v.imposed by this Act ... is guilty of an offence ..." it is
Canada, [1997] 2 S.C.R. 336 McLachlin J. at §8).apparent that there are two constituent elements
Structuring Your Affairsfor committing this offence:
It is a fundamental principle of tax law that "[e]very* proof of an act or course of conduct (the "actus
man is entitled if he can to order his affairs so asreus") which has the effect of evading or attempting
that the tax attaching under the appropriate Acts isto evade payment of taxes actually owed under the
less than it otherwise would be": Inland RevenueAct (Klundert, above, §34); and
Commissioners v. Westminster (Duke of), [1936] A.C.* a culpable state of the taxpayer's mind (the "mens
1 (H.L.), at p. 19, per Lord Tomlin.rea").
As Wilson J. put it in Stubart Investments Ltd. v. TheThe conduct component can usually be established
Queen, [1984] 1 S.C.R. 536 (S.C.C.), at p. 540, "[a]where tax is owed under the ITA and the taxpayer
transaction may be effectual and not in any sense ahas failed to report, calculate and pay the applicable
sham (as in this case) but may have no businesstax owing (Klundert, §42).
purpose other than the tax purpose".The fault or mental component is found in the word
Tax Policy"wilfully": R. v. Docherty (1989), 51 C.C.C. (3rd) 1
Some so-called loopholes in the ITA are actually(S.C.C.) What will be required is something more than
provisions designed to achieve a particular policy"negligently" or even "recklessly".
objective for Parliament.Culpability will then follow only where the accused
One kind of behaviour may be thought to beengages in conduct intended to avoid the payment
beneficial and it is given a preferential tax treatmentof tax owing under the Act; that is, the accused
(e.g., tax shelters) while another may be consideredmust know that the tax is owing under the ITA and
detrimental to public policy objectives or revenuethey must intend to avoid payment of the tax
generation and it is subject to a higher level of(Klundert, §46).
taxation (e.g., §219 ITA). It is the complexity ofMistakes of fact can negate the fault requirement
these competing interests which help make incomefor the offence (e.g., arithmetic errors) but purely
tax as complex as it is.legal errors usually won't (e.g., §19 Criminal Code,
It is imperative that any taxpayer, who wants to"CC"). Discuss with your lawyer whether any
structure their affairs to achieve a particular benefit,mistakes of fact, or law, you may have made
should consult their tax accountant and/or their taxprovide you with a defence to the charge(s). Each
lawyer to get expert advice before they do anything.case will resolve itself based on its own set of facts.
Your situation is unique and so too is the solution toTax Planning
your circumstances - there is no substitute forThere is a "need to distinguish between legitimate
expert advice tailored for you. For large transactionstax planning and the crime of tax evasion" (Klundert,
your tax advisers may even recommend obtaining an§36).
advance tax ruling from CRA (see InformationIt is the culpable state of mind (i.e., mens rea) that
Circular IC 70-6R).distinguishes the legitimate tax planner from the
ITA: A Codedishonest tax evader. Both may engage in the same
The Income Tax Act is designed to be a completecourse of conduct that can aptly be described as a
code; that is, if you fall inside its provisions you will bedeliberate attempt to avoid payment of tax. The
subject to its terms as dictated by Parliament, but ifdifference lies in their respective states of mind.
you fall outside its provisions you are free of itsUnlike the tax evader, the tax planner does not
strictures.intend to avoid the payment of a tax that he or she
The ITA taxes on residency (§2(1) ITA) andknows is owed under the Act, but rather he or she
source of income (e.g., §§5 and §9(1)intends to avoid owing tax under the Act in the first
ITA) so usually if you are a non-resident (not carryingplace (Klundert, §41).
on business in Canada; e.g., §§2(3)(b) andSection 239(1)(d) is part of an Act which is
§253) you are subject to taxation here. Similarly,necessarily and notoriously complex. It is subject to
if your receipt of funds is not attributable to aongoing revision. No lay person is expected to know
prescribed source (e.g., lottery winnings or gifts) thenall the complexities of the tax laws. It is accepted
you are not tax on those receipts.that people will act on the advice of professionals
Here is a caveat for our American readers: the IRSand that the advice will often turn on the meanings
taxes on residency and on citizenship; they also taxto be given to provisions in the Act that are open to
'windfalls' like your winnings in Las Vegas; and 'gifts'various interpretations. Furthermore, it is accepted
may be subject to both federal and state taxes.that one may legitimately structure one's affairs so
The theory is generally the same, if you're in the Actas to minimize tax liability (Klundert, §55).
you pay, and if you're out of the Act, you don't. It isIn other words, if you retain and follow professional
this clear demarcation, which permits, tax planningadvice then it is unlikely you will be charged with tax
(cf., Hickman Motors Ltd., above).evasion; or if charged, that you will be convicted.
The theory, however, is subject to someSo essentially we're back to where we began, "an
complications. Under Part XVI of the ITA, afterounce of prevention is worth a pound of cure.