Ottawa, February 13, 2017—The size of the tax gap in Canada—the difference between what a government should collect in tax revenues compared to the amount it actually brings in—is not well known. While other countries have calculated comprehensive assessments of the amount of revenue they are not collecting, Canada has not yet done the same.
“When some individuals and companies do not pay their fair share of taxes, it increases the burden of funding public services on compliant taxpayers,” said Matthew Stewart, Associate Director, National Forecast at The Conference Board of Canada. “It is not easy to estimate the tax gap, but doing so is an important step in eventually collecting the revenues that support government activities.”
- Applying estimates from other countries suggests that the federal tax gap could range between $8.9 billion and $47.8 billion annually.
- Factors that contribute to the loss of tax revenue include evasion, unacceptable avoidance, or simply mistakes on prepared returns.
- In recent years, the federal government has stepped up its efforts to increase tax collections and has begun to estimate elements of the tax gap itself.
A new Conference Board of Canada briefing, released today, discusses tax gap estimates in other jurisdictions and assesses the potential federal tax gap. In the absence of an overall estimate, this analysis seeks to provide a range of the potential size of Canada’s tax gap using the assumption that the size of the Canadian gap is similar to that in other countries. Depending on the methodology used, the federal government could be short between $9 billion and $50 billion in revenue annually.
Components of the tax gap can include:
- evasion—deliberately ignoring a specific part of a law to evade taxes;
- unacceptable avoidance of taxation—undertaking activities that comply with the letter of a law, but contravene the spirit and intent of the law;
- mistakes made by tax filers;
- nonpayment of assessed tax liability.
In recent years, the federal government has stepped up its efforts to increase tax collections and has begun to estimate elements of the tax gap itself. In June 2016, the Canada Revenue Agency (CRA) said non-compliance has caused an average annual loss in potential Goods and Services Tax/Harmonized Sales Tax revenues of 5.6 per cent from 2000 to 2014.
Actions that could help reduce the tax gap include more sophisticated evaluation and auditing, regular consultations with other tax administration authorities, learning from best practices worldwide, and increased use of data analytics.
Furthermore, measures to simplify Canada’s tax code and smooth tax administration would reduce the complexity of the tax system thereby reducing filing errors and increasing the revenue collected by governments.
The report, Canadian Tax Avoidance: Examining the Potential Tax Gap, was commissioned by SAS Institute. Matthew Stewart will be presenting the findings on a webinar on March 9, 2017, at 1 p.m. Eastern.