Tax gap methodological annex


© Her Majesty the Queen in Right of Canada, as represented by the Minister of National Revenue, 2022.

Cat. No. RV4-149/2-2022E-PDF (Electronic PDF, English)

ISBN: 978-0-660-38678-2

1. Introduction

Although it may appear to be a relatively simple concept, tax gap estimation is complex and requires nuanced analysis depending on the unique circumstances of each tax administration. For example, tax gap can be evaluated from a number of perspectives such as domestic vs. international, types of tax, and forms of non-compliance, each of which may require a unique methodology.Footnote 1 In addition, tax gap estimates often require the analysis of historical data, particularly when examining compliance and collection activities which can take multiple years to complete. For example, comprehensive audits of large corporations can take about eight years to finish. As a result, tax gap estimates often have a time lag between the tax years being examined and the publication year. In certain instances, a projection method is applied for more timely estimates. However, it is important to balance timeliness with other considerations such as the quality of tax gap estimates. 

All tax gap estimates are subject to varying degrees of uncertainty based on multiple factors, including the type of gap being estimated, the limitations of a particular methodology, and the quality of available data. To navigate these challenges, the CRA allocates dedicated resources to examine the different components of Canada’s federal tax gap, including updating methodologies and estimates on an ongoing basis. 

This methodological annex contains technical details related to the methods used to estimate different components of the overall federal tax gap. In previous publications, methodologies related to specific tax gap components were embedded within the annex of each corresponding report. However, given that this year’s report includes all the tax gap components published to date, a separate methodological annex was developed. In the overall tax gap report, two main forms of non-compliance are captured for personal income tax (PIT), corporation income tax (CIT), goods and services tax/harmonized sales tax (GST/HST), and excise revenueFootnote 2 :

Reporting non-compliance is generally difficult to measure since it involves income, assets, and economic activities that are deliberately hidden, or errors that can be difficult to detect. In contrast, the payment gap can be calculated directly using CRA accounting records – taxpayers have either paid or have not paid their taxes owing.

In general, there are two main approaches to estimating the reporting gap. A top-down approach uses independent external data, such as macro-economic data, to estimate the theoretical value of tax which is then compared with the actual tax amount reported. This approach is often used to estimate gaps related to indirect taxes such as GST/HST and excise revenue. In contrast, a bottom-up approach uses internal tax administration data, such as audit data, to extrapolate the level of non-compliance to the rest of the population. This approach is often used to estimate gaps related to direct taxes such as corporation income tax.

Currently, four tax gap components related to reporting non-compliance are estimated using a top-down approach and two components are estimated using a bottom-up approach. The payment gap is calculated using CRA accounting records. In addition, the overall tax gap report examines the impact of CRA’s compliance and collection activities that identify and reduce the tax gap for each tax type, referred to as the net tax gap. This reduction is calculated using CRA’s compliance and collection data, including additional federal tax adjustments from audits and additional tax revenue collected. It is important to note that all tax gap estimates are based on a “tax year” and in 2018 constant dollars to account for inflation. Therefore, figures in this year’s tax gap report are not directly comparable with other public figures published on Canada.ca. 

Figure 1: Overview of tax gap methodologies

Figure 1 is a schema showing the overview of tax gap methodologies

* Projection of potential federal tax adjustments was used for corporations since audits for tax years 2014 to 2018 have not all been finalized.

Image description

Figure 1 shows three approaches to tax gap methodologies (top-down, bottom-up, and calculation) and their corresponding components. Four components were estimated using the top-down methodologies: the PIT reporting gap for the underground economy, the PIT gap for hidden offshore investment income, the GST/HST reporting gap, and the excise reporting gap for the illegal production and/or smuggling of cigarettes. Two tax gap components were estimated using the bottom-up methodologies: the CIT reporting gap for small and medium enterprises, and the CIT gap for large corporations. The calculation was conducted for two other tax gaps: for all payment gaps and net tax gaps*.

This methodological annex is organized as follows. Sections 2 to 5 present reporting gap methodologies related to PIT, CIT, GST/HST, and excise revenue. Sections 6 and 7 present the methodologies related to the payment gaps and the net tax gaps for all tax types. Each of these sections highlights tax gap estimates, scope of analysis, key data sources, estimation and projection methods, key sources of uncertainty, and public references. Section 8 provides concluding remarks. 

2. Personal income tax (PIT) reporting gap methodology

Methodology overview
Tax gap component General approach Key data source Method
Domestic underground economy Top-down  Statistics Canada’s underground economy estimates Apply marginal effective tax rates to estimated taxable income in the underground economy
Hidden offshore investment income Top-down Global financial statistics and international banking data Based on the work of key academics

This section outlines the methodologies used to estimate PIT reporting non-compliance related to the domestic underground economy and hidden offshore investment income. For the domestic component, Statistics Canada’s underground economy estimates were used to approximate hidden sources of taxable income and the corresponding federal tax revenue loss. For the international component, global financial statistics and international banking data were used to estimate potential federal tax loss from hidden offshore investment income. The methodologies for these tax gap components remained largely consistent with the previous tax gap reports published in 2017 and 2018. For both components, the estimates were updated using the latest available data at the time of writing this report, where applicable.

An overview of the PIT reporting gap methodologies is illustrated below. Additional details on these methodologies can be found in sections 2.1 and 2.2. 

The image is described below
Image description

This figure represents the steps used to estimate the Personal Income Tax domestic reporting gap. The first step is an estimate of the underground economy. Next is the estimation of potential taxable income and finally the estimation of potential federal tax loss. 

This figure represents the steps used to estimate the Personal Income Tax international reporting gap. The first step is an estimate of global offshore wealth as well as the Canadian share. Next are the estimations of investment income earned, and unreported income, and finally an estimate of potential federal tax loss.

2.1 Domestic underground economy

Table 1: Personal income tax reporting gap from the domestic underground economy for tax years 2014 to 2018
  2014 2015 2016 2017 2018
In constant 2018 dollars ($ billions) $7.0 $7.3 $7.4 $7.9 $7.7
% of federal PIT revenue* 4.9% 4.8% 5.0% 5.1% 4.7%

* Public Accounts Canada was used to calculate percentage of federal tax revenue.

