CRA employs aggressive new laws designed to catch terrorists in crackdown on tax evaders

The days of the Canada Revenue Agency taking a kinder, gentler approach to its relations with taxpaying business owners are long gone. From employing sophisticated algorithms to tightening rules around its own Voluntary Disclosure Program, Ottawa has become accustomed to using increasingly aggressive tactics to collect overdue taxes and punish alleged tax cheats.

In some cases, we’ve watched the agency take entrepreneurs to court when it was clear that investigators’ interpretation of Canadian tax law was flawed. In multiple cases, courts ruled in the defendants’ favour and in a couple of high-profile examples, even issued punitive judgments against the CRA. A balanced application of the law with a focus on diligent collection seems to have taken a back seat to efforts to punish and intimidate taxpayers.

Now, the CRA has taken that strategy to another level.

An aggressive new strategy

Ottawa has, for the first time, used the Criminal Code of Canada’s proceeds-of-crime provisions to catch tax evaders. Specifically, the agency can use the law to seize assets and freeze the bank accounts of individuals accused of deliberate tax evasion. It’s worth noting that these laws were designed to curb illicit activities such as money laundering or suspected terrorism financing.

“I can say that this is indeed the first time, but I can promise you that this is not the last time that we [will use] those provisions of the Criminal Code to restrain or seize assets that tax evaders have acquired through their illegal behaviours,” Stéphane Bonin, a CRA criminal investigator, told CBC News.

This novel application of the Criminal Code stems from a case against an Ottawa couple accused of under-reporting income over several years to the tune of $3.1 million—and allegedly evading $523,532 in taxes in the process—on several commercial and residential properties, manipulating supplier invoices and engaging in various other misdeeds, according to a CBC report. The CRA has used the law to seize several of the couple’s properties and a vehicle as the case makes its way through the courts.

In addition, the agency can use the proceeds-of-crime provisions to seize foreign assets, which it will likely have no hesitation doing given the increasing scrutiny of offshore tax havens and the revelations of apparent tax-dodging in the so-called Panama Papers scandal, as well as other recent reports of questionable offshore tax avoidance activities. There is little doubt that many high-net-worth Canadians are nervously sipping martinis on their Caribbean-docked yachts, wondering if—or when—the tax man will come calling.

Tapping proceeds-of-crime laws also prevents individuals from declaring bankruptcy to avoid paying back taxes. As such, we wouldn’t be surprised to see a rush of voluntary disclosures on the part of individuals hoping to avoid potential prosecution or penalties.

Foregoing balance

While we fully support the government’s efforts to find, charge and prosecute tax evaders, the CRA’s dogged determination of late, coupled with an unprecedented wielding of decidedly blunt legal tools to catch the most egregious cheats, raises several red flags.

As we’ve seen in recent cases, the sense of balance that once permeated the CRA’s dealings with taxpayers has largely succumbed to an almost orthodox application of the law and a zealous deployment of tax-recovery tactics. The problem with that approach is that it largely foregoes the presumption of innocence. Remember, most business owners have absolutely no accounting experience. They are often their organization’s chief executive officer, head of sales and marketing, IT person and client relations manager—among many other duties. Accurate and comprehensive accounting is a challenging task for anyone, let alone inexperienced amateurs. Most tax errors are just that—simple mistakes, not attempts to flout the law.

Which brings us to the bigger challenge: who will police the CRA if the quest to collect overreaches? While there has been no indication that the agency is going to apply proceeds-of-crime laws to less serious cases, there’s frankly nothing stopping them from using a more sweeping application of the law to try and catch—or at least intimidate—everyday entrepreneurs who may be trying to achieve full compliance, but inadvertently fall short. Is the government willing to put the brakes on its most determined investigators, or sit back and allow them to do whatever it takes to fill the treasury’s coffers?

Sending the wrong message

Lastly, there’s the branding problem. What kind of message does it send when an agency deploys laws designed to catch international money launderers and terrorists to catch tax evaders—even those who genuinely are guilty of breaking the law? The CRA’s culture has already been shaped by years spent attempting to collect and intimidate using any means necessary. It’s not unreasonable to assume that its culture will only become more aggressive if this approach is embraced in full across the agency.

In our experience working with thousands of clients and dealing with hundreds of interactions with the CRA, taking a firm but somewhat accommodating approach is usually the best way to collect taxes owing. In that scenario, everyone wins: taxpayers who have made errors repay what they owe and are put on notice not to run afoul of the law again. The agency makes its point and gets its money. Not surprisingly, the majority of taxpayers go to great lengths to comply in future tax filings. In turn, the CRA avoids costly court cases and criminal prosecutions.

Surely this makes more sense than treating (potentially inadvertent) tax evaders in the same harsh way as sophisticated international criminals.

Armando Iannuzzi, Tax Partner