Accounting for Law

Large penalties, jail time common in 'tax protest' scheme cases

A recent case where two ‘tax protesters’ were given jail sentences for their role in enabling or advising individuals to evade paying income tax shows that the arguments made in these cases are habitually rejected by courts and the penalties awarded are often steep, Canadian tax lawyer David J. Rotfleisch tells

The Canada Revenue Agency (CRA) recently reported that two Quebec-based tax protesters pleaded guilty to fraud charges and each received a conditional prison sentence of two years minus a day, two years of probation and 480 hours of community service. The charges followed a CRA investigation, which revealed that between 2008 and 2011, one of the individuals advised and enabled 120 people to evade or try to evade more than $1.7 million in federal income tax for the 2003 to 2010 tax years.

“The scheme he used consisted of helping or advising individuals to file income tax returns or request adjustments in order to claim non-deductible expenses by using the distinction between a ‘natural’ person and a ‘legal’ person. This scheme is based on an argument made by tax protesters, which Canadian courts have repeatedly and consistently rejected,” says the CRA.

The other individual reportedly enabled 95 individuals to evade or try to evade $1.435 million in federal income tax for the 2003 to 2010 tax years by claiming false expenses in order to reduce their taxable income.

Tax protesters, says the CRA, “are individuals who support the false notion that they do not have to pay tax on the income they earn on the basis of a combination of legal and other arguments to place themselves beyond the reach of Canada’s tax laws.”

As Rotfleisch, founding tax lawyer with Rotfleisch & Samulovitch Professional Corporation, explains: “The tax protest movement is a U.S. import that has been adopted by Canadians and in many cases marketed on a multilevel marketing basis, with participants receiving commissions for bringing in ‘customers.'

“The arguments made by the tax protesters are nonsensical and have been rejected by every court that has considered them. Jail terms are commonly awarded to the promoters of these tax protest schemes, and sometimes to the participants as well,” adds Rotfleisch, who wasn't involved in the case and comments generally.

Indeed, the CRA notes that between 2006 and 2017, 75 taxpayers or promoters from across Canada were convicted of offences related to tax schemes, which led to $7.15 million in court-imposed fines and 936 months of jail time awarded.

“We have helped tax protesters who have not been caught come back into the tax system through a voluntary disclosure. If they contact the CRA before the CRA finds them, there will be no prosecution and there may be no penalties and an interest reduction under the new rules that came into place on March 1,” says Rotfleisch.

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