Taxman Is Watching

What Every Canadian Taxpayer Needs to Know and Fear

Paul Dioguardi

• Publisher: HarperCollins Publishers
• Year: 2010
• Print ISBN:
  9780002008853
• eBook ISBN:
  9781554689668
• Topic: Personal Development
• Subtopic: Personal Finance

Wake up and smell the fear, says Paul DioGuardi, senior partner at DioGuardi & Company, Canada's foremost tax amnesty firm. Canada Revenue Agency (CRA) may be out to get you.

Since 2004, when Revenue Canada became an independent agency, more and more Canadians have been under tax surveillance. As the pressure to collect more tax dollars grows, any Canadian taxpayer can be at risk for a secret "lifestyle" audit or become caught in one of numerous tax infractions. The trick is to know how CRA works and, at the same time, learn the simple and effective strategies—both offensive and defensive—to avoid tax traps and protect your home and other important assets. This is the guide that every tax-paying Canadian, including the self-employed, small business owners and investors, should read. The Taxman Is Watching delivers accurate, accessible and often little-known information, as well as real-life "Tales from Tax Hell." It also:

• debunks the common myths about the Canada Revenue Agency
• shows you the "red flags" that may cause your return to be audited or re-assessed
• helps you protect your assets and fight back
• offers practical advice on when to get a tax lawyer
• tells you what to do when your accountant isn't your friend

1
YOUR RELATIONSHIP WITH THE CANADA REVENUE AGENCY (AND WHY YOU SHOULD BE VERY AFRAID)

“Tax. noun 1. a compulsory financial contribution imposed by a government to raise revenue, levied on income or property, on the prices of goods and services, etc. 2. a heavy demand on something; a strain. [From Old French taxer, from Latin taxare to appraise, from tangere to touch]”

Source: Collins Canadian English Dictionary, 2004.

Any time a drab recycled paper envelope bearing the CRA logo arrives in the mail, how many Canadians can truly say their heart doesn’t skip a beat before they open it up to discover the message within?

Is it a Notice of Audit? A reassessment? An objection to a deduction made on your last tax return? Or—good news—acceptance of your return with a statement showing there is no tax owing…for now.

Instinctively, Canadians seem to understand that their relationship with the CRA is based principally upon fear. Fear that they have done something wrong. Fear that a small mistake on a tax return gone by will one day come back to haunt them. Fear that the Agency will continue to take more of their money before they even see it.

And we should be very afraid. Every taxpayer—even the most conscientious, T4-salaried, always-file-on-time Canadian—stands in danger of the Agency’s scrutiny. It could be in the form of a reassessment, or even worse, an audit. Once the CRA has turned its eye on you, it will treat you as if you were already guilty of the tax transgression it is determined to prove you have committed.

Why, then, when that drab envelope arrives in the mailbox, do so many Canadians insist on dealing with the CRA as a trusted friend?

We Canadians are amazingly accepting of our heavy burden of tax. The majority of us say we believe that paying taxes is a social responsibility—the price we willingly accept for health care, for highways, for public safety, and social order. “Peace, order, and good government” is our national mantra.

We think that most of us do pay our taxes, and that we pay them on time. And we are incredibly smug in our belief that, in return for our dutiful acceptance of our taxes, we will be rewarded with the respect and gratitude of the tax authorities. Only non-filers, non-payers, and cheaters have reason to be wary of the CRA.

Nothing could be further from the truth!

Our American neighbours have always had a healthy fear of the Internal Revenue Service—affectionately known the world over as the IRS. Perhaps this began with the case of Al Capone who, despite his status as Public Enemy #1, was able to elude criminal charges until the IRS used the results of a lifestyle audit to indict him for not paying income tax.

Capone allegedly remarked that tax laws were a joke because “the government can’t collect legal taxes on illegal money.” Unfortunately, he was unaware that the tax laws make no distinction on how income is earned. Even the proceeds of crime are subject to tax. Capone was convicted of tax evasion in 1931 and served 11 in years in prison.

Since Capone, the IRS has become notorious for its draconian pursuit of tax evaders, and a long list of high-profile Americans have been prosecuted for cheating on their taxes. Some highlights include:

Leona Helmsley: After claiming some $2.6 million worth of phony business expenses, the “Queen of Mean” was found guilty of tax fraud in 1992 and spent four years in prison. She was reputed to have boasted, “Only the little people pay taxes.”

Spiro Agnew: In 1973, while serving as vice-president to Richard Nixon, he was charged with tax evasion and money laundering. He pleaded no contest to the charges, agreed to resign, and received three years’ probation and a $10,000 fine.

Joseph Nunan: The IRS commissioner from 1944-47 was charged in 1952 with criminal tax evasion for failing to report $1,800 in winnings from a bet that Harry Truman would win the presidential election.

