Lessons Learned From Tax Cheaters

Why tax cheaters never prosper

“The avoidance of taxes is the only intellectual pursuit that carries any reward.”

It’s not surprising to hear that those words came from the mouth of John Maynard Keynes, widely seen as one of the most influential economic thinkers of the 20th century. His theories continue to guide capitalistic thought including the economic policies of President Obama, former President George Bush and former British Premier Gordon Brown.

Of course, if you ask infamous gangster Al Capone, who despite having a laundry list of murders, extortion and selling of contraband, ultimately found himself behind bars for tax evasion – he’s apt to have a different view on how intelligent it is to avoid paying taxes.

What’s Is Tax Avoidance and Evasion?

Although tax avoidance and tax evasion may seem like the same thing, there is a definite distinction under Canadian law as policed by the Canadian Revenue Agency.

Tax avoidance is when actions are taken to minimize tax that “while these actions are within the law, they contravene the object and spirit of the law.”

Tax evasion is deliberately ignoring a specific part of the law – and can result in prosecution in a criminal court.

Tax season is now in full swing, and headlines have been full of news on tax cheat scandals, but locally and around the world. Here’s a quick roundup on these tax cheaters – and the lessons learned from their attempts to sway the system.

The Secret World of Tax Havens – Busted!

In early April, a 260-gigabyte hard drive containing the identities of over 130,000 wealthy offshore account holders – including 450 Canadians – was obtained by the International Consortium of Investigative Journalists (ICIJ), a Washington, D.C. based non-profit group.

The group then disseminated the information to various news agencies around the world, which have been pouring over it and slowly releasing names.

So far, the only high profile Canadian to make headlines is class action lawyer Tony Merchant, who reportedly has an account with $1.7-million in the Cook Islands.

The leak spells trouble for the individuals and business that take advantage of offshore bank accounts to hide portions of their wealth and lower their taxes.

 The lesson: It is not illegal to open an offshore bank account, however, all Canadians are required by law to report their income to the CRA, even if it’s being “stored” offshore.

 European Union Says Tax Dodging Worsens Debt

As if the Eurozone wasn’t struggling enough financially – tax dodging is causing the EU to lose 1 trillion of income each year, according to Herman Van Rompuy – the president of the European Council.

To put it in perspective, the lost revenue is equivalent to the entire annual economic output of Spain. Not to mention that the losses far exceed the nearly 400 billion euros committed to bailouts for euro zone members Greece, Ireland, Portugal and Cyprus.

EU policymakers are hoping all 27 member states will sign up to the EU savings directive, which calls for the sharing of depositor data – a legislation expected to help combat tax evasion.

So far Austria, a country with a long history of banking secrecy, is the only one who hasn’t signed on.

 The lesson: Tax evasion on a large scale has the ability to affect a country’s economy as a whole. Given that the losses eclipse the amount needed to bailout many European countries, taxpayers end up carrying the buck on all fronts for both the dodgers and the bailouts.

 Condo Controversy In The GTA

In light of the booming condo market, the CRA is turning a closer eye on condo sales.  Auditors are focusing on non-reporting of taxable income – builder GST/HST housing rebates and capital gains/income in sales of real property.

According to an article in the Toronto Star last week, Canada Revenue Agency auditors have added penalties to taxes for those who claimed their condo as a home on their taxes, but then quickly changed their mind and sold it.

As part of the auditing process, CRA auditors will look at seller’s intention, the property type, the frequency of purchase and sales by that person, why they sold and how the purchase and sales fit with their ordinary business.

Some sellers are upset with the changes and increased scrutiny, citing extenuating circumstances for the quick sales.

 The lesson: Canada has three levels of tax treatment when it comes to real estate sales — no tax on a principal residence, tax on half a gain from selling a recreational, rental or other investment property, and full taxation for making a business of buying and selling (commonly referred to as ‘flipping’).

If you’re selling real estate, know which tier you fit into – and the potential taxes you may be shelling out.

This post is also available in: French

Related Topics

Personal Finance / Taxes

One thought on “Lessons Learned From Tax Cheaters

Leave a Reply