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Enforcement Notifications: Fraudulent SR&ED Claims & Tax Evasion

Enforcement Notifications: Fraudulent SR&ED Claims & Tax Evasion  Photo credit: Pixabay via Pexels.com

 

The CRA released two enforcement notifications in 2022 regarding fraudulent SR&ED claims. They are engaging in these enforcement activities regarding SR&ED to ensure taxpayers understand the consequences of fraudulent SR&ED claims and tax evasion.

Deterrent of fraudulent SR&ED claims

Law Enforcement action on SR&ED has been publicly announced as a deterrent.

The CRA seeks publicity on conviction in the case of tax evasion. It does this to maintain confidence in the integrity of the self-assessment system, and to increase compliance with the law through the deterrent effect of such publicity.1

During the height of the pandemic, the CRA accepted all SR&ED claims as filed and as a result, claims that did not meet the requirements may have been accepted as filed. In order to ensure compliance, the CRA has begun scrutinizing claims much as they had prior to the pandemic. Most Canadians are law-abiding taxpayers but the CRA states, “the CRA conducts compliance programs to ensure the uniform application of the laws it administers”.2

On October 12, 2022, the CRA released an advisory for businesses about third parties offering to apply for SR&ED on your behalf. In the announcement, they stated:

The Canada Revenue Agency (CRA) has observed a recent increase in SR&ED claims containing false and/or non-compliant information. The CRA is advising you to be cautious if you receive an unsolicited offer to help you claim SR&ED investment tax credits.3

CRA enforcement notifications regarding fraudulent SR&ED claims

In 2022, two enforcement notifications were released regarding fraudulent SR&ED claims one June and one in October.

Tax fraud connected to the Scientific Research and Experimental Development Tax Incentive Program: two Quebec taxpayers sentenced

On June 10, 2022, the CRA released an Enforcement Notification regarding tax fraud connected to the SR&ED program:

 […] pleaded guilty on March 26, 2021, and was sentenced on June 8, 2022, to a 20-month conditional prison sentence and 240 hours of community service, in addition to being fined $50,000. […] pleaded guilty on June 8, 2022, for the same scheme and he was sentenced to a conditional 15 months in prison.   […] also paid a $421,360 fine, equivalent to the full amount of the tax credits received illegally. […] The CRA investigation showed that […] was using the identity of clients of his accounting firm, ACGI inc., to create false invoices for the benefit of Impresa, managed by Salvatore Leo. This scheme allowed Impresa to receive $421,360 in fraudulent Investment tax credits for the 2008 to 2011 tax years in the Scientific Research and Experimental Development Tax Incentive Program.4

Eastern Ontario resident sentenced for fraudulent GST/HST refunds, Scientific Research and Experimental Development claims

The Canada Revenue Agency (CRA) released an Enforcement Notification on October 19, 2022, which stated that:

 […] sentenced on October 6, 2022, to a conditional jail sentence of 12 months, including 6 months of house arrest, and 70 hours of community service for federal tax offences under the Excise Tax Act. In addition, he received 12 months of probation for provincial offences under the Provincial Offences Act of Ontario to run concurrently with the conditional jail sentence. […] was also fined a total of $190,100 representing 50% of the amount of Goods and Services Tax/Harmonized Sales Tax (GST/HST) and the Ontario Innovation Tax Credits (OITC) claims he obtained or tried to obtain as refunds. […] pleaded guilty on September 28, 2022, in the Ottawa Court House to three counts of unlawfully making false or deceptive statements and obtaining or attempting to obtain GST/HST refunds of $160,050 under the Excise Tax Act, and to three counts of making false or deceptive statements and obtaining or attempting to obtain OITC refunds of $220,150 under the Taxation Act of Ontario.

A CRA investigation revealed that […] as shareholder and senior officer of American Domain Names LLC (ADN) and Maple Names Inc. (MNI), filed false GST/HST returns, corporate income tax returns and SR&ED claims. Between July 2013 and July 2015, […] also submitted false documents in order to receive or attempt to receive a total of $160,050 in GST/HST refunds and $220,150 in OITC refunds to which he was not entitled. […] claimed that MNI was developing the integration of computers and mobile devices into various household devices, and that ADN was developing encryption hardware for sale to internet service providers. When the CRA asked for documentation to support these claims, […] provided false information and submitted fabricated invoices.5

The Ontario Innovation Tax Credit (OITC) is an 8% refundable tax credit for qualified expenditures on Scientific Research and Experimental Development (SR&ED) performed in Ontario.

