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Although they’re an important part of Canada’s economy, no one likes having to pay income taxes. Thankfully, there are ways to lower your yearly tax bill and even avoid paying certain types of taxes. The only problem is that some methods, like tax avoidance, are legal, while others, like tax evasion, are totally illegal.
Want to know the key differences between tax avoidance and tax evasion? Here are a few essential details to keep you out of trouble with the CRA.
Despite its name, tax avoidance doesn’t really mean you can simply go without paying taxes. In reality, tax avoidance is the act of reducing your taxable income or tax owed using various legal methods. According to the Canada Revenue Agency, tax avoidance laws include all forms of tax planning that are deemed “unacceptable” or “abusive”.
So, if you’re looking to reduce your yearly tax debt but still comply with the CRA’s legal regulations, you’ll have to implement “effective” tax planning, where any arrangements are consistent with the law. Common methods of tax avoidance include:
These methods are all legal and could help you pay fewer taxes from year to year, as long as you fill out the proper documents and let the CRA know what you’re doing, rather than disguising your intentions by evading taxes altogether.
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Tax evasion is when you or your business avoid paying taxes through illegal means, such as lying about your income or failing to submit any required tax reports. It doesn’t matter if you’re doing it on purpose or if you simply forgot, no federal, provincial or territorial tax authority will let willful tax evasion slide for very long.
Even though tax evasion sounds similar to tax avoidance, there are laws that clearly define both types of tax planning and specific punishments for failing to comply with your area’s tax regulations. Different tactics could also qualify as tax evasion, including:
As mentioned, different ways of avoiding your taxes come with different legal and financial penalties, so it’s essential to speak with a CRA representative if you’re not sure whether you should be reporting certain types of income. Here’s what could happen if you participate in tax avoidance or tax evasion in Canada:
Some forms of tax avoidance are acceptable, others can involve serious legal penalties. Due to these kinds of complications, the Canada Revenue Agency must take measures to verify that all taxpayers are reporting their income properly, such as:
Paying taxes may not be fun, but there are several ways to reduce your taxable income or get yourself (or your household) moved to a lower tax bracket. Make sure to look up the specific federal and regional rules surrounding each form of legal tax avoidance, because there are still financial penalties you could encounter:
The CRA only accepts one tax return per year from each taxpayer and you can’t submit a second one if you make a mistake. Don’t worry, because you are allowed to contact the CRA and make adjustments to your tax return. Here’s what you can do:
Before you make changes, wait for your Notice of Assessment so you can work around any delays or automatic adjustments made by the CRA. If the error is still there after or you want to report something else, file a request online or by mail (processing time is about 2 – 10 weeks).
Sign in to your CRA My Account and click “Change Return”. You can then choose a tax year and submit adjustments. Unless your changes are denied, you should receive a Notice of Assessment around two weeks later. Watch out, as you can’t submit a second return until your first is approved.
To file a CRA Adjustment Request by mail, print and complete Form T1ADJ-T1, then send it to your regional tax bureau. Be sure to include all receipts, tax slips or other proof to back your request. Keep in mind, mail-in requests often take longer to process (up to 10 weeks vs. two weeks online).
If you’re not an experienced taxpayer, it’s possible to lose out on tax benefits, like deductions from past expenses. Luckily, the CRA allows you to request adjustments dating back to a maximum of 10 years, so don’t throw away any eligible receipts or slips.
Remember, some forms of tax avoidance are legal but pushing the boundaries of what tax authorities consider acceptable. Plus, tax evasion can come with some serious legal and financial penalties, even if you’re committing it by accident. So, if you’re not sure what you’re doing during tax season, it’s best to hire a tax professional or use certified tax filing software to help you get the most out of your tax return without any problems.
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