The federal government is losing up to $ 23.4 billion a year in uncollected taxes, according to the Canada Revenue Agency’s more detailed effort to date to estimate Canada’s tax gap.
The tax gap refers to the difference between the amount of taxes Ottawa collects each year and the amount it could have collected if each individual and corporation paid all the taxes they legally owe. Part of the gap is due to illegal activities, such as undeclared cash payments to the construction industry or global companies hiding offshore assets. The gap may also include legal factors, such as unpaid tax debts due to personal or corporate bankruptcy.
Since 2016, the CRA has published seven reports related to specific components of the tax gap, such as personal income tax or sales taxes. All of these reports focused on fiscal year 2014. A new CRA report released on Tuesday is the agency’s first attempt to estimate the total tax gap in all tax categories. It covers the years from 2014 to 2018.
Leaks of bank records through revelations such as the 2016 Panama Papers and the 2017 Paradise Papers have pressured the CRA to increase its enforcement of offshore tax evasion in particular. Federal budgets in recent years have often provided the agency with more funding to increase its audit and enforcement powers in an effort to crack down on default and increase federal tax revenues.
Tuesday’s CRA report, which was drafted 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 aims to show that the agency is having some success in closing the gap.
The report says there was a total gross tax gap of between $ 35.1 billion and $ 40.4 billion in 2018 and states that the agency has been able to reduce it by almost half through its various compliance policies, giving resulting in a total net tax gap of $ 18.1. – billion and $ 23.4 billion.
The gap remained constant at 9 percent of federal revenue over the five years.
The report says it would be impossible to reduce the fiscal gap to zero, as it includes losses caused by issues the ARC cannot control through additional enforcement, such as bankruptcies.
The CRA provided an advance copy of the report to The Globe and Mail.
Kelly Taylor, managing director of the agency’s research and innovation lab, said Monday in an interview that the results show a “low and stable” fiscal gap.
Since this is the first such report, the CRA said it will provide a baseline for future reports that can show which areas of the fiscal gap are improving or getting worse.
The report says the agency is also looking for the best way to enforce tax obligations when payments are made using cryptocurrency.
“Certainly, the cryptocurrency is on the radar,” Dr. Taylor said. “This is a constantly evolving space.”
Tuesday’s report includes a section on the role of the underground economy in contributing to the personal income tax gap.
The CRA estimates that between $ 1 billion and $ 3 billion in taxes were not reported in 2018 due to hidden offshore investment income, while about $ 7.7 billion in possible personal income taxes were not reported due to the underground economy.
Of that $ 7.7 billion, some of the major areas of the underground economy are listed as construction, own, trade-related activities, and rent payments.
Throughout the report, the CRA warns that reaching specific estimates is a difficult task. In the case of hidden offshore investment income, the report says that complex structures are sometimes marketed by professionals as tax schemes that promise to reduce taxes.
“Data on these offshore corporations and trusts are scarce and it can be difficult to distinguish between the legitimate uses of these financial institutions from tax non-compliance,” the report states. Offshore leaks, as well as formal information exchange agreements, including electronic funds transfers and common information standards, “have increased the amount of data on these offshore entities and helped the CRA investigate cases. potential for international tax default “.
The Liberal Party’s 2021 platform pledged to increase the CRA’s budget to $ 1 billion a year “in order to close Canada’s fiscal gap” and said this would generate $ 11.9 billion over four years in additional tax revenue.
Finance Minister Chrystia Freeland’s 2022 budget fell far short of that promise, 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, with a net profit of $ 1.3 billion.
This rate of return is at odds with a statement made elsewhere in the budget that says every dollar added to the CRA’s budget since 2016 has yielded a return of five dollars.
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 make sure they are met. He also said Ottawa could have reached the limit of how much additional revenue can be earned through the application.
“It could be a case where they have reached a point of declining returns,” he said.
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