The Panama Papers Scandal: The Difference Between Tax Avoidance and Tax Evasion

by True Wealth Advisors

Do you think high-income earners  should pay their fair share of taxes? That’s at the heart of the debate of the Panama Papers scandal. With the top tax rate for high-income earners at a record 54 percent, there’s speculation that some of Canada’s wealthiest may be implicated. Tax avoidance, tax evasion and aggressive tax planning are some of the buzz words we’ve been hearing a lot in the media. Let’s take a closer look at these ambiguous terms to gain a better understanding of what’s going on.

What are the Panama Papers?

The Panama Papers are a leaked database of over 11.5 million documents from legal firm Mossack Fonseca. It exposes information on some of the world’s richest and most powerful individuals who use offshore tax havens to avoid paying their fair share of taxes. This in turn is costing governments billions of dollars worldwide at an especially challenging economic time. This is believed to be the largest ever leak of documents. The passport details of 350 Canadians are believed to be mentioned in the leak. In response to the scandal, Prime Minister Justin Trudeau has given the Canada Revenue Agency (CRA) carte blanche to combat tax avoidance and evasion.

What’s the difference between tax avoidance and tax planning?

With the CRA cracking down on tax dodgers, it’s more important than ever to stay on the good side of the taxman. Tax avoidance and tax planning are similar to an extent – both involve reducing your taxes payable to a minimum, while meeting the letter of the law, but that’s where the similarities end. Effective tax planning is being consistent with the intent of the law. When you go against the intent of the law, you’re considered to be involved in tax avoidance. The CRA considers any tax planning that’s “unacceptable or abusive” to be tax avoidance. Aggressive tax planning is about pushing the envelope of tax planning, while paying the least amount of taxes.

What’s the difference between tax avoidance and tax evasion?

While tax avoidance and tax evasion are both illegal, it’s important to understand the difference between the two. Both terms have been used interchangeably, but there are key differences to be aware of. As mentioned, tax avoidance involves taking actions to minimize the amount of taxes paid within the letter of the law. Tax evasion on the other hand, is when you purposely ignore tax laws. For example, underreporting income from the so-called underground economy or overstating expenses are both forms of tax evasion. Both are serious crimes. Not only can you face stiff penalties and interest, you can face criminal prosecution from tax evasion.

With the CRA taking a closer looking at tax avoidance and tax evasion schemes, make sure you’re on the right side of the law. If you’re in the top tax bracket, there are ways to legally reduce your taxes paid. If you’re looking for legal tax planning strategies to keep more money in your pockets, feel free to contact our office. We’ll look for ways to lower your tax bills and stay on the good side of the CRA.

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