The CRA’s latest report in its tax gap series focuses on the corporate income tax gap — revealed to be the biggest gap yet.
The tax gap is the difference between taxes owed and taxes actually paid and collected. A dedicated CRA unit was established in 2016 to examine different parts of the gap and help target CRA compliance activities.
In its fifth report, released Tuesday, the CRA estimated the federal corporate income tax gap to be between $9.4 billion and $11.4 billion for the 2014 tax year, before accounting for audit results.
The estimate includes the tax gap for incorporated small and medium enterprises, and for large corporations. The former is estimated at between $2.7 billion and $3.5 billion; the latter, between $6.7 billion and $7.9 billion.
In a release, the CRA said that its efforts to address corporate non-compliance are expected to reduce the corporate tax gap by between 55% and 66%. That would put the gap at between $3.3 billion and $5.3 billion in 2014, or between 8% and 13% of corporate income tax revenue, the report said.
The agency said it uses analytical tools to risk-assess all large business corporate tax returns yearly, improving its ability to identify high-risk transactions and decide which taxpayers to audit each year. In 2014, less than 1% of corporate tax filers were large corporations, but they reported more than half of the total corporate taxable income, the report said.
Since 2016, the CRA has published four other tax gap reports with a focus on the 2014 taxation year. The first and second reports were released in June 2016, with the first detailing the tax gap concept, and the second estimating a tax gap of $4.9 billion in terms of non-compliance with GST/HST.
The third report, in 2017, estimated that the tax gap for individuals was almost $9 billion, or 6.4% of personal income tax revenue.
And the fourth report, released last year, estimated between $800 million to $3 million of tax revenue was lost because of offshore tax evasion by individuals, representing between 0.6% and 2.2% of personal tax revenue.
Cracking down on tax evasion and avoidance
CRA compliance efforts have been supported by more than $1 billion in government support, including investments from the federal budgets in 2016, 2017 and 2018, the CRA said in the release.
The latest federal budget committed $150.8 million over five years to hire additional auditors, build technical expertise in sectors of emerging risk, create a new data quality examination team and extend programs aimed at combatting offshore tax non-compliance. “These investments are helping the CRA crack down on tax evasion and aggressive tax avoidance,” the CRA said in the release, which detailed current compliance efforts.
For example, the CRA automatically accesses and reviews international electronic funds transfers over $10,000 entering or leaving Canada, representing over 1 million transactions each month.
“Reviewing these transfers helps us identify transactions on which taxes should potentially have been paid, and better risk-assess individuals and businesses,” the release said.
It also noted that Canada is among 70 jurisdictions that share country-by-country reports, which provide access to information about multinational corporations in every country in which they operate. The first exchanges of such information occurred in June 2018.
The CRA has also gained easier access to information on Canadians’ overseas bank accounts, with the first exchanges under the Common Reporting Standard (CRS) occurring last fall.
“With the implementation of the CRS, Canada and over 100 other jurisdictions have begun exchanging financial account information,” the CRA said in the release. “This information will help us connect the dots and identify instances where taxpayers have not complied with Canadian tax laws.”
The CRA said it intends to build on the tax gap series by producing studies on other areas of non-compliance and updating its tax gap estimates on a three-year cycle.
It also said it will continue to engage with external experts, stakeholders and the Parliamentary Budget Officer to ensure Canadians are informed about tax compliance.