Dennis Kozlowski: The former CEO of Tyco bought $13 million worth of paintings in 1992 for his Manhattan apartment. He tried to avoid paying sales tax by making it appear as if they were shipped out of state. An indictment for tax evasion prompted his resignation from Tyco. He is currently serving a 25-year sentence for other dubious business practices.

Willie Nelson: In 1990, the country music singer received a bill from the IRS for $16.7 million in back taxes. The IRS confiscated and auctioned off all his assets to pay the arrears. Ironically, Nelson later became an advertising spokesperson for H&R Block.

Richard Hatch: Famous for being the first winner of the popular reality TV show Survivor, Hatch neglected to pay taxes on his $1 million grand prize. He was convicted in 2006 of tax evasion and sentenced to 51 months in prison, plus three years of supervised release after serving his sentence.

Wesley Snipes: The actor ran into trouble in 2006 when the government accused him of failing to file tax returns for the years 1999 through 2004. He pleaded not guilty on Dec. 8, 2006, and was released on a $1 million bond. If convicted, Snipes could face up to 16 years in prison and substantial fines.

These are high-profile convictions, but there are thousands upon thousands of real-life scenarios that see families evicted from their homes, ordinary people reduced to penury, and tax debtors so debilitated with dread that their job performance suffers, their personal lives fall apart, and, in the case of military personnel, they may be prohibited from being deployed for duty abroad in an active war zone.

The IRS has gone out of its way to create a “brand personality” based on fear and intimidation, and its frightening powers are deeply imbedded in the American psyche.

Strangely, Canadians do not mirror these feelings in our relationships with our own federal tax authority.

Ask a Canadian to name a high-profile Canadian tax-evasion case, and you’ll likely get a blank stare. A few of the well-read may mumble about Lord Black of Crossharbour—Conrad to his Bay Street colleagues—but they’ll quickly refer that case back to issues with the IRS. Why? Because in Canada, we don’t think of the Agency as the enemy. We don’t believe that our tax authorities would ever do anything to harm us. In fact, most Canadians are entirely misinformed about the powers and governing mission of the CRA.

Take this quick quiz to see how much you really understand about what the CRA can and can’t do. The questions themselves will begin to raise doubts about the benign relationship you think Canadians have with the CRA. The answers may keep you up at night.

TAXMAN TRUE OR FALSE?

• Nobody ever goes to jail for not filing a tax return. (It’s just a scare tactic to get people to pay up.)

FALSE. People do go to jail. Sentences are a maximum of two years for each summary conviction, and up to five years for each conviction on indictment. Typically, you face a different charge for each tax year involved and for each breach of the Income Tax Act, which can result in multiple convictions and multiple jail sentences to be served consecutively. It can add up to serious jail time.

• If The CRA hasn’t questioned your return after four years, you got away with it.

FALSE. If there is evidence of fraud or misrepresentation of income, the Agency can come after you at any time for any tax year.

• Transfer your assets into your spouse’s name and the CRA won’t be able to take anything.

FALSE. If the transfer of assets is made after there is tax owing, your spouse will share your responsibility for paying the tax, up to the fair market value of the assets he or she received from you.

• You should always feel comfortable talking to the CRA on your own because they work for the government and they’re on your side.

FALSE. The CRA is the government’s collection agency, with police powers to investigate you and recommend charging you with offences against the tax code. Anything you tell them can be used against you in tax court or criminal court.

• The CRA has the power to order your bank to provide records of your financial transactions without your permission. TRUE. The Income Tax Act gives the Agency the power to require information about you from any source it chooses. Banks and credit card companies, among others, are required by law to provide records of your transactions if so requested by the CRA. There is no requirement to inform you or seek your permission.

• The CRA is under no obligation to notify you that a lien has been registered against your home or other property.

TRUE. In the collection of tax—and especially if there is concern that you may sell or mortgage your property in an attempt to avoid payment of tax—the CRA has the power to seize assets and register a lien against real property without notifying you.

• The CRA has a special 1-800 number that people can call to snitch on suspected tax evaders.

TRUE. The CRA encourages people to report tax evaders by calling their local tax services office. Reports may be made anonymously.

• The CRA makes public the names and sentencing details of convicted tax evaders.

TRUE. The CRA issues press releases detailing the names and offences of convicted tax evaders. These can be found in the media room on the CRA website under “Convictions.” The stories are often picked up by newspapers and radio newsrooms and reported publicly.

How did you do? The more answers you got right, the healthier your respect for the Agency.

