Simply, tax avoidance is the organization of one’s financial affairs aimed to minimize their tax burden. Tax avoidance is NOT ILLEGAL, it is a hallmark of what makes a competent accountant extremely valuable. An intelligent accountant can guide their clients to maximize the amount of income they retain following taxation. This can be done through tax credits, tax deductions, income exclusion & a variety of loopholes.
These legal tax reduction techniques are designed to incentivize certain behaviors such as saving up for retirement or buying a home. While it may seem that it should be frowned upon, governments establish these provisions for the ultimate betterment of society.
On the other hand, tax evasion is the nefarious action of purposely misstating income or inappropriately allocating funds to avoid paying taxes which one is obliged to pay. Tax evasion IS ILLEGAL, and anyone engaging in tax evasion will face stern prison time. Examples of tax evasion include but are not limited to:
– Under-reporting or failing to report income.
– Under-reporting or failing to report income from a specific source such as cash transactions or foreign earned income.
– Overstating deductions.
– Using fake identification to establish businesses and commit GST/HST fraud.
The difference between tax avoidance and tax evasion ultimately comes down to the intent of the tax payer. In the case of tax evasion, the tax payer must have clear intent to avoid paying taxes that are known to be owed. Also, it must be clear that the income under scrutiny would clearly be subject to tax. Its fine details like this where an experienced accountant is invaluable. If ever in doubt, reach out to a trusted CPA (Chartered Professional Accountant) for help and they will ensure that you don’t fall into any trouble.