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TAX EVASION

My grandfather always had words of wisdom for me.

He used to say: "Tim, if at first you don't succeed, skydiving is not for you."

I think it's interesting that skydiving is a lot like tax evasion. If you do it once and you're successful, you'll want to do it again. And each time you succeed, and reap the personal benefits, you'll try it over and over. But let me tell you, when things go wrong, they can go very wrong.

Unlike skydiving, however, the potential consequences of cheating on your taxes don't disappear when you land safely with your feet on the ground. There's always the chance that the Canada Revenue Agency (CRA) can catch what you've done in the past. If this causes you to lose sleep at night, you may want to consider a voluntary disclosure.

The disclosure

If you've been hiding income from the CRA, or falsely claiming certain deductions or credits, you can come clean by simply filing an adjustment to the tax return in question. All you need to do is complete Form T1-ADJ for each year.

The problem with this approach is that the CRA could charge interest and penalties, and even seek to prosecute you. If the amount of tax evaded is significant, a voluntary disclosure (VD) could make more sense.

The VD program was created to encourage naughty taxpayers to come clean by allowing them to correct or disclose any incomplete or incorrect information without penalties or prosecution. In order to make a valid VD, four conditions have to be met: (1) the disclosure must be voluntary, (2) it must be complete, (3) it must involve a penalty, and (4) it must include information that is at least one year past due, or where the information relates to periods under a year, the disclosure cannot be initiated simply to avoid late-filing or instalment penalties.

If you meet the criteria, the CRA can use its discretion to waive all or part of the penalties that would apply, and forgo prosecution. In some cases, the CRA may waive some or all of the interest owing.

The no-names basis

Tax professionals acting on behalf of clients have been in the habit of coming forward to the CRA with all the details necessary in a VD, except the taxpayer's name. The idea is to gain insight into the implications of a particular VD before identifying the taxpayer.

On Oct. 3, the CRA revised its policy on no-names VDs. While they'll still be accepted, the identification of the taxpayer must be provided within 90 days of the effective date of disclosure, or the CRA will close the file. You'll be protected from penalties and prosecution during this 90-day period, but a final and complete submission must be made in that time. That's the bad news.

Now for the good news. In a recent court decision, Karia v. Minister of National Revenue, the issue was whether or not the VD was considered to be voluntary (one of the criteria that must be met). The taxpayer had made a VD on a no-names basis and had asked the CRA to confirm that the VD would be considered voluntary -- which the CRA did confirm in writing. The CRA then tried to renege on that promise. The Federal Court sided with the taxpayer. It shows the importance of getting a written statement from the CRA in the case of a no-names VD. Read CRA Information Circular IC00-1R for more.

Tim Cestnick, FCA, CPA, CFP, TEP, is a tax specialist and author of Winning the Tax Game 2005 and The Tax Freedom Zone.

tim@timcestnick.com



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