The Liberals’ fiscal plan includes revenue from more tax penalties, which has raised eyebrows given the likely targets — corporations and high-income taxpayers — and a projected fiscal impact that’s likely overstated.
The Liberal Party of Canada has projected nearly $52 billion in new revenue over the next four years, of which $3.75 billion, or about 7%, would come from “increasing penalties and fines,” according to the Liberals’ fiscal and costing plan.
The party’s plan says the government will leverage technology at the Canada Revenue Agency (CRA) “to better identify and prosecute instances of tax evasion, fix loopholes and strengthen enforcement.” Combating tax evasion is already part of the CRA’s 2024–25 departmental plan.
The Liberals’ campaign provides no details about how the $3.75 billion was calculated, and the party didn’t respond to a request for comment. Voters are heading to the polls Monday.
“There’s no reference anywhere [in the Liberals’ platform] to legislating new penalties or fines,” said Fred O’Riordan, EY Canada’s national leader of tax policy in Ottawa. O’Riordan previously spent two decades with the CRA in various senior executive roles, including with the appeals branch and the international and large business directorate.
With no such reference, he assumes the amount is “revenue resulting from assessments that also include penalties and fines.” Those assessments could include gross negligence, which the CRA applies relatively frequently, he said. Under the Income Tax Act, the CRA may impose gross negligence penalties when a taxpayer knowingly or carelessly makes a false statement or omission in their tax return.
O’Riordan said CRA staff “are aggressive auditors by international standards, especially on international tax, transfer pricing, offshoring income and so on” — areas that focus on large corporations and high-income earners. The agency also undertakes targeted projects, focusing on the underground economy, for example. “You would expect to see some sort of uptick in assessments and associated revenues, and to some extent fines and penalties as well, associated with those [areas],” O’Riordan said.
The Liberals’ projected revenue from increasing penalties and fines is slated to begin in 2026-27, not this fiscal year, which “hints” of potentially more aggressive action by the CRA, O’Riordan said. That would align with the Liberals’ reference in its plan to identifying and prosecuting tax evasion.
‘Somewhat unsettling’
Rick Robertson, professor emeritus at Western University’s Ivey Business School in London, Ont., said the $3.75-billion projection was concerning, because it suggests that “there’s an awful lot of underlying tax that’s not being paid.”
O’Riordan said the amount “is somewhat unsettling,” especially if the targets are large corporations and high-income taxpayers. “There is already a very aggressive tax attitude towards those areas,” he said. He also noted that Canada’s high marginal tax rates incentivize tax avoidance.
Further, Canada has a productivity problem, and “if productivity is stalling, then incomes are stalling as well,” O’Riordan said. While the two main political parties both recognize in their platforms Canada’s urgent need for greater productivity, it’s unclear if their proposed measures to address productivity will work. “How are those revenue projections arrived at?” O’Riordan said. “There’s not much detail in these [platform] documents to kick those tires.”
In the case of enforcement-based revenue projections, they’re generally unrealistic: The CRA “may collect [the revenue], but they won’t retain it,” O’Riordan said. In federal budgets, when the Department of Finance adds enforcement resources to the CRA, the budgets project a return on that investment of about five to one, he said. The fiscal impact includes additional income tax plus interest and penalties, and the present value of future federal tax assessable arising from compliance actions, the CRA says online. The fiscal impact doesn’t account for tax disputes (which probably aren’t included because they take years to resolve).
If tax disputes were taken into account, “roughly half of that revenue disappears,” O’Riordan said, because many of the CRA’s assessments ultimately aren’t successful: “If there are fines and penalties, they’re refunded; if there’s interest that’s been paid, it’s refunded…. That’s … a waste of a lot of resources from the CRA.”
And those resources have increased substantially in recent years. Over the past decade, the number of CRA employees has increased substantially, ballooning to more than 59,000 employees from about 43,000.
Robertson noted an opposite approach south of the border. “In the U.S., they’re doing all they can to gut the [Internal Revenue Service],” he said, referring to recent staff cuts related to improved processes and tech innovation.
Last fall after a spending review, the CRA said it was restricting certain hiring activities and freezing non-critical overtime, as well as eliminating about 600 contract or temporary employees as it transitions away from pandemic operations. The Liberals’ fiscal plan, which acknowledges that the federal government has overspent, commits to capping public service employment.
O’Riordan suggested some of the CRA resources allocated to more assessments should be reallocated to dispute resolution mechanisms.
Simplifying the tax system
Tax compliance is the actual source of government revenue, said Peter Weissman, a partner with Cadesky Tax in Toronto. Rather than collecting penalties, “simplifying the tax system … would be money better spent,” he said.
If the Liberals win the election on Monday, they’re committed to a comprehensive review of the corporate tax system, while the Conservatives say they’ll launch a tax reform task force to deliver a “simple, fair” tax code.
There’s been no broad-based tax reform since 1972, when reforms were implemented following the Royal Commission on Taxation, chaired by accountant Kenneth Carter, in the 1960s. (Carter was named an Officer of the Order of Canada for his contributions to taxation.)
To best address tax avoidance, O’Riordan suggested a review of tax expenditures — such as tax credits, deductions and exemptions — because they can complicate the tax system. “Review them and eliminate them, so that you can broaden the [tax] base,” O’Riordan said. “And when the base starts to get broadened, you can start to lower the [tax] rates, and you can end up with a revenue-neutral result. You might even get more revenue, arguably.” The positive consequence would be greater tax compliance and less need of audits, he said.
Groups such as CPA Canada, the Canadian Tax Foundation, the C.D. Howe Institute and the University of Calgary School of Public Policy have long advocated for tax reform and will continue to do so as the new government forms.
With so many voices calling for tax reform, “hopefully, something will materialize out of this,” O’Riordan said.