2.12 What is the difference between tax evasion, tax avoidance, tax planning and tax deferral? Provide some examples.

Tax evasion occurs when an individual intentionally understates their revenue or overstates their expenses to reduce their tax payable. Tax evasion is considered a crime. Unlike tax avoidance, tax evasion has criminal consequences and the individual may face prosecution in criminal court.

For example, Alex works at an accounting firm and wants to minimize his tax bill, he claims $700 in deductions for fictitious meals and entertainment, moreover he neglects to report $7,000 he earned in cash from renting out a room from his house. Alex is committing tax evasion.

Tax avoidance is associated with tax evasion, but it’s not considered a crime. Tax avoidance occurs when a person reduces or eliminates tax within the letter of law but not within the spirit and intent of the law.  KPMG’s Isle of Mann scheme is a good example of a tax avoidance scenario.

If CRA believes there is an avoidance transaction they may challenge your application of tax law under the General Anti-Avoidance Rules (GAAR).

Tax planning is an attempt to reduce one’s tax liability, within the framework and spirit of existing tax rules and laws. An individual could reduce their income, increase their deductions and take the advantages of the tax credits through proper tax planning.

Tax deferral is an attempt to use existing tax rules and law to push tax payments/liability into the future. Tax deferral is not considered a crime.

A good example of both tax planning and tax deferral can be found in a Registered Retirement Savings Plan (RRSP). RRSP deductions reduce tax in the current year and defer it to the future when amounts in the RRSP are withdrawn. If, for example, you withdraw amounts from your RRSP when you are retired you will have achieved deferral (you’ve pushed taxation of the amount into the future when it was withdrawn) and you may have achieved tax planning/tax reduction if you are in a lower tax bracket during retirement than you were when you were working.

References and Resources

• Income Tax Act, RSC 1985, c1, (5th Supp.) ss 245, IC73-10R3
• Article – “IC88-2 General Anti-Avoidance Rule – Section 245 of the Income Tax Act” (Author: Government of Canada)
• Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.3.2