A close-upshot of several Canada Revenue Agency (CRA) tax forms sitting on top of each other.

Ask the Expert… What’s the difference between tax planning, avoidance and evasion?

March 17, 2022

While we can all agree it’s great to pay less tax, it goes without saying that you need to make sure any methods of tax reduction you utilize follow the law. That’s why it’s important to know the difference between tax planning, avoidance and evasion when you’re looking for ways to keep your taxes down.

Tax planning – Simply put, tax planning involves arranging your business affairs to reduce or defer the amount of taxes payable, within the specific wording and intent of tax legislation.[1] As a business owner, you’ll work with your advisor to reduce or defer taxes through legal avenues such as claiming the small business deduction and business-related expenses and credits, income splitting with family members[2], and claiming the capital gains exemption when selling your shares (if tests are met). Your advisor will make sure to explore every avenue and credit available to you in order to identify planning opportunities to reduce taxes.

Tax avoidance – Tax avoidance is interpreted by the CRA as “actions taken to minimize tax that, while within the letter of the law, contravene the object and spirit of the law.” There is a distinction between acceptable tax planning and tax avoidance that is often the subject of debate between taxpayers, the CRA and the Courts. It would be more accurate to say that the government and CRA are against abusive tax plans that rely on aggressive interpretations of tax law or circumvent anti-avoidance rules. The CRA actively discourages these methods and looks diligently for instances of tax avoidance in their audits.

Tax evasion Tax evasion is no grey area—it involves ignoring specific sections of the law through subtle schemes like under-reporting taxable receipts, claiming expenses that are non-deductible or overstated, or more overtly refusing to comply with reporting requirements. Actions like these can result in interest, penalties (of up to 200% of the taxes evaded), and prosecution in criminal court that could lead to jail time of up to five years.

If you’re unsure of how to most effectively reduce your taxes while ensuring you avoid any wrongdoing, reach out to one of our advisors and they’ll be happy to help.

Note – You and your advisors may also need to disclose your tax plan to the CRA if you decide to implement it. There is disclosure under the revised Reportable Transaction Rules (disclosure due June 30) or the new Notifiable Transaction Rules (once it is legislated, disclosure is due 45 days of the earlier of when you are contractually obligated or enter into the transaction). Penalties are heavy if you don’t disclose.

[1] This principle and right has been upheld in Canadian courts, based on the principle from the UK’s Duke of Westminster case.

[2] Subject to the TOSI and income attribution rules.