The Canada Revenue Agency (CRA) has recently uncovered a fraudulent scheme in which taxpayers claim large losses or expenses equal to their personal expenses such as payments for mortgages, personal loans, vehicle loans and common everyday expenses.

In this scheme, taxpayers use a CRA business number to submit information slips for amounts related to their personal debts and expenses. These slips include the T5008 Statement of Securities Transactions, the T5 Statement of Investment Income and the T4A Statement of Pension, Retirement, Annuity and Other Income. The amounts from the slips are reported on T1 tax returns as business losses, professional income losses, capital losses or as expenses. Under the Income Tax Act, deductions for personal expenses are not permitted.

Serious consequences

The CRA has identified taxpayers who are participating in this scheme, and is taking action. Under the Income Tax Act and the Excise Tax Act, the CRA has the authority to reassess tax returns, charge interest and levy penalties. Where intentional non-compliance with tax laws, tax evasion or fraud is suspected, the CRA will undertake criminal investigations and will recommend prosecution against the taxpayers promoting, organizing or participating in such tax schemes.

If you are convicted of tax evasion or tax fraud, the courts may fine you up to 200% of the federal tax evaded or false refunds claimed, and sentence you to a jail term of up to five years. The CRA will also publicize your court conviction in the media to deter non-compliance with tax laws, and to maintain confidence in the integrity of the self-assessment tax system.

Even if you receive a refund, you can still be reassessed

You may have participated in this scheme and received a tax refund; however, this does not mean that the CRA agrees with your claims. Therefore, keep your books and records, since the CRA generally has three years from the date of assessment to audit and reassess taxpayers.

In cases of alleged fraud or misrepresentation, such as neglect, carelessness or willful default, the CRA can audit and reassess outside the three-year period. These audits can take over a year to complete. The fact that participants in this type of scheme have not yet been reassessed should not be interpreted as the CRA's acceptance of their claims.

Get professional, independent advice

If you are thinking about participating in an arrangement to minimize your tax, it's very important that you get independent legal and tax advice. Independent advice means advice from a tax professional who is not connected to the particular arrangement.