Fast facts
- Tax evasion is the act of evading the taxes that an individual or corporation is required to pay by not complying with
tax laws, and it is illegal.
- If a bank suspects an account is being used for criminal purposes of any kind it will report the activity and close
the account.
- The banking sector has long believed that tax transparency and the exchange of information between tax authorities in
different countries is the best way to combat tax evasion and is supportive of international standards put in place to
achieve this.
The bottom line
Banks firmly adhere to the laws in Canada and other countries where they carry on business, including those laws
designed to deter illegal activities such as tax evasion and money laundering. Canadian banks have implemented
comprehensive compliance policies and procedures to ensure that their products and services are not used for the purpose
of evading taxes.
What is tax evasion?
Tax evasion is the act of evading the taxes that an individual or corporation is required to pay by not complying with
tax laws, and it is illegal. This can be done by under-reporting taxable income or claiming a tax deduction that the
individual or corporation is not entitled to claim.
In some cases, tax evasion occurs when money is moved to another country with a lower tax rate by a Canadian resident
and income earned in that country is not reported to Canadian tax authorities when it should be.
Tax minimization is taking steps to minimize the amount of taxes paid. While tax evasion is illegal, tax minimization is
not as long as tax laws are followed. For example, investing money in a Registered Retirement Savings Plan (RRSP) is a
form of tax minimization because contributions made to the plan can be deducted from gross income at tax time, reducing
the amount of income tax paid that year. Tax minimization is an important part of personal financial planning.
Banks work to prevent tax evasion
Banks firmly adhere to the laws in Canada and other countries where they carry on business, including those laws
designed to deter illegal activities such as tax evasion and money laundering. Banks do not advise their clients to
evade taxes in Canada or elsewhere.
To prevent and detect cases of potential tax evasion, Canadian banks have implemented comprehensive governance and
compliance policies and procedures to ensure that the products and services they offer are not used for the purpose of
evading taxes. These include “know your client rules” as well as anti-money laundering (AML) and anti-terrorist
financing (ATF) reporting requirements. Banks have significantly increased their anti-money laundering controls and
expanded their compliance departments in the past decade to meet increasingly stringent requirements from Canadian and
international policy makers.
If a bank suspects an account is being used for criminal purposes of any kind it will report the activity and close the
account.
Canadian banks with foreign subsidiaries or foreign branches must implement a compliance program to detect money
laundering and terrorist financing similar to what is required here in Canada. Banks use their Canadian anti-money
laundering regime as a baseline and then overlay local regulations, policies, and procedures to ensure they are
compliant with the laws of the jurisdictions in which they operate.
Compliance regimes are supervised by senior management at the banks as well as by committees of the banks’ Boards of
Directors, which are appointed to oversee risk management and regulatory compliance with tax laws, securities laws, and
other rules imposed by banking supervisors.
To ensure internal processes within banks are effective at detecting tax evasion, banks are subject to regular oversight
by Canadian tax authorities and the banks’ prudential regulator, the Office of the Superintendent of Financial
Institutions (OSFI). All bank employees must also agree to strict internal codes of ethics.
The use of offshore accounts
Canadians are permitted to hold accounts offshore in other countries, and there are many legitimate reasons to do so,
including estate management, maintaining a vacation property or conducting business in that country.
Canada’s tax system is a self-assessment system and it is the responsibility of individuals and businesses to disclose
their foreign holdings to the Canada Revenue Agency (CRA) and pay the appropriate amount of Canadian tax owing. If a
bank believes that a client intends to commit a criminal offence and evade taxes, the bank would report that activity
and no longer do business with the client.
International efforts to prevent tax evasion
The banking sector has long believed that tax transparency and the exchange of information between tax authorities in
different countries is the best way to combat tax evasion on an international scale.
With that goal in mind, the banking sector complies with and supports new standards being put in place by the OECD,
known as the Common Reporting Standard (CRS). Under the CRS, all participating countries require financial institutions
to determine the tax residency of account holders. If the account holder is found to be a tax resident of another
country, information about the account holder and the account are automatically transferred to tax authorities in that
country. Canada is one of over 100 countries that have implemented the CRS and these international efforts significantly
enhance the ability of governments to tackle tax evasion.
Banks as taxpayers
Like many other Canadian businesses, banks are increasingly becoming export-oriented, growing their business operations
abroad with well-established subsidiaries in countries across the globe.
By competing globally and earning foreign income, banks not only bolster Canada’s international reputation, they
generate important economic benefits here at home. These benefits include highly-skilled, high-paying head office jobs
and higher profits from which dividends are paid to Canadian shareholders. It is important to remember that most
Canadians are shareholders in Canada’s banks through the Canada and Quebec Pension Plans, their employer pension plans,
RRSPs, mutual funds and direct investments.
As taxpayers, banks pay all taxes due on their business income in Canada and in other countries where they do business.
The banking sector is one of the largest sources of tax revenue in Canada. In 2023, banks in Canada paid approximately
$15 billion in taxes to federal, provincial and municipal governments across Canada.
Further reading:
Remarks to the Quebec National Assembly Committee on Public Finance re a Study on the Tax Havens
Phenomenon, November 2015
Remarks to the House of Commons Standing Committee on Finance re a Study on Tax Evasion and the Use
of Tax Havens, February 2013