In a recent decision by the B.C. Supreme Court, Tony and Helen Samaroo were awarded nearly $1.7 million in damages to be paid by the Canada Revenue Agency (CRA) after Justice Robert Punnett found that the CRA engaged in malicious prosecution when investigating the Nanaimo, B.C. couple for tax evasion.
The two owned a nightclub/motel/restaurant and were accused of skimming $1.7 million from its coffers before being brought up on 21 criminal charges for dodging the taxman. The charges were eventually dropped for insufficient evidence, but the damage to the Samaroo’s reputation as business owners was already done.
“She said she had worked hard to build up her reputation as a reputable nightclub operator and felt that the charges had ruined her reputation,” noted Justice Punnett when describing Helen Samaroo, who had a breakdown and says couldn’t get out of bed for six months as a result of the charges.
“She testified that the charges had a significant impact on her husband who became stressed and got quieter and quieter, and over time worked less and less and stopped socializing […] She said that, even with the acquittal, she will never feel the same again.”
During court proceedings, it was found that CRA investigators had placed a targets on the Samaroo’s backs, deciding they’d committed a crime while suppressing and misstating evidence. In an email exchange it was also revealed that CRA investigators took particular perverse delight in investigating a couple they already assumed was guilty.
“The Samaroo case is quite unfortunate,” says Bobby Solhi, tax lawyer and partner at TaxChambers LLP in Toronto. “I’m not sure it’s an exception to CRA behaviour, but certainly it’s the only case that I know of where people were able to receive an award of damages against the CRA.”
If a tax lawyer of a big city Toronto law firm doesn’t believe the Samaroo case to be an exception to CRA behaviour and with the CRA itself stating that it will crack down on tax evaders like never before, it’s important to know what to do if you find yourself in the Samaroo’s position, especially with the personal income tax deadline less than a month.
Becoming a Target
There are three circumstances under which you may find yourself under investigation for tax evasion.
The first, and probably least likely of the three, is being named in The Panama Papers or similar leaked documents over the last few years. This is a stated priority for the CRA and all world tax authorities, so being named in the Panama Papers will immediately put you on their radar.
“If you are outed in one of those releases of documents, you will be investigated on a proclaimary basis,”says David Rotfleisch, founding lawyer and CPA at Rotfeisch & Samulovitch PC – a boutique Toronto law firm specializing in tax law. “You will probably then be subject to a criminal tax evasion investigation. The CRA released a press release three weeks ago announcing that they had executed three search warrants related to The Panama Papers investigation. It is unprecedented for them to announce search warrants in this manner.”
The second way you may come to the awareness of the CRA for tax evasion is if you’re outed by a whistle blower through an anonymous tip.
“The CRA has always, as a matter of policy, investigated anyone who is revealed through a whistle blower,” says Rotfleisch. “Furthermore, it’s an institutionalized policy with respect to offshore tax evasion through OTIP – the CRA’s Offshore Tax Informant Program, which pays a percentage reward for any successful squealing.”
A tip through OTIP or by any other means, such as a letter or an e-mail, will launch a preliminary investigation before a more formal, and perhaps criminal, investigation can proceed.
The third and most common way you will enter the CRA’s purview is through an audit when the auditor finds something that triggers their suspicions, looks into it further and then refers it to the CRA’s criminal investigation officers as a possible case of tax evasion.
“If you report one thing, but the auditor looks at your documentation and bank statements and sees you have all these other unidentified deposits into your accounts and they inquire about them, but you don’t have a good explanation or if they determine you’ve deliberately omitted reporting deposits, then they would have to decide if there’s enough there to pursue a criminal investigation,” says Solhi.
Typically, the case would stay as a civil matter and you may be ordered to pay gross negligence penalties, which can be up to 50 per cent of the tax you now owe on top of the tax amount owing, but if its egregious enough and the amounts are significant or omitted frequently enough, you may be facing criminal charges.
What are your rights?
Tax evasion should not be confused with reporting your taxes and then not paying the amount you owe. This is not tax evasion, but a collections matter with civil penalties such as wage garnishment. Tax evasion is when you purposely or accidentally omit reporting significant portions of your income to the CRA. If you have been accused of tax evasion, you are still afforded several rights and there are several ways you can lessen the impact of the charges or try and halt investigations.
At the outset, the rights you have depend on where you are in the investigations process. In particular, you have different rights in an audit versus a prosecution and Section 11 of the Canadian Charter of Rights and Freedoms kicks in when it becomes a criminal investigation. These include rights like, right to be informed of the offence, right to be tried within a reasonable time and the right to be presumed innocent until proven guilty.
“This is where the CRA sometimes stumbles: the auditor decides your lifestyle doesn’t support your income, they investigate further and they ask for all sorts of information,” says Rotfleisch.
“However, if they’ve already made the decision to prosecute you, they are now doing a criminal investigation and their rights are restricted. You have to have your full charter rights protected and if not, there’s a good chance of getting the prosecution thrown out.”
If the investigation proceeds, a search warrant will likely be executed against your home and your business. This is why bringing in a tax lawyer is important because anything you tell them is protected by attorney client privilege, while anything you tell your accountant must be disclosed to the CRA unless that accountant is brought in under the umbrella of the lawyer. Your computers, ledgers and all other sensitive financial documents will likely be confiscated as a result of a search warrant.
“These can be confiscated for months, which is extremely disruptive of your business, so whenever I have a client who might be accused of tax evasion and subject to a search warrant my first advice is to lease a new secure location, back up all of your computer hard drives and put them off-site,” says Rotfleisch. “If you have paper files, back those up as well because if you have no back-ups, you could be out of business.”
From the moment you are questioned, you are entitled to a lawyer and if you think there’s cause for concern, you may want to have a lawyer present from the time of audit. Sometimes an investigation can be headed off at the pass if a tax lawyer is present during the audit, but if it’s a criminal matter, you should get your lawyer involved right away and let them know everything that’s going on, including your unreported income if that’s the case.
“I’ve also been successful in averting criminal prosecution by nipping it in the bud,” says Rotfleisch. “A client comes to me during an audit saying the auditor has found what appears to be unreported income and we have successfully stick-handled around that during our presentation.
“I will do a complete analysis for the auditor with all the unreported income, give him schedules, do all the auditor’s work for him and say, ‘You know what? The guy had a bad bookkeeper, didn’t know what was going on, here’s the corrected information.”
You can also avoid criminal prosecution or gross negligence penalties through voluntary disclosure, which entitles you to disclose unreported income one time on your own to the CRA without penalty. However, the voluntary disclosure process was once a lot more forgiving than it is now.
“Before you could come forward, no matter how egregious, and disclose the omission or error whether deliberate or not,” says Solhi.
As of March 1, 2018, there are two streams: one is like the previous program and the other is called the Limited Program and it is reserved for those cases where the facts show intentional conduct on the part of the offender. If you are placed in this stream, you won’t be subject to gross negligence penalties or criminal prosecution, but you will be subject to other penalties and interest payments.
“There’s nothing in the CRA’s system that we’re aware of on the outside that suggests that once you make a voluntary disclosure or are placed into the Limited Program that they look at you with more scrutiny, but we don’t know. That shouldn’t happen, as it would discourage people from coming forward,” says Solhi.