Tax Avoidance vs Tax Evasion

Robert wants to lower his gross income and pay less taxes to the government, he engages in a strategy to maximize the full amount of tax deductions and tax credits he is allowed. He contributes to charitable organizations, pays into as registered retirement savings plan and carries out an energy audit on his home during the income year so he has the lowest possible adjusted taxable gross income. For this tax year Robert files his income tax return and his liability is significantly reduced, therefore he pays lower taxes.

This is tax avoidance and is aptly defined as the use of any legal methods to modify an individual’s financial situation in order to lower the amount of tax owed. This is generally accomplished by claiming the permissible deductions and credits. Further examples of tax avoidance involve using tax deductions, changing an individual’s tax residence or changing of tax status through incorporation, establishing a company, trust or foundation in an offshore tax haven.

Were Robert to engage in a somewhat different strategy to minimize his tax liability by claiming credits and deductions to which he were not entitled he would have committed fraud and evaded tax. Tax evasion is defined as an illegal practice where an individual intentionally avoids paying their true tax liability. It includes the dishonest tax reporting such as understating income, profits or gains, or over-claiming expenses and deductions. Those caught evading taxes are generally subject to criminal charges and substantial penalties.

“Distinction between evasion and avoidance is fine yet definite.”

Through tax evasion and tax avoidance the government loses tax dollars. So what differentiates between which form of ‘non-compliance’ can land you in jail and which won’t?

In the case of Paul Antle v The Queen, the taxpayer established a spousal trust in Barbados and used the spousal rollover rules to avoid paying Canadian capital gains tax on a sale of shares.

Mr. Antle...