Tax Evasion vs.Tax Avoidance
Read this brief overview of the difference between tax evasion, tax avoidance, tax planning, and tax deferral.
What is the Difference Between Tax Evasion, Tax Avoidance, Tax Planning, and Tax Deferral?
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 the $7,000 he earned in cash from renting out a room in 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 the 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 your tax liability within the framework and spirit of existing
tax rules and laws. An individual could reduce their income, increase their deductions, and take advantage of the tax credits through proper tax planning.
Tax deferral is an attempt to
use existing tax rules and laws 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 RRSP deductions reduce tax in the current year and defer it to the future when amounts in the RRSP are withdrawn.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when you are retired, you will have achieved deferral (you've pushed taxation of the amount into the future when it was withdrawn,) and you may have achieved tax planning/tax reduction if you are in a lower tax bracket during retirement than you were when you were working.
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Source: Swei Liang - KPU - Pressbooks, https://kpu.pressbooks.pub/cdntax/chapter/__unknown__-34/
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