TAXPAYER DO’S AND DON’TS

• Don’t think the Agency will never worry about you. You can be on the CRA’s radar without even knowing it. The federal tax authorities already monitor tax evasion suspects with “lifestyle” or “net-worth” audits that scrutinize bank accounts and credit card transactions, in search of anomalies between income reported and income spent. And when they ask the bank to hand over your records, the bank, by law, is obliged to do so.

• Don’t treat tax evasion as a mildly embarrassing social faux pas. You can go to jail for up to two years on summary conviction for one count of tax evasion. If the Crown elects to proceed by indictment, the sentence is a maximum of five years. If you are convicted of multiple counts of tax evasion, the sentences could be imposed consecutively, condemning you to several years of incarceration. On top of that, there would be criminal fines ranging from no less than 100% of the tax evaded to a maximum penalty of 200% of the tax evaded. And you still have to pay the tax owing, with interest. Even if you don’t go to jail, you can be financially ruined, to say nothing of the social stigma of having your name made public.

• Don’t trust the CRA to honour a verbal deal. An agent of the tax department is not legally bound to honour a verbal commitment to you regarding protection from prosecution or settlement of a tax issue. Only an experienced tax lawyer can negotiate a legally-binding settlement on your behalf. You wouldn’t go into court without defence counsel. Don’t attempt to negotiate with the CRA without the same legal protection.

• Do seek legal counsel to clean up your tax evasion before the tax agency comes looking for you. Anybody can become a tax evader—knowingly or by innocent oversight. But it is easier to negotiate a settlement of your outstanding tax liability when the CRA doesn’t know your name. So if you’ve been avoiding your legal obligations, clean up your act now with a lawyer-negotiated tax amnesty. You’ll be protected from criminal prosecution and financial penalties, and in some cases you may even be granted a waiver of interest or not taxed for some of the years owing.

• Do seek the counsel of an appropriately experienced tax lawyer when you run into trouble with the CRA. You could be in a dispute over your tax assessment; or have a large tax bill that you can’t afford to pay; or want to protect your assets with a tax-compliant offshore structure (yes, it can be done legally); or, worst-case scenario, you may already be under investigation and be facing charges in criminal court. Whatever the problem, you are entitled to protect your rights as a citizen and as a taxpayer by seeking legal counsel. Don’t expect your accountant, the helpful associate at the local tax preparation franchise, or the family member who studied accounting at school to be able to help you talk your way out of the problem. Legal matters need legal assistance, and once you’re in trouble with the CRA, it’s legal.

• Don’t be afraid to fight back! As a taxpayer, you have the right to defend your position, or dispute the opinion of the tax authorities. But you have to know how to do it. The following chapters will provide you with the insights and information you need to talk back to the CRA. Think of this as a taxpayer’s prescription—a suite of legal remedies to help you cure your tax problems without nasty side effects.

2
MEET THE AGENCY

Introducing a simplified tax return for all Canadians:

1. How much money did you earn? $

2. Send it all to us. And have a nice day.

Let us introduce you to the CRA and its true purpose.

Originally called the Department of National Revenue, Canada’s federal tax authority has changed its name several times and is now called the Canada Revenue Agency. For brevity, we will refer to this entity as the CRA or the Agency.

The next section, “A Tax Agency Who’s Who,” outlines the CRA’s current organizational structure.

A TAX AGENCY WHO’S WHO

The CRA reports to the Minister of National Revenue, who is, in turn, accountable to Parliament for all the CRA’s activities.

A Board of Management, consisting of 15 members, oversees the organization and management of the CRA. It does not have the authority to administer and enforce legislation or to access confidential ...

Table of contents

• Cover Page
• Title Page
• Epigraph
• Table of Contents
• 1 YOUR RELATIONSHIP WITH THE CANADA REVENUE AGENCY (AND WHY YOU SHOULD BE VERY AFRAID)
• 2 MEET THE AGENCY
• 3 TRACKING TAX
• 4 TAX EVASION: PASSIVE CRIME OR ACTIVE REVOLT?
• 5 ORDINARY PEOPLE, EVERYDAY TAX TRAPS
• 6 TRAPPING THE T4S—WHEN DEDUCTIONS AT SOURCE AREN’T ENOUGH
• 7 THE HEAVY ARTILLERY-A TAXPAYER’S GUIDE TO THE AGENCY’S TOP 10 TACTICS AND TECHNIQUES
• 8 THE RIGHT PROFESSIONAL FOR THE RIGHT TASK
• 9 BEFORE THE AGENCY COMES: THE AMNESTY ALTERNATIVE
• 10 SURVIVING A TAX AUDIT
• 11 TAX APPEALS
• 12 WHEN THE TAX COLLECTOR COMES
• 13 PARTING THOUGHTS
• SOURCES
• AUTHORS’ NOTE
• INDEX
• Acknowledgements
• Copyright
• About the Publisher