Tax Gap in Canada: A Conceptual Study

Chapter 1

Introduction

The fairness and integrity of the self-assessment tax system is rooted in compliance with the tax rules – that is, the right people paying the right amount of tax at the right time.

The fundamental importance of a fair and efficient tax system and, consequently, of ensuring compliance has led to an increased focus on accountability of tax administrations by taxpayers and stakeholders alike, as well as on performance measurement by governments. However, assessing compliance and the overall health of the tax system is a complex task. The domestic underground economy and international tax evasion, for example, are difficult to quantify because, by definition, they involve undeclared or under-declared income and assets or transactions that are deliberately hidden from the government.

Photo of a keyboard with a finger pressing a key that reads pay

Tax administrators use a variety of techniques to understand and combat non-compliance and their approaches are constantly evolving. In recent years, some tax administrations have started to use the tax gap as an additional tool to help evaluate the extent of lost tax revenue and the effectiveness of their compliance activities, and to communicate to the government and the public the results of their efforts.

This paper represents the first step in the Canada Revenue Agency's ( CRA ) work on the concept of the tax gap. As we begin this work, it is important that Canadians and stakeholders alike have a clear understanding of what a tax gap estimate is and what it can – and cannot – tell the CRA and Canadians.

To achieve this understanding, this paper:

  • Examines some of the key considerations related to tax gap estimation;
  • Outlines the approaches to tax gap estimation taken by key countries that publish such estimates;
  • Reviews the advantages and limitations of tax gap estimation and discusses the potential utility and relevance of the concept for the CRA; and
  • Identifies the next steps that the CRA will take on this issue.

In cooperation with the Department of Finance, the CRA is also releasing today a companion paper entitled Estimating and Analyzing the Tax Gap Related to the Goods and Services Tax/Harmonized Sales Tax, which contains an estimate of the tax gap related to Canada's Goods and Services Tax/Harmonized Sales Tax (GST/HST). The results indicate that the average estimated GST/HST gap over the 2000 to 2014 period was 5.6 percent of the total theoretical revenues with a relatively stable trend. The GST/HST estimate also demonstrates some of the insight that can be gained through tax gap estimation. 

Ensuring Compliance with the Federal Tax System

The CRA's compliance activities protect the integrity of Canada's self-assessment system by identifying and addressing those who do not accurately report income. Our compliance interventions follow an escalating approach, from influencing voluntary compliance to enforcing it.

  • We seek to influence compliance attitudes by increasing taxpayers' understanding of their tax obligations through targeted outreach activities, client service, and education.
  • We also conduct examinations, audits, investigations, and collection activities at the domestic and international levels to ensure compliance with Canada's tax laws, including payment of amounts owed.

In recent years, the CRA has taken significant action to detect, correct and deter non-compliance. This has included increasing the focus on high-risk segments of the population and reducing the burden on compliant and low-risk taxpayers, as well as reinforcing strategic partnerships with key countries and organizations, developing business intelligence tools to maximize the use of all available tax data, and enhancing risk assessment capacity.

Further investments to crack down on tax evasion and combat tax avoidance will increase the CRA's ability to find those who aggressively evade or avoid taxes, making the tax system fairer for everyone. To that end, Budget 2016 proposed to invest $444.4 million over five years for the CRA to enhance its efforts to crack down on tax evasion and combat tax avoidance by:

  • hiring additional auditors and specialists;
  • developing robust business intelligence infrastructure;
  • increasing verification activities; and,
  • improving the quality of investigative work that targets criminal tax evaders. 
These measures are expected to result in a revenue impact of $2.6 billion over five years.

The CRA will also continue ramping up its outreach efforts to ensure that taxpayers understand and meet their tax obligations. These efforts improve tax compliance through a "get it right from the start" approach to educate, inform and support taxpayers by improving service and encouraging voluntary compliance.

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