Senior Manager, Research and Business Development
Forecasting and Analysis
The Paradise Papers are just the latest high-profile exposé of the financial dealings of the world’s wealthy. The documents released in early November contain more than 120,000 names of people and companies, including politicians, business leaders, firms, and royalty.
Some observers have been quick to call for investigations and prosecutions of those mentioned in the Paradise Papers. A poll commissioned in December indicated that 90 per cent of Canadians believe the use of tax havens is morally wrong and 87 per cent think they should be banned by law.1
The Canada Revenue Agency (CRA) indicated it would consider investigating Canadians named in the documents, of which there are more than 3,000.2 Subsequent to the Paradise Papers’ revelations, the agency announced that it had 123 audits underway from the larger 2016 Panama Papers leak, including several criminal investigations. The CRA had announced in 2016 an investment of $444 million to improve enforcement of measures against tax evasion.3
Yet, cracking down on offshore tax havens is much more difficult than it appears in headlines. First, utilizing a tax haven is not in itself illegal. There are subtle but real distinctions among different forms of actions that reduce taxation. Tax avoidance is defined as actions that are taken to minimize taxes that are within the letter of the law but contravene its object and spirit. Tax evasion involves deliberately ignoring the law, and has criminal consequences.4
Second, tax avoidance (whether technically legal or outright illegal) is just one component of the tax gap—an estimate of what a government should receive in revenues compared with what it actually collects. In addition to evasion and avoidance, governments can lose revenue due to criminal attacks, legal disputes, write-offs of tax debts, failure by tax filers to take reasonable care on their returns, or simple error.
Third, governments have limited information about the amount of money that it is missing. It is this challenge that the Conference Board has assessed. Our 2017 report, Canadian Tax Avoidance and Examining the Potential Tax Gap, provided a range of estimates for the federal tax gap. This analysis applied existing tax gap estimates from the tax agencies in the United States and United Kingdom, which are widely viewed to have more advanced measures of their respective tax gaps than does Canada.
Depending on the methodology used, the Conference Board estimates that the federal government alone could be short between $9 billion and $47.8 billion in revenue annually. On top of that, provincial governments would have their own individual tax gaps.
The federal government is beginning to fill in some of the holes around the tax gap. Since 2016, government analyses have calculated estimates of the personal income tax and goods and services/harmonized sales tax gaps (GST/HST).5 The Department of Finance estimated that, between 2000 and 2014, an average of 5.6 per cent of potential GST/HST revenues were lost due to non-compliance, worth approximately $4.9 billion in 2014. In 2017, the CRA estimated that it lost $8.7 billion in 2014, worth 6.4 per cent of the total personal income tax revenues collected. The CRA has indicated that it will produce an analysis in 2018 on the international component of the tax gap. This study should be much anticipated because it will begin to put some estimates behind the use of international tax havens.
Knowing the size and scale of the tax gap does not by itself collect additional tax revenues. However, it does identify the types of tax avoidance that are commonplace and lucrative—and just as importantly, the areas that collection can be done most efficiently. It would be virtually impossible for governments to collect every dollar of tax revenue owed. But collecting more unpaid taxes—without expending unreasonable time and financial resources to do so—should be an objective of governments and their tax agencies.
Related Live Webinar
Tax Avoidance in the U.S. – Lessons for Canada
The Conference Board of Canada, March 20, 2018 at 02:00 PM EDT