Scope: 

Key data sources:

Estimation and projection method:

The methodology for the domestic component of the PIT reporting gap is consistent with the one developed in CRA’s 2017 tax gap report. Tax gap estimates were updated using the latest data from Statistics Canada and Finance Canada.

Step
1
Statistics Canada’s underground economy estimates

The domestic component of the PIT reporting gap is commonly related to underground economic activities that are hidden from public authorities. This can include individuals working under the table or when net income is understated by under-reporting income or over-reporting costs. The starting point for this tax gap component is Statistics Canada’s underground economy estimates. These estimates aim to identify missing or unreported productive activity that is not captured in the official Gross Domestic Product (GDP) statistics. These estimates are first prepared by Statistics Canada on an expenditure-by-sector approach to arrive at a GDP estimate related to the underground economy. Subsequently, an income-based GDP related to the underground economy is developed by benchmarking the expenditure-based estimates to factors such as compensation to employees, gross operating surplus, and gross mixed income. These income-based estimates provide a general sense of the potential hidden income in Canada’s underground economy.

Step
2
Potential taxable income in the underground economy

Statistics Canada’s income-based GDP related to the underground economy is not perfectly aligned to the concept of hidden taxable income for individuals. As a result, it was necessary to take certain steps to transform the estimates to approximate the hidden taxable income base related to individuals. For example, this transformation requires removing elements related to corporations (e.g., gross operating surplus) and leaving only the components relevant for individual taxpayers. 

The potential taxable income in the underground economy for individual taxpayers are estimated based on two groups of individuals:

The table below shows the breakdown of key underground economic components for these groups of individuals.Footnote 4

Table 2: Estimated taxable income ($billions) in the underground economy by components and share of total, 2014 to 2018*

Individuals (compensation to employees)
Individuals (compensation to employees) 2014 2015 2016 2017 2018
Construction $6.5 (20%) $6.8 (21%) $7.0 (20%) $7.8 (22%) $8.0 (23%)
Tips $6.4 (12%) $6.6 (12%) $6.7 (12%) $6.6 (12%) $6.7 (12%)
Trade-related activities $2.5 (8%) $2.8 (8%) $2.8 (8%) $2.8 (8%) $2.8 (8%)
Other underground economic activities $12.3 (37%) $12.5 (37%)  $12.9 (37%) $13.0 (36%) $12.6 (36%)
Sub-total $27.7 (77%) $28.7 (78%) $29.3 (77%) $30.1 (77%) $30.0 (78%)
Self-employment (mixed income)
Self-employment (mixed income) 2014 2015 2016 2017 2018
Construction $2.1 (5%) $2.1 (5%) $2.2 (5%) $2.4 (6%) $2.4 (6%)
Rent/rooming and boarding $0.6 (2%) $0.7 (2%) $0.7 (2%) $0.7 (2%) $0.7 (2%) 
Other underground economic activities $5.1 (15%) $5.1 (15%) $5.2 (15%) $5.4 (15%) $5.0 (14%)
Sub-total $7.8 (23%) $7.9 (22%) $8.1 (23%) $8.5 (23%) $8.1 (22%)
Total (individuals and self-employment) $35.6 (100%) $36.6 (100%) $37.5 (100%) $38.6 (100%) $38.1 (100%)

* Totals may not add due to rounding. All amounts are in 2018 constant dollars. Source: Statistics Canada’s Underground Economy estimates

Step
3
Potential federal tax loss

To determine the federal taxes that would have been assessed if the income earned in the underground economy had been reported, the federal marginal effective tax rates of individuals in similar circumstances were applied. Therefore, each of the seven underground economy components (outlined in Table 2) had their own marginal effective tax rates for each tax year. They were then applied to the estimated taxable income in these sectors. These rates were calculated by Finance Canada using a micro-simulation model to account for statutory income tax rates, deductions and credits, and, when applicable, the clawbacks of federal income-tested benefits. 

Key sources of uncertainty:

Public references:

2.2 Hidden offshore investment income

Table 3: Personal income tax reporting gap from offshore investment income for tax years 2014 to 2018
  2014 2015 2016 2017 2018
In constant 2018 dollars ($ billions) $1.1 to $2.9 $1.3 to $3.5 $1.5 to $3.6 $1.5 to $4.2 $1.0 to $3.0
% of federal PIT revenue* 0.7% to 2.0% 0.8% to 2.3% 1.0% to 2.4% 0.9% to 2.7% 0.6% to 1.9%

* Public Accounts Canada was used to calculate percentage of federal tax revenue.

Scope: 

Key data sources: 

Estimation and projection method:

The methodology of the international component of the PIT reporting gap is consistent with the one developed in CRA’s 2018 tax gap report with minor adjustments where certain data for more recent years were not available. 

Step
1
Global offshore wealth stock

In order to estimate unreported offshore investment income for a given country, the first step is to estimate the global offshore wealth held by individuals.Footnote 5  In order to estimate the tax gap for 2014 to 2018, it was necessary to estimate offshore wealth for 2013 to 2017 since offshore investment income would be earned the year after. It is estimated that the global offshore wealth ranged between $7.9 trillion to $8.2 trillion in 2013 up to between $8.5 trillion to $9.5 trillion in 2017.Footnote 6

The global offshore wealth was allocated into asset types based on key academic literature.Footnote 7

Step
2
Canadian share of global offshore wealth

The next step is to estimate the portion of the global offshore wealth that belongs to individuals in Canada during 2013 to 2017. As shown in the table below, three sources were used to create a minimum/maximum estimate for Canada’s share of global offshore wealth. 

