The federal government is missing out on up to $23.4-billion a year in uncollected taxes, according to the Canada Revenue Agency’s most detailed effort to date to estimate Canada’s tax gap.
The tax gap refers to the difference between how much tax Ottawa collects each year and how much it could have collected if every individual and corporation paid all of the tax they legally owed. Some of the gap is because of illegal activity, such as cash payments in the construction sector that go unreported or global companies that hide assets offshore. The gap can also include legal factors, such as tax debts going unpaid because of personal or corporate bankruptcies.
Since 2016, the CRA has published seven reports related to specific components of the tax gap – such as personal income tax or sales taxes. Those reports all focused on the 2014 tax year. A new CRA report released Tuesday is the agency’s first attempt to estimate the total tax gap across all categories of tax. It covers the years from 2014 to 2018.
Bank record leaks through disclosures such as the 2016 Panama Papers and 2017 Paradise Papers have pressed the CRA to increase its enforcement of offshore tax evasion in particular. Federal budgets in recent years have frequently provided the agency with more funding to boost its audit and enforcement powers in an effort to crack down on non-compliance and increase federal tax revenues.
Tuesday’s CRA report, which was produced by the agency and is not an independent analysis of the agency’s work, acknowledges the pressure to do more. The figures are presented in a way that is meant to show the agency is having some success at closing the gap.
The report says there was a total gross tax gap of between $35.1-billion to $40.4-billion in 2018 and claims the agency has been able to cut that nearly in half through its various compliance policies, resulting in a total net tax gap of between $18.1-billion and $23.4-billion.
The gap remained constant at 9 per cent of federal revenues over the five years.
The report states that it would be impossible to reduce the tax gap to zero, given that it includes losses caused by issues the CRA cannot control through added enforcement, such as bankruptcies.
The CRA provided an advance copy of the report to The Globe and Mail.
Kelly Taylor, director general of the agency’s research and innovation lab directorate, said in an interview Monday that the results show a “low and stable” tax gap.
Given that this is the first report of its kind, the CRA said it will provide a baseline for future reports that can show which areas of the tax gap are improving or worsening.
The report said the agency is also looking at how best to enforce tax obligations when payments are made via cryptocurrency.
“Certainly cryptocurrency is on the radar,” Dr. Taylor said. “This is an ever-evolving space.”
Tuesday’s report includes a section on the role of the underground economy in contributing to the collection gap in personal income taxes.
The CRA estimates that between $1-billion and $3-billion in tax went unreported in 2018 because of hidden offshore investment income, while about $7.7-billion in potential personal income tax went unreported owing to the underground economy.
Of that $7.7-billion, some of the main areas of the underground economy are listed as construction, tips, trade-related activities and rent payments.
Throughout the report, the CRA cautions that arriving at specific estimates is a challenging task. In the case of hidden offshore investment income, the report said complex structures are sometimes marketed by professionals as tax schemes that promise to reduce taxes.
“Data on these offshore corporations and trusts are sparse and it can be difficult to distinguish between legitimate uses of these financial entities from tax non-compliance,” the report states. Offshore leaks, as well as formal information sharing agreements, including electronic funds transfers and common reporting standards, “have increased the amount of data on these offshore entities and have helped the CRA investigate potential cases of international tax non-compliance.”
The Liberal Party’s 2021 platform pledged to increase the CRA’s budget by up to $1-billion a year “in order to close Canada’s tax gap” and said this would bring in $11.9-billion over four years in additional tax revenue.
Finance Minister Chrystia Freeland’s 2022 budget fell well short of that pledge, announcing $916-million spread over those same four years for CRA audits and compliance programs. The budget said this would generate more than $2.2-billion in new revenue over the same period, for a net gain of $1.3-billion.
That rate of return is at odds with a statement made elsewhere in the budget that says that every dollar added to the CRA’s budget since 2016 has yielded a five-dollar return.
Parliamentary Budget Officer Yves Giroux, a former senior CRA official, told The Globe earlier this year that the government may be underestimating its revenue targets to ensure they are hit. He also said Ottawa may have reached the limit of how much extra revenue can be gained through enforcement.
“It could be a case where they have reached a point of diminishing returns,” he said.
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Bill Curry