The CRA warns Canadians against tax "myths"

There are groups and individuals in Canada who claim that people can lawfully refuse to pay taxes or file a tax return.

In an open and free democracy like Canada, citizens have every right to freely express their opinions on the constitution, taxes, or any other issue. The Canada Revenue Agency (CRA) is concerned, however, that individuals who mistakenly confuse opinions with facts may expose themselves to serious financial and legal problems if this results in their failure to comply with the Income Tax Act and other tax laws.

For this reason, the CRA wishes to address some misleading statements and "myths" about Canada's tax laws and the way they are administered by the CRA.

Myth # 1
It is a myth that federal income tax is unconstitutional. This myth is based on the faulty argument that the Canadian Constitution gives the power of direct taxation (such as income tax) exclusively to the provinces. The myth is that the Supreme Court of Canada supposedly confirmed this position in a decision in 1950. According to this myth, individuals can legitimately refuse to pay income tax to the federal government because it is unconstitutional.

The Facts
The Constitution, section 91, says the federal government can raise money "by any mode or system of taxation." Section 92 says the provinces can impose "direct taxes within a province" to raise revenue for provincial purposes. As a result, while federal and provincial taxing powers overlap, the federal government can levy both indirect and direct taxes, including income tax.

The courts have confirmed the power of the federal government to levy direct taxes including income tax. No court in Canada has ever agreed with the idea that the federal government cannot levy income taxes. The often-cited 1950 Supreme Court decision concerning the Lord Nelson Hotel in Nova Scotia dealt with the issue of whether the federal government and a provincial government could delegate authority to each other on specific issues of labour and taxation. The Court did not address the issue of imposing direct taxes or their constitutionality.

In Canada, if citizens feel a law is unconstitutional, they may ask the courts to declare it so. Until that happens, the law applies.

A number of individuals and groups are actively promoting claims that there are lawful ways to declare oneself exempt from tax. Relying on such "advice" could result in anything from late filing penalties and interest imposed by the CRA to fines and imprisonment imposed by the courts - in addition to having to pay your taxes. Before paying for such information, or participating in such groups, individuals are urged to seek comments, clarification or guidance from a tax professional or the CRA.

Myth # 2
The income tax system is based on "voluntary compliance." The myth is that this proves that the government knows the law is unconstitutional and cannot be enforced

The Facts
There is no question that voluntary compliance is the cornerstone of Canada's self-assessment taxation system. This simply means that the government expects Canadians to respect their legal obligations and comply fully with their tax obligations.

The fact that the government, and most Canadians, expect people to abide by the law does not imply that the law cannot be enforced if necessary. In the small number of cases where taxes are not paid, or are not paid on time, the Income Tax Act and other laws provide a range of penalties for offences such as tax evasion, smuggling, failure to pay taxes, failure to disclose income or refusing to file a tax return.

The Act gives the CRA powers in these cases to impose fines, make third-party claims, seize property, and prosecute through the criminal process. On the other hand, taxpayers who come forward voluntarily without having been investigated are usually eligible to pay their overdue taxes or customs duty with interest but without any penalty.

Myth # 3
Some individuals who challenge the validity of tax laws claim not to have filed tax returns for years, and claim that the government has not been able to force them to do so because the Income Tax Act is unconstitutional and unenforceable

The Facts
The CRA cannot respond directly to such claims because the confidentiality provisions of the Income Tax Act prevent government officials from revealing information about individual taxpayers. We can only encourage the public to be wary of such claims.

Some of these individuals may indeed have filed in past years, or been fined for failing to file. In some cases, an individual may not be required to file a tax return because they have no taxes owing due to source deductions or because they have no taxable income. In other cases, the CRA may not yet have acted against an individual who did not comply with an obligation to file.

Under the law, individuals who fail to file a return as required, or who fail to comply with a court order to file, are liable to a fine of $1,000 to $25,000 and up to 12 months imprisonment, as well as having to pay their unpaid taxes with interest.

The CRA devotes a large part of its resources to providing the information and assistance required by the majority of Canadians who accept their tax obligations and comply with the law. Audit, prosecution and other enforcement activities are carefully targeted on the small minority of taxpayers who attempt to evade their obligations.

This responsible enforcement approach reinforces public confidence in the integrity of the tax system and reassures law-abiding Canadians that the law is being administered by the CRA in a fair and efficient manner. In the 1999-2000 fiscal year the CRA laid more than 2,000 charges for non-filing and more than 240 income-tax evasion charges for wilfully failing to declare income.

Myth # 4
Some individuals who challenge the validity of tax laws urge taxpayers to refuse to co-operate with CRA employees and refuse to comply with the law. The myth is that this will force the CRA to lower or even eliminate taxes.

The Facts
The CRA administers and enforces tax laws as passed by Parliament and provincial Legislative Assemblies. The CRA has no power to impose new taxes, remove existing taxes, raise or lower taxes, or decide how tax money will be spent once it is collected. These powers belong to the elected representatives of the Canadian people in Parliament and in provincial Legislative Assemblies.

Under our parliamentary system, federal tax policy is developed by the Department of Finance under the direction of the Minister of Finance. Tax measures are put before Parliament in the form of legislation. Any changes in taxation must be passed by the House of Commons and by the Senate in order to become law. The CRA also collects some taxes imposed by the provinces under laws passed by provincial Legislative Assemblies.