Table 4: Canadian global offshore wealth share, 2013 to 2017
  2013 2014 2015 2016 2017
Zucman (2014, 2015) 1.2% 1.2% 1.2% 1.2% 1.2%
Pellegrini et al. (2016) 2.2% 2.4% 2.4% 2.5% 2.7%
Pellegrini et al. (2016) – GDP approach 2.4% 2.3% 2.1% 2.0% 2.0%
Min/Max 1.2% to 2.4% 1.2% to 2.4% 1.2% to 2.4% 1.2% to 2.5% 1.2% to 2.7%

Step
3
Investment income earned

Individuals in Canada are usually required to pay tax on investment income generated by their wealth, but not on their stock of wealth. The investment income earned by Canadian residents is estimated by applying a rate of return on the estimated amount of hidden wealth held by individuals in Canada. 

Rates of return are estimated separately for each asset type.

Step
4
Unreported offshore investment income

Of the offshore investment income earned, it is assumed that only a portion of it is reported to the CRA. Due to the absence of reliable data, there are many possible estimates for unreported offshore investment income.Footnote 10

In the absence of reliable under-reporting rates related to offshore investment income, all of these rates were incorporated into the analysis (see Table 5). The sensitivity analysis presented below illustrates the impact of the assumptions used in this methodology.

Step
5
Potential federal tax loss

It is assumed that the international component of the PIT reporting gap stems primarily from individuals with high levels of income. Therefore, the highest federal statutory marginal tax rate was used for each tax year, ranging from 29% in 2014-2015 to 33% starting in 2016. The tax rate was adjusted for each asset type. For instance, the highest marginal rate is applicable to foreign interest and dividend income. However, for capital gains, the 50% inclusion rate is taken into account which reduces the effective rate to 14.5% for tax years 2014-2015 and to 16.5% starting in 2016. 

Using the parameters detailed in the previous steps, tax loss is first estimated by asset type and then added together to obtain the total federal tax loss due to unreported offshore investment income. The table below shows each step of the calculation for tax year 2018.

Table 5: Parameters and steps for estimating offshore investment income tax loss (2018*)
  Bank accounts Debt securities Asset securities
Hidden global offshore wealth stock (billions) (2017) $1,965 to $2,220 $1,769 to $1,998 $4,127 to $4,664
% Canadian (2017) 1.2% to 2.7% 1.2% to 2.7% 1.2% to 2.7%
% Return 1.0% 4.4% 2.0% (dividends) 
6.2% (capital gains)
% Unreported 60% to 80% 75% to 90% 75% to 90%
Unreported income (billions) $0.1 to $0.5 $0.7 to $2.3 $3.3 to $10.2
Effective tax rate 33% 33% 33% (dividends)
16.5% (capital gains)
Estimated tax loss (billions) $0.1 to $0.2 $0.3 to $0.8 $0.7 to $2.1
Total estimated tax loss (billions)   $1.0 to $3.0  

Totals may not add due to rounding. Annual exchange rates were applied to certain US dollar amounts for hidden global offshore wealth stock.

* Unless specified otherwise.

Key sources of uncertainty:

Table 6: Sensitivity analysis with a 10% increase in parameters for tax year 2018
Parameter Percentage change in estimated tax loss
Offshore wealth composition  
Bank deposit -2.6%
Asset securities +1.0%
Debts securities -0.4%
Canadian proportion +10.0%
Rate of return  
Bank accounts +0.6%
Debt securities +2.5%
Dividends +2.7%
Realized capital gains +4.2%
Reporting rate -9.1%

Public references:

3. Corporation income tax (CIT) reporting gap methodology

Methodology overview
Tax gap component General approach Key data source Method
Small and medium-sized enterprises (SMEs) reporting gap Bottom-up Random audit results Extrapolation with projection to more recent tax years
Large corporations reporting gap Bottom-up Risk-based audit results Extreme value method and clustering

This section outlines the methodologies used to estimate CIT reporting non-compliance related to incorporated SMEs and large corporations. For the SME population, results from random audits conducted during fiscal years 2013-14 to 2014-15 were used to estimate the reporting gap. For large corporations, two different methods were used to extrapolate risk-based audit results while minimizing selection bias. The methodologies for these tax gap components remained largely consistent with the previous tax gap report on corporate non-compliance, published in 2019. The estimates were updated using the latest CRA data with adjustments to better project the estimate for tax years beyond 2014.

An overview of the CIT reporting gap methodologies is illustrated below. Additional details on these methodologies can be found in sections 3.1 and 3.2. 

The image is described below
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This figure represents the steps used to estimate the Corporate Income Tax Small and Medium Enterprises reporting gap. The first step consists in using the random audit results to project for more recent tax years. Next, an indicator of the rate of non-compliance is used to estimate the potential federal tax loss. 

This figure represents the steps used to estimate the Corporate Income Tax large corporation reporting gap. The first step is using risk-based audit results to estimate the level of non-compliance. These results are then projected for more recent tax years to estimate the potential federal tax loss.

3.1 Small and medium enterprises

Table 7: Corporation income tax reporting gap from small and medium-sized enterprises for tax years 2014 to 2018
  2014 2015 2016 2017 2018
In constant 2018 dollars ($ billions) $2.6 to $3.4 $2.8 to $3.6 $2.9 to $3.7 $3.1 to $4.0 $3.3 to $4.2
% of federal CIT revenue* 6.3% to 8.1% 6.6% to 8.4% 6.8% to 8.6% 6.4% to 8.2% 6.6% to 8.3%

* Public Accounts Canada was used to calculate percentage of federal tax revenue.

Scope: 

Key data sources:

Estimation and projection method:

The methodology for the CIT SME reporting gap is consistent with the one developed in CRA’s 2019 report with minor adjustments to account for changes in non-compliance behaviour.

Step
1
CRA’s random audit results

The CRA’s most recent random audits of incorporated SMEs took place during fiscal years 2013-14 and 2014-15 and examined SMEs that filed a tax return for tax year 2011. Using a stratified random sampling methodology, the CRA completed over 4,500 full-scope audits of SMEs operating in 21 industry sectors. 

