The intersection between tax and money laundering: Guidance for tax advisors

A recent American Bar Association Practice Point article posed the question: may tax evasion be charged as a money laundering offence? In Canada, the answer is unequivocally, yes – the acts that result in a charge of tax evasion might also result in a charge of money laundering. Because the Criminal Code of Canada offence of money laundering can result in different and more significant penal consequences than tax evasion, it is worth noting the differences between the offences. Perhaps more importantly, professional advisors must understand the distinctions between lawful tax planning and avoidance, and tax evasion, and understand the intersection between proceeds of crime, money laundering and taxes so that professional advice does not stray into the commission or counselling of a criminal offence.

“Proceeds of crime”, “designated offence” and “laundering” are all defined terms. “Proceeds of crime” refers to “property, benefit or advantage, within or outside Canada, obtained or derived directly or indirectly as a result of: (a) the Commission in Canada of a designated offence, or (b) an act or omission anywhere that, had it occurred in Canada, would have constituted a designated offence.”

Tax evasion is a “designated offence”. Significantly, the definition of “proceeds of crime” is drafted to capture proceeds from tax evasion committed both within and outside of Canada and, property, benefit or advantage that is both within and outside of Canada.

The offence of laundering the proceeds of crime is also broadly defined and captures a broad range of activity related to the movement of money that is proceeds. An offence is committed when a person “uses, transfers the possession of, sends or delivers to any person or place, transports, transmits, alters, disposes or otherwise deals with, in any manner and by any means, any property or any proceeds of any property with intent to conceal or convert that property or proceeds, knowing or believing that all or a part of that property or any of those proceeds was obtained or derived directly or indirectly as a result of (a) the commission in Canada of a designated offence; or (b) an act or omission anywhere that, if it had occurred in Canada, would have constituted a designated offence.”

Notably, these definitions capture “proceeds” from a “designated offence”, as well as “laundering” of those proceeds that are or occur within or outside of Canada. In addition, the offences capture the acts of a principal (the person who committed the tax evasion or laundered the proceeds of crime) as well as the acts of a person who encourages, assists in or facilitates those offences.

Both tax evasion and money laundering can have significant penal consequences. For tax evasion, the maximum penalty is 5 years of imprisonment and a mandatory fine of between 100% and 200% of the amount of tax evaded. The maximum penalty for money laundering is 10 years of imprisonment. However, unlike the law governing the prosecution of tax offences, the Criminal Code also gives the government significant powers to forfeit property that is proceeds of crime, to restrain that property in advance of forfeiture, or to impose a fine in lieu of forfeiture where the property is not available. If a fine is imposed and the convicted person cannot pay the fine, the court is required to impose a jail sentence.

In Canada, there is a distinction between lawful tax planning and avoidance on the one hand, the tax evasion on the other. To borrow from the CRA, the distinction is:

Tax avoidance results when actions are taken to minimize tax, while within the letter of the law, those actions contravene the object and spirit of the law.

Tax evasion typically involves deliberately ignoring a specific part of the law. For example, those participating in tax evasion may under-report taxable receipts or claim expenses that are non-deductible or overstated. They might also attempt to evade taxes by wilfully refusing to comply with legislated reporting requirements.

The difficulty is that while some tax plans will clearly not be evasion and some acts might be clear cases of evasion, there might also be areas in between where an auditor, investigator or prosecutor might interpret an aggressive plan as evasion where the tax advisor has not. In these circumstances, a risk might be present though it has not been identified by the advisor.

There are a number of take-aways from all of this for professional tax advisors. First, the risks of fines, jail, and forfeiture facing a client who is offside the law are significant. It is therefore essential that an advisor understand when a client might potentially be exposed to those risks in order that the advisor may protect the client’s interests and advise the client in the face of those risks. In many cases, these considerations should arise at the audit stage.

It is also crucial for professional advisors to understand the scope of these offences so that advice upon the movement of money does not become a criminal offence. For example, a client might have an offshore investment account where the account and the income have been undeclared and the client might seek advice on whether and how the funds from the account may be transferred to Canada. Or, a client who is concerned that an audit might turn into an investigation for evasion might ask for assistance in transferring assets to a spouse “just in case”. In plain language, advising on how to move dirty money (money which is the proceeds of crime from tax evasion) might itself be a criminal offence.

Next, tax advisors in Canada must understand that, depending on the circumstances, a client might be at risk of tax evasion and money laundering prosecutions both within Canada and abroad. Advisors in Canada who are considering issues with cross-border dimensions must be wary of what they don’t know. Advisors should not assume that the laws elsewhere are the same as the laws in Canada and should not advise in areas in which they are unfamiliar, unqualified or not competent.

Next, perhaps one of the most challenging situations is when a tax advisor is asked to assist in undoing or correcting an arrangement that might never have been legal or, which in hindsight or through a new perspective is recognized as being tax evasion. Advising a client to transfer funds in that circumstance can be potentially perilous both to the client and to the advisor. If the advisor is uncertain as to what the law permits and prohibits, the advisor should seek advice.

Finally, it is obvious but nonetheless worth emphasizing that a professional advisor must not, under any circumstance, knowingly assist a client in committing an offence. To do so might result in the advisor becoming the target of an investigation or prosecution. Further, and in the language from the Code of Professional Conduct for British Columbia, “a lawyer should be on guard against becoming the tool or dupe of an unscrupulous client”.

Clients are entitled to receive professional advice even when that advice is to tell a client that an idea is a bad idea. However, professional advice in these areas, and particularly where the relevant facts cross international borders, can be very complicated and the stakes for both the advisor and client can be high.