Canada could be facing significant “tax gap,” report finds

The Canadian government is likely owed billions of dollars, possibly tens of billions dollars, in unpaid taxes, according to a new report from the Conference Board of Canada.

The report acknowledges that the tax gap in Canada is currently not known. Instead, it uses estimates of the tax gap from other countries to suggest that the amount of government tax revenue lost to various forms of tax evasion, “unacceptable” tax avoidance, unpaid taxes and honest mistakes in Canada could range from $8.9 billion to $47.8 billion.

The federal government has recently stepped up its efforts to combat tax evasion and it has begun estimating certain elements of the tax gap as well, the report notes. So, absent a credible official estimate, the report projects the potential size of the tax gap in Canada, assuming that the Canadian gap is similar to other developed countries, including estimates from the U.S. and the U.K.

“[The estimate] also takes into account other studies that employ a top-down approach by estimating the size of a country’s shadow economy and then approximating the tax gap using that estimate and taxes paid as a share of gross domestic product in the observable economy,” the report says. “While this approach has obvious limitations for estimating the size of the gap, it does provide a comparative measure of the types of tax avoidance and a sense of how much each component could contribute to the overall gap.”

The leak of the Panama Papers last year helped highlight the scope of offshore tax evasion, the report notes. In addition, “Global attention has been focused on income inequality, concerns that real wage growth in the middle class has stagnated globally, and equal concerns that certain businesses and individuals are avoiding paying their fair share of taxes.”

The government could work to reduce the tax gap through measures such as more sophisticated evaluation and auditing, regular consultations with other tax authorities, learning from best practices worldwide and increased use of analytics, the report also suggests. In addition, it says measures to simplify Canada’s tax code and to ease the administration of the tax system would reduce filing errors and increase government revenue collection.

“When some individuals and companies do not pay their fair share of taxes, it increases the burden of funding public services on compliant taxpayers,” says Matthew Stewart, associate director, national forecast at the Conference Board, in a statement. “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.”

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