Among audited taxpayers, about 37.6% of SMEs were assessed with additional federal tax liability by an average amount between 1,690 to $2,160 for tax year 2011. Extrapolating the results to the SME population as a whole, the reporting tax gap is estimated to be between $2.5 billion to $3.1 billion for tax year 2011.Footnote 11

Step
2
Projection to more recent tax years

In order to account for changes in the SME tax base due to economic growth and changes in certain tax laws, compound annual growth rates of the total federal tax payable at initial assessment were applied to project the tax gap estimate for tax years 2014 to 2018. The table below shows the total federal tax payable at initial assessment and its growth rate for tax years 2014 to 2018. 

Table 8: Total federal tax payable at initial assessment for tax years 2014 to 2018
  2014 2015 2016 2017 2018
Total federal tax payable at initial assessment ($ billions) $23.7 $25.3 $26.6 $29.4 $31.4
Compound annual growth rate (R1)* 8.2% 7.8% 7.3% 7.8% 7.6%

* 2011 tax year was used as the baseline given that random audit results were for that year.

Step
3
Non-compliance rate indicator

In the previous corporate tax gap report (2019), it was assumed that non-compliance rates remained relatively stable during 2011 to 2014. However, given that this year’s report projects the SME reporting gap for tax years beyond 2014, the methodology was refined to approximate potential changes in non-compliance rates. This non-compliance rate indicator was developed by looking at the ratio between the estimated growth of corporate income in the underground economy and the actual growth of reported taxable income. A positive growth rate of this ratio would suggest that the corporate income from the underground economy grew at a faster rate than reported taxable income. In contrast, a negative growth rate would suggest that corporate income from the underground economy grew at a slower pace. The table below shows changes in the non-compliance rate indicator for tax years 2014 to 2018.

Table 9: Compound annual growth rate of the non-compliance rate indicator
  2014 2015 2016 2017 2018
Non-compliance rate indicator (R2)*  -3.5% -2.2% -1.8% -1.9% -1.5%

* 2011 tax year was used as the baseline given that random audit results were for that year.

Step
4
Potential federal tax loss

Using the two growth rates above, the SME reporting gap is calculated using the following formula for each tax year, i :

The image is described below
Image description

In order to gross up the SME reporting gap for a specific year, a compound annual growth rate and a non-compliance rate for that year were applied to the 2011 federal reporting gap for SMEs.

Key sources of uncertainty:

Public references:

3.2 Large corporations

Table 10: Corporation income tax reporting gap from large corporations for tax years 2014 to 2018
  2014 2015 2016 2017 2018
In constant 2018 dollars ($ billion) $7.2 to $9.0 $6.7 to $8.3 $7.4 to $9.2 $7.9 to $9.8 $9.0 to $11.3
% of federal CIT revenue* 17% to 22% 16% to 19% 17% to 21% 16% to 20% 18% to 22%

* Public Accounts Canada was used to calculate percentage of federal tax revenue.

Scope: 

Key data sources:

Estimation and projection methods:

The methodologies for the CIT large corporation reporting gap are largely consistent with the ones developed in the CRA’s 2019 report with minor adjustments to improve the quality of estimates. 

Step
1
CRA’s risk-based audit results

Unlike SMEs, the CRA relies exclusively on risk-based audits for the large corporate population due to the relatively small number of large corporations. Through these audits, the CRA closely examines relevant books and records of corporations to make sure they fulfill all of their tax obligations. While risk-based audits make efficient use of audit resources, non-compliance identified through these audits cannot be directly extrapolated to the population due to selection bias. Therefore, two statistical methodologies were applied to minimize selection bias and estimate the federal tax gap for large corporations. Due to the limitations of each method, one can underestimate the tax gap (extreme value methodology) while the other can overestimate it (cluster analysis). Therefore, both methods were used to create a range representing lower- and upper-bound estimates.

Step
2
Estimation

Extreme value methodology

The extreme value methodology in the context of estimating tax non-compliance has been employed by the US Internal Revenue Service to develop its large corporate tax gap estimates and it has been refined by key academics.Footnote 14

The extreme value methodology relies on risk-based audit results to derive a tax gap estimate based on an assumed power law distribution. Under a power law distribution, the amount of federal tax adjustments from audit is inversely related to a corporation’s non-compliance ranking in the population. This implies that the magnitude of non-compliance will tend to drop off exponentially as one moves down the ranks of corporations from the most to the least non-compliant.Footnote 15

The tax gap was estimated by applying ordinary least squares (OLS) regression based on the relationship between the logarithm of corporation non-compliance rank and the logarithm of audit adjustments. Figure 2 is an illustration of the OLS regression used to estimate the large corporate reporting gap. The main assumption for this methodology is that the taxpayers with highest adjustments have already been audited by the CRA. However, since risk-based audit selection may not always identify the most non-compliant corporations, this method can underestimate the tax gap. Therefore, the tax gap estimate from this method was used as a lower-bound estimate. 

Figure 2: OLS regression to estimate the large corporate tax gap

Figure 2 is a graphic showing the OLS regression to estimate the large corporate tax gap.
Image description
Figure 2 Key Statistics
R-Square 0.97
Adjusted R-Square 0.97
Intercept 9.31
(0.028)
Slope -1.32
(0.013)
Mean Square Error 0.009

Cluster analysis

In addition to the extreme value methodology, a clustering technique was used to determine whether large corporations could be organized into relatively distinct clusters on the basis of key characteristics and to estimate the potential level of non-compliance within each cluster.

To improve the cluster analysis from the 2019 tax gap report, the methodology was refined to increase the efficiency of the clustering algorithm. In particular, this year’s algorithm combined k-means (for numerical characteristics) and k-modes (for categorical characteristics) clustering. It also automatically selected the optimal number of clusters based on cluster distances. In addition, an iterative approach was taken to improve the accuracy of the estimate by estimating the gap multiple times and taking the average. 