Consequences of Tax Evasion and Fraud

Tax evasion is a crime and the consequences of committing fraud and tax evasion are steep. The CRA states: “Falsifying records and claims, wilfully not reporting income, or inflating expenses can lead to criminal charges, prosecution, jail time, and a criminal record.”6 The CRA is aggressively pursuing tax evasion and false claims.

In the June 10, 2022 Enforcement Notification the CRA stated:

From April 1, 2020, to March 31, 2021, there were 36 convictions, with court imposed fines totalling $5,172,844. These taxpayers were sentenced for wilfully evading payment amounts totalling $10,902,950 in federal tax. Out of the 36 convictions, 15 individuals were sent to jail for a total of 26.2 years.7

In the October 19, 2022 Enforcement Notification the CRA stated:

From April 1, 2021, to March 31, 2022, there were 23 convictions, with court imposed fines totalling $3,303,110. These taxpayers were sentenced for wilfully evading payment amounts totalling $4,407,386 in federal tax. Out of the 23 convictions, 10 individuals were sent to jail for a total of 15.3 years.8

Conclusion

Be extra careful and ensure all the information on your SR&ED claims is wholly truthful. The CRA is currently investigating and prosecuting fraudulent SR&ED claims aggressively as there has been an alarming increase in the amount of fraud and/or false information being put forward by claimants. Any individual or business who underreports income or claims losses or benefits to which they are not entitled may have to repay the benefit amounts and may be subject to other possible action. The CRA previously released a reminder for businesses filing SR&ED claims in April 2022 which reminded taxpayers to ensure the information they provide on their tax returns is valid and warned them of the consequences. Be sure your SR&ED claim can be properly backed up in the case that your SR&ED claim is pulled for review. The importance of contemporaneous documentation cannot be overstated.

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Show 8 footnotes

  1. Enforcement notifications: compliance actions. (December 2, 2022). Canada Revenue Agency. Retrieved December 6, 2022, from: https://www.canada.ca/en/revenue-agency/news/newsroom/criminal-investigations-actions-charges-convictions.html
  2. Ibid
  3. Advisory for businesses claiming SR&ED investment tax credits. (October 12, 2022). Canada Revenue Agency. Retrieved December 6, 2022 from: https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2022/advisory-businesses-claiming-sred-investment-tax-credits.html
  4. Government of Canada. (June 10, 2022). Tax fraud connected to the Scientific Research and Experimental Development Tax Incentive Program: two Quebec taxpayers sentenced. Retrieved December 5, 2022, from: https://www.canada.ca/en/revenue-agency/news/newsroom/criminal-investigations-actions-charges-convictions/20220609-tax-fraud-connected-scientific-research-experimental-development-tax-incentive-program-quebec-taxpayers-sentenced.html
  5. Government of Canada. (October 19, 2022). Eastern Ontario resident sentenced for fraudulent GST/HST refunds, Scientific Research and Experimental Development claims. Retrieved October 20, 2022, from: https://www.canada.ca/en/revenue-agency/news/newsroom/criminal-investigations-actions-charges-convictions/20221019-eastern-ontario-resident-sentenced-fraudulent-gsthst-refunds-scientific-research-experimental-development-claims.html.
  6. ibid.
  7. Government of Canada. (June 10, 2022). Tax fraud connected to the Scientific Research and Experimental Development Tax Incentive Program : two Quebec taxpayers sentenced. Retrieved December 5, 2022, from: https://www.canada.ca/en/revenue-agency/news/newsroom/criminal-investigations-actions-charges-convictions/20220609-tax-fraud-connected-scientific-research-experimental-development-tax-incentive-program-quebec-taxpayers-sentenced.html.
  8. Government of Canada. (October 19, 2022). Eastern Ontario resident sentenced for fraudulent GST/HST refunds, Scientific Research and Experimental Development claims. Retrieved October 20, 2022, from: https://www.canada.ca/en/revenue-agency/news/newsroom/criminal-investigations-actions-charges-convictions/20221019-eastern-ontario-resident-sentenced-fraudulent-gsthst-refunds-scientific-research-experimental-development-claims.html.

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