The CRA and its employees are subject to the law. Any citizen who feels the CRA has failed to respect their rights or has acted without authority has a right to redress through the courts.

Myth # 5
There is a myth that the Income Tax Act applies only to corporate entities and not to "natural" persons or human beings. This myth says that Common Law rights dating back to the Magna Carta make all taxes on individuals voluntary.

The Facts
These myths have been rejected by Canada's courts. For example, on August 31, 2000, the Ontario Superior Court of Justice issued a ruling rejecting arguments that the Income Tax Act applies only to corporate entities and that all taxes are voluntary.

The judge said, "I find that a 'person' as defined in s. 248(l) of the Income Tax Act includes both a natural person and an artificial person. It follows that the applicant is a 'person' and a 'taxpayer.' ... His obligations include the filing of annual income tax returns and the payment of any income tax owing under his returns."

The judge said, "In my view, there is no support in 'the common law, (also known as) the rule of law' for the extremely broad proposition that all taxes are voluntary."

A number of individuals and groups are actively promoting claims that there are lawful ways to declare oneself exempt from tax. Relying on such "advice" could result in anything from late filing penalties and interest imposed by the CRA to fines and imprisonment imposed by the courts - in addition to having to pay your taxes. Before paying for such information, or participating in such groups, individuals are urged to seek comments, clarification or guidance from a tax professional or the CRA.

Myth # 6
Some individuals claim to be exempt from GST/HST. Some carry a card to "prove" their claim.

The Facts

GST/HST legislation does not provide tax exemptions for any individuals. However, individuals with Indian status under the Indian Act may not be required to pay GST/HST on the purchase of goods and services under certain conditions. (For details, see Publication B-039R: GST Administrative Policy - Application of GST to Indians.)

Vendors who are registered to collect GST/HST must remit GST/HST on all taxable transactions. The tax must be remitted even if it was not collected from a purchaser because they falsely claimed an exemption.

Some consumers seem to think that falsely claiming an "exemption" is an effective protest against taxes or a government. In fact, any resulting discount they receive is at the expense of the vendor. Vendors must remit tax on all taxable transactions, even if they have mistakenly failed to collect the GST/HST from an individual falsely claiming an exemption.

Consumers may sometimes be led to believe that they are not paying GST/HST because a vendor may promote a sale by advertising "Pay no GST" or other similar claims. The vendor in these cases discounts the price so that the final, tax-inclusive cost is the same as the advertised, pre-tax price.

You can view our flyer called "Paying GST/HST" in pdf format.

Myth #7
It is a myth that you can make tax-free withdrawals from your self-directed RRSP by investing in private companies that in turn agree to lend you your own money.

The Facts

If an RRSP is used as security for a loan, the value of the RRSP will be added to the taxpayer's taxable income. Similarly, if an RRSP is used to purchase shares of a private corporation, and the shares are not a qualified investment under the rules, then the value of the shares will be added to the RRSP holder's taxable income.

Some promoters of financing schemes promise Registered Retirement Savings Plan (RRSP) owners that they can make tax-free withdrawals from their RRSPs. Typically, the arrangement involves using an individual's self-directed RRSP to purchase shares of a private company. The funds used to purchase the shares are then loaned back to the owner of the self-directed RRSP at low or no interest.

These schemes are often promoted with claims such as "Take advantage of your RRSP now -- no tax to pay," or "I will loan you $5,000 to $250,000 over five years if your RRSP is locked in." Taxpayers who respond to these kinds of advertisements risk losing retirement savings and the tax benefits of their RRSP.

Taxpayers should consult with knowledgeable tax advisors before taking part in any scheme that promises a tax-free withdrawal of RRSP funds. Administrators and trustees are asked to advise clients that there may be tax consequences if non-qualified investments or loans are secured with an RRSP.

Myth #8
The CRA uses email to conduct "e-audits."

The Facts

The Better Business Bureau of Saskatchewan has made us aware of what appears to be an e-mail audit scam currently going on in the United States. Although the Canada Revenue Agency (CRA) is not aware of any confirmed cases of such scams in Canada, we would like to alert Canadians to act prudently should they receive a similar e-mail.

Here's how a similar scam might work in Canada: A taxpayer would receive an e-mail using "Canada Revenue Agency e-audit" as the subject line, giving the appearance that it was sent by the CRA. The recipient/taxpayer would be instructed to fill out a questionnaire and return it within 48 hours to avoid penalties and interest. The fraudulent questionnaire would require the taxpayer to provide his or her social insurance number, bank account numbers, and other confidential information. Once the scam artist has this confidential information, the taxpayer is a potential victim of fraudulent activities.

The CRA does not notify taxpayers about pending audits by e-mail, nor does it conduct "e-audits". Taxpayers should never respond to a request for confidential information without first confirming the identity of the requestor and assuring themselves that the requestor is legally permitted to request such information.

The CRA is committed to safeguarding the confidentiality of all taxpayer information. Because the Internet is not a secure medium of communication, the CRA does not use it to communicate with clients unless the taxpayer has first provided permission.

If you receive such an e-mail, please contact your tax services office.

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