Once the clusters were formed, the potential tax gap for each cluster was estimated based on the ratio between the federal tax adjustments found by audit and the reported revenues of audited corporations at initial assessment. This ratio was then used to estimate the potential federal tax adjustment for each cluster. The main assumption is that the ratio between federal tax adjustments and reported revenues for audited corporations is likely to be the same for unaudited corporations within the same cluster.Footnote 16  The overall federal tax gap is estimated by aggregating the projected amounts of non-compliance across all clusters. It is important to note that cluster analysis can overstate the tax gap since it does not account for the fact that large corporations selected for audit may still be more likely to have a higher level of non-compliance compared to those that are not audited within the same cluster. Therefore, the tax gap estimate from this method was used as an upper-bound estimate for large corporations.

Box 1: An illustrative example of cluster analysis

Image description

The left-hand side illustrates the entire large corporate population, some that have been subject to a risk-based audit (red dots) and others that have not been audited (yellow dots). A clustering algorithm is used to group the corporations into clusters (green, orange, blue circles) based on key characteristics including, among others, corporation type, industry sector, financial ratios, the presence of foreign affiliates, and the level of international transactions. Once they are grouped together, federal tax adjustments from already audited corporations (red dots) are extrapolated to the entire cluster to estimate the potential federal tax adjustment, including unaudited corporations (yellow dots).

Step
3
Projection

Comprehensive risk-based audits can take multiple years to complete, particularly for large corporations, due to the complex and often global nature of their business activities. Therefore, it was necessary to analyze historical audit data from earlier tax years to estimate and project the tax gap for tax years 2014 to 2018. Moreover, to make audit adjustments comparable over years, they included audit reassessments up to eight years after each tax year. Applying a similar method used by the US, the tax gap estimates were projected to tax years 2014 to 2018. 

The projection method is based on estimating the voluntary reporting rate (VRR) and assuming that this rate remained relatively consistent from year to year. The VRR was calculated from reported federal taxes and the estimated tax gap. The average VRR from 2010 and 2011 tax yearsFootnote 17  was used, which was 72%. 

The image is described below
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Voluntary reporting rate (VRR) equals to the average of two ratios: federal tax in 2010 divided by the sum of the tax gap in 2010 and federal tax in 2010, and federal tax in 2011 divided by the sum of tax gap in 2011 and federal tax in 2011.

Step
4
Potential federal tax loss

Using this rate, the CIT reporting gap from large corporations was projected for tax years 2014 to 2018 through the following formula for each tax year, i :

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Tax gap for each tax year equals federal tax for that year multiplied by the ratio of 1 minus the voluntary reporting rate divided by the voluntary reporting rate. 

Key sources of uncertainty:

Public references:

4. Goods and services tax/harmonized sales tax (GST/HST) reporting gap methodology

Methodology overview
Tax gap component General approach Key data source Method
GST/HST reporting gap Top-down Data from Finance Canada, Statistics Canada, Canada Border Services Agency, and the CRA Difference between total theoretical tax liability and actual assessed tax

This section outlines the methodology used to estimate the federal GST/HST reporting gap. The methodology for this tax gap component remained largely consistent with the previous tax gap report on GST/HST non-compliance published in 2016. The estimates were updated using the latest data from Finance Canada, Statistics Canada, CBSA, and the CRA.

An overview of the GST/HST reporting gap methodology is illustrated below. Additional details on this methodology can be found in the following pages. 

The image is described below
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This figure represents the steps used to estimate the GST/HST reporting gap. The first step is to estimate the total theoretical tax liability Next, the federal GST/HST assessed is calculated. Finally, the difference between the theoretical tax liability and the amount of tax assessed is calculated.

Table 11: Goods and services tax/harmonized sales tax reporting gap for tax years 2014 to 2018
  2014 2015 2016 2017 2018
In constant 2018 dollars ($ billion) $4.1 $4.8 $3.9 $3.6 $4.3
% of overall GST/HST revenue* 10.2% 11.7% 9.1% 8.2% 9.5%

* Public Accounts Canada was used to calculate percentage of federal tax revenue.

Scope: 

Key data sources:

Estimation and projection method:

The difference between this theoretical liability and the federal portion of the assessed GST/HST represents the federal GST/HST reporting gap. Amounts for assessed GST/HST are based on data for declared GST/HST revenue from the CRA and the CBSA for tax years 2014 to 2018.

Step
1
Estimate total theoretical tax liability

The first step is to estimate the total theoretical federal GST/HST liability. It is estimated by determining the tax base that would result from full compliance using a number of economic and administrative data sources (as noted below) and then multiplying the base by the federal GST/HST rate.

The tax base is comprised of household expenditures, residential construction, and the expenditures of entities that produce GST/HST exempt servicesFootnote 18 , including public sector bodies, listed financial institutions, and certain other businesses. 

Moreover, since economic activities taking place in the underground economy are not fully captured in the National and Provincial Economic Accounts, each of the estimated tax base components are adjusted to account for the underground economy. The adjustment factors are derived from Statistics Canada’s estimates of the underground economy. For example, the consumer expenditure tax base is grossed up by a factor ranging from 2.8 per cent to 3.1 per cent depending on the year, which is derived by dividing the estimated GDP in the underground economy by reported GDP related to household final consumption expenditure.

Step
2
Calculate federal GST/HST assessed

Assessed taxes are based on data for declared federal-provincial GST/HST revenue from the CRA and CBSA. Certain adjustments are required to account for revenues foregone due to intentional tax policy design that would otherwise count towards assessed taxes (and are included in the theoretical tax liability). These adjustments include:

Once the federal-provincial GST/HST revenues have been adjusted by the above elements, the federal portion of the revenues is determined using the HST Revenue Allocation Framework, which determines the revenues shares of the federal government and HST provinces using economic data from Statistics Canada and administrative data from the CRA and the CBSA.

Step
3
Difference between the theoretical tax liability and assessed tax

The federal GST/HST reporting gap is estimated by difference between the theoretical tax liability that would result from full compliance and assessed GST/HST:

The image is described below
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GST/HST gap equals theoretical tax liability minus assessed tax.

Key sources of uncertainty:

Public references:

Estimating and analyzing the tax gap related to the goods and services tax/harmonized sales tax (2016). Canada Revenue Agency.

5. Excise reporting gap methodology

Excise reporting gap methodology
Tax gap component General approach Key data source Method
Federal cigarette duty reporting gap Top-down Data from Statistics Canada, Health Canada, the CRA, and the Canada Border Services Agency Gap analysis

This section outlines the methodology used to estimate the excise reporting gap related to the illegal production/smuggling of cigarettes.Footnote 19  The methodology for this tax gap component remained largely consistent with the previous tax gap report on excise non-compliance published in 2020. A separate econometric model could not be replicated for tax years beyond 2014 due to data limitations. The estimates were updated using the latest data from Statistics Canada, Health Canada, the CRA, and the CBSA.

An overview of the excise reporting gap methodology is illustrated below. Additional details on this methodology can be found in the following pages. 

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This figure represents the steps used to estimate the Federal cigarette duty gap. The first step is to estimate the total consumption and then the legal consumption. It is then possible to estimate the illegal consumption to finally obtain an estimate of potential federal tax loss.

Table 12: Federal cigarette duty reporting gap for tax years 2014 to 2018
  2014 2015 2016 2017 2018
In constant 2018 dollars ($ billions) $0.5 $0.5 $0.4 $0.3 $0.4
% of overall federal excise duties,
taxes and other specific levies revenue*
4.2% 4.1% 3.2% 2.9% 3.3%

* Public Accounts Canada was used to calculate percentage of federal tax revenue.

Scope: 

Key data sources:

Estimation and projection method:

The federal excise reporting gap is measured by estimating the potential consumption of illegal cigarettes by comparing total consumption levels with legal consumption levels. The excise duty rate is then applied to the assumed level of illegal consumption to estimate the potential federal tax loss. 

Step
1
Total consumption estimate

Survey results from Statistics Canada related to smoking prevalence rates (percentage of smokers in Canada) and smoking intensity (average number of cigarettes smoked per day by daily and occasional smokers) were used.

Total reported consumption is calculated separately for daily and occasional smokers. It is the product of the number of smokers and the consumption intensity. The number of smokers is calculated as the product of the population aged 15 and over and the smoking prevalence rate. The consumption intensity is calculated as the product of the average number of cigarettes smoked per day and the number of smoking days.

An uplift factor is then applied to correct for under-reporting related to smoking prevalence.Footnote 20  This report uses the 35% under-reporting rate calculated by Guindon et al. (2017), corresponding to an uplift factor of 1.54. This adjustment is consistent with the United Kingdom’s approach to estimating their cigarette excise duty gap. The uplift factor is calculated as:

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Uplift factor equals the ratio of 1 and 1 minus underreporting rate.

The total consumption is calculated as the product of the total reported consumption and the uplift factor.

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The total consumption equals the multiplication of the total reported consumption and uplift factor.

Step
2
Legal consumption estimate

The number of tax-paid cigarettes was estimated using tax information on manufacturers in Canada, importers of cigarettes, and duty-free shops. To estimate RYO cigarettes, we used cigarette fine-cut tobacco sales data, expressed in units of weight (kilograms), as reported by tobacco manufacturers to Health Canada. 

The number of cigarettes that have expired or have been exported are subtracted since there are quantities for which producers or importers are entitled to claim reimbursements (referred to as “refunds”).

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Legal consumption equals domestic production plus imports plus roll-your-own cigarettes minus refunds.

Step
3
Illegal consumption estimate

Illegal consumption is estimated by taking the difference between total consumption and legal consumption of cigarettes.

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Illegal consumption equals total consumption minus legal consumption.

Step
4
Federal cigarette duty gap estimate

The federal cigarette duty tax gap is then estimated by multiplying the average federal cigarette duty rate (for five cigarettes) by the magnitude of the illegal consumption (number of illegal cigarettes). The average federal duty rate corresponds to the average of the official duty rates on a daily basis between January 1st and December 31st of each year.

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Federal cigarette duty gap equals illegal consumption multiplied by federal cigarette duty rate divided by 5.

Details of the calculations are presented in the table below.

Table 13: Steps for estimating federal excise duty gap for tax years 2014-2018
  2014 2015 2016 2017 2018
Estimate of consumption from survey (billions of cigarettes) 22.9 21.6 21.1 20.1 19.03
Uplift factor 1.54 1.54 1.54 1.54 1.54
Step 1: Total consumption (billions of cigarettes) 35.2 33.3 32.5 30.9 29.3
Step 2: Legal consumption (billions of cigarettes) 30.5 28.8 29.0 27.8 26.0
Step 3: Illegal consumption (billions of cigarettes) 4.6 4.4 3.5 3.2 3.4
Federal cigarette excise duty rate* $0.51456 $0.52575 $0.52575 $0.53602 $0.58742
Step 4: Federal excise duty gap ($ billions)** $0.5 $0.5 $0.4 $0.3 $0.4

* Amounts are in nominal dollars.

** Amounts are in constant 2018 dollars.

Note: numbers may not add up due to rounding.

Key sources of uncertainty:

Table 14: Sensitivity analysis with changes to the under-reporting assumption for tax year 2018*
Under-reporting assumption Uplift factor Total consumption estimate (billion cigarettes) Illegal consumption estimate (billion cigarettes) Federal cigarette duty tax gap estimate ($ billion)
30% 1.43 27.2 1.2 $0.1
35% 1.54 29.3 3.3 $0.4
40% 1.67 31.7 5.8 $0.7
45% 1.82 34.6 8.6 $1.0

* Figures may not add due to rounding.

Public references:

6. Payment gap methodology

Methodology overview
Tax gap component General approach Key data source Method
Payment gaps Calculation CRA accounting data Calculate uncollected tax revenue after payment due date

This section outlines the methodology used to calculate the payment gaps for each tax type. The methodology was adjusted from the CRA’s previous payment gap publication (2020) in order to add payment gaps to the reporting gap estimates. In addition, the payment gaps were calculated using the latest CRA data at the time of writing this report. 

An overview of the payment gap methodology and its steps is illustrated below. Additional details on the methodology can be found in the following pages.

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This figure represents the steps used to estimate the payment tax gap. First is the establishment of payment due dates. Next is a calculation of payment gap from the outstanding balance and finally, an estimate of payment gap by tax type.

Table 15: Total gross payment gap for tax years 2014 to 2018
  2014 2015 2016 2017 2018
In constant 2018 dollars ($ billions) $5.2 $7.8 $7.9 $9.3 $9.5
% of overall federal tax revenue* 2.2% 3.1% 3.2% 3.6% 3.5%

* Public Accounts Canada was used to calculate percentage of federal tax revenue.

Scope: 

Key data sources:

Estimation and projection method:

Step
1
Define payment due dates

Payment tax gap occurs when assessed taxes are not fully paid on time by taxpayers for a particular tax year. A gross payment tax gap was calculated right after the payment due date, which can vary depending on the tax type. The payment due date may coincide with a filing due date but in some cases, it can be different.Footnote 25  Since each transaction (e.g. payment) may take several days to be posted in the CRA’s accounting system, the gross payment tax gap was calculated 10 days after the actual payment due date to account for potential processing times. The payment due dates for each tax type are outlined below.

Figure 3: Payment due dates by tax type

PIT
  • April 30th*
CIT
  • 2nd or 3rd month after a reporting period end date
GST/HST
  • Annual filers who are individuals: April 30th
  • Monthly and quarterly filers: 1 month after a reporting period end date
  • Other annual filers: 3 months after a reporting period end date
Exise
  • 1 month after a reporting period end date

* A due date has been adjusted accordingly if a deadline falls on a weekend

Step
2
Calculate payment gaps from outstanding balance

Before presenting how the payment gaps are calculated, it is important to highlight certain key features of payment non-compliance that helped shape the methodology. First, payment non-compliance from a tax gap perspective is different from a tax administration perspective. From a tax gap perspective, payment non-compliance is related to foregone tax revenue regardless of whether it is collectable or not. In contrast, from a tax administration perspective, what matters is collectable outstanding debt, whether or not it is a tax, interest, or penalties. Therefore, the payment gaps in this report do not measure the overall outstanding debt (which can include interests and penalties) and instead calculates uncollected tax revenue, even when it becomes uncollectable (i.e., write-offs). Second, the CRA is responsible for collecting certain provincial taxes and always pays provincial tax liabilities first under federal-provincial tax collection agreements (before any collection actions are completed).Footnote 26  Therefore, all of the payment gap is generally considered to be part of the federal tax debt from a tax gap perspective.Footnote 27  This is why certain provincial taxes owed are included in the scope of the payment gap. Finally, the payment gap for a given tax year is constantly changing due to reassessments by the CRA (e.g., audit results increasing or decreasing the balance owing) and payments by taxpayers (e.g., reducing the tax debt by making payments to the CRA). Therefore, it is particularly important to treat the payment gap as an evolving measure rather than a static figure at a point in time. To better account for these changes, the gross and net payment gaps were calculated separately. This was also necessary in order to add the payment gaps to reporting gap estimates.

Given these unique features, a methodology was specially developed to derive the payment gap from outstanding tax debt. 

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Payment gap equals outstanding debt minus interest and penalties plus write offs. 

Where:

Step
3
Payment gap by tax type

The PIT payment gap in this report includes unpaid federal personal income tax, unpaid provincial personal income tax (except Quebec), unpaid First Nations personal income tax, repayable deductions and credits, and all uncollectable debt (i.e., write-offs). According to the findings from the previous study, the individual payment gap is at its highest level after one year. 

The CIT payment gap includes unpaid federal corporate income tax, unpaid provincial corporate income tax (except in Quebec and Alberta), and all uncollectable tax debt (i.e., write-offs). Corporations can range from small businesses to multinational corporations. The corporation payment gaps for earlier tax years reached their highest level after the fifth or sixth year as complex audits with high adjustments were completed around that time. From there, the payment gap declined as corporations paid down their tax debt. 

The GST/HST payment gap includes unpaid GST (federal sales tax), unpaid HST (harmonized sales tax of relevant provinces), unpaid sales tax for First Nations governments, unpaid sales tax for certain financial institutions, and all uncollectable tax debt (i.e., write-offs). The GST/HST payment gap tends to be at its highest level after the first two years. From there, the payment gap starts declining as taxpayers pay off their outstanding tax debt.

The excise payment gap includes unpaid excise duties and taxes as well as all uncollectable tax debt (i.e., write-offs). Between tax years 2017-2018, the payment gap ranged from around $0.1 billion to $0.2 billion, most of which came from a small number of licensees/registrants. Given the small number of non-compliant licensees/registrants and the negligible payment gap for tax years 2014 to 2016, the exact amounts could not be reported for previous tax years to maintain taxpayer confidentiality.

The total gross payment gap includes payment gaps for individuals, corporations, GST/HST registrants, and excise licensees/registrants. Over the study period, the payment gap stemmed largely from individuals (around 60%) and GST/HST registrants (around 30%). Corporations had relatively low levels of payment non-compliance (around 10%)Footnote 28  and the excise payment gap was mostly negligible. 

Figure 4: Gross payment tax gap by taxpayers* ($ billion)

Figure 4 is a bar chart depicting the gross payment tax gap by taxpayers in billions of dollars.

* Does not include non-residents. All amounts are in 2018 constant dollars.

Source: CRA’s accounting systems as of June 2021.

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Figure 4: Gross payment tax gap by taxpayers* ($ billion)
Tax Year 2014 2015 2016 2017 2018
Individuals $1.8 $4.8 $5.1 $6.2 $6.3
Corporations $1.2 $0.6 $0.5 $0.7 $0.7
GST/HST registrants $2.2 $2.3 $2.2 $2.4 $2.2
Excise licensees/registrants $ -** $ -** $ -** $0.1 $0.2

* Does not include non-residents. All amounts are in 2018 constant dollars.

** The excise payment gaps for tax years 2014 to 2016 were negligible due to high levels of regulation and compliance. The exact tax gap amount is not reported to maintain taxpayer confidentiality.

Key sources of uncertainty:

Public References:

7. Net tax gap methodology

Methodology overview
Tax gap component General approach Key data source Method
Net tax gaps Calculation/projection CRA compliance and collections data Calculate impact of CRA compliance and collections and subtract from the gross tax gap

This section outlines the methodology used to calculate the net tax gaps for each tax type. The latest CRA data at the time of writing this report were used. Certain projections were required for reassessments (e.g., audits) that can take multiple years to complete.

An overview of the net tax gap methodology and its steps is illustrated below. Additional details on the methodology can be found in following pages.

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This figure represents the steps used to estimate the net tax gap. First is the estimate of initially reported amounts, then the estimate of the impact of compliance. Next is an estimate of the impact of collections and finally, an estimate of net gaps by tax type.

Table 16: Total net tax gap for tax years 2014 to 2018
  2014 2015 2016 2017 2018
In constant 2018 dollars ($ billions) $15.9 to $20.2 $17.4 to $22.0 $17.4 to $22.1 $17.9 to $23.5 $18.1 to $23.4
% of overall federal tax revenue* 7% to 9% 7% to 9% 7% to 9% 7% to 9% 7% to 9%

* Public Accounts Canada was used to calculate percentage of federal tax revenue.

Scope: 

Key data sources:

Estimation and projection method:

Step
1
Initially reported amounts

Given that compliance activities for tax years 2014 to 2018 have not all been completed, it was necessary to project the impact of compliance. To develop this projection method, it was first necessary to examine how taxpayers initially report their taxes on their first submission of their tax returns. These amounts were examined to establish a baseline of how the taxpayer population and the tax system (e.g., tax rates) have changed during tax years 2014 to 2018. For consistency, initial assessments up to one year after a given tax year were examined. Specifically:

Step
2
Impact of compliance

The impact of compliance activities mainly includes adjustments to taxes found by audits.Footnote 30  Since audits may take several years to complete, especially for taxpayers with high adjustments, it was important to consider audit results as of eight years after a given tax year. The eight year period was selected because the majority of the assessed tax amounts do not change significantly after this time period. However, given that the trend for adjustments from audit for GST/HST registrants is slightly different, those adjustments were projected using the results as of five years after a given tax year. Given that the overall tax gap report examines tax years 2014 to 2018, it was necessary to examine historical data to project the impact of CRA compliance for these tax years. The following steps were taken to project the impact of compliance:

A. Calculate a ratio of compliance results and initially reported taxes (CRR) for tax years 2010 to 2012Footnote 31  and find an average for those years:

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The compliance results ratio and initially reported taxes (CRR) is an average over tax years 2010 to 2012 of the ratio of the compliance results on initially reported taxes.

B. Project compliance resultsFootnote 32  based on the ratio and initially reported taxes:

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Projected compliance results for a specific tax year equal initially reported taxes for that year multiplied by the CRR.

C. Calculate the net tax gap for each tax year:

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Projection of net reporting tax gap for a specific year equals the projected tax gap for that year minus projected compliance results for that tax year.

The main assumption of this projection approach is that the ratio of compliance results to the initially reported taxes is relatively constant over time. This assumption will be monitored and the impact of compliance will be updated as more recent compliance data becomes available. 

Step
3
Impact of collections

The impact of collections includes all the changes related to the payment gap starting from the payment due date to 10 years after a given tax year. This 10 year period was selected based on CRA’s internal assessment on the evolution of the payment gap. This also helped account for certain compliance activities that may impact the payment gap. It is important to note that the payment gap can change due to factors other than CRA collection activities such as reassessments and voluntary payments. For example, audit reassessments may increase the payment gap while appeal reassessments and voluntary payments may decrease it.

Given that projecting the impact of collections involves identifying both increases and decreases to the payment gap, it was necessary to project a net payment tax gap, defined as the payment tax gap 10 years after a given tax year. The following steps were taken for this projection approach:

A. Calculate a ratio of net payment tax gap and initially reported taxes (PTGR) for tax years 2007 to 2010Footnote 33  and find an average for those years:

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Payment tax gap ratio (PTGR) is an average over tax years 2007 to 2010 of the ratio of the net payment tax gap and initially reported tax. 

B. Project net payment tax gap based on the ratio and initially reported taxes:

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Projection of the net payment tax gap for a specific year equals initially reported taxes for that year multiplied by the payment tax gap ratio (PGTR).

The main assumption of this projection approach is that taxpayers pay out the same portion of reported taxes 10 years after a given tax year. This assumption will be monitored and the impact of collections will be updated as more recent collections data becomes available.

Step
4
Net gaps by tax type

The table below presents the net tax gaps by tax types. For more information on the tax gap results, see the overall federal tax gap report on Canada.ca.

Table 17: Net tax gap by components for tax years 2014 to 2018* (in billions)
  2014 2015 2016 2017 2018
Individuals $7.8 to $9.6 $8.2 to $10.4 $8.6 to $10.7 $9.0 to $11.8 $8.3 to $10.3
Corporations $4.2 to $6.7 $4.3 to $6.7 $4.6 to $7.2 $4.9 to $7.7 $5.1 to $8.3
GST/HST $3.4 $4.3 $3.8 $3.6 $4.3
Excise $0.5 $0.5 $0.4 $0.4 $0.4
Total $15.9 to $20.2 $17.4 to $22.0 $17.4 to $22.1 $17.9 to $23.5 $18.1 to $23.4

* All amounts are in constant 2018 dollars. Totals may not add due to rounding.

Key sources of uncertainty:

8. Conclusion

The CRA is committed to openness and transparency as a world-class tax and benefit administration. Therefore, the CRA continues to study and publish Canada’s federal tax gaps, including the methodologies underlying each tax gap component. This methodological annex outlined technical details related to these methods, including the scope of analysis, data sources, estimation and projection methods, sources of uncertainty, and public references. High-level summaries of Canada’s tax gap methodologies are presented below:

Figure 5: Tax gap components and their estimation steps

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The first line of the figure represents the steps used to estimate the Personal Income Tax domestic reporting gap. The first step is an estimate of the underground economy. Next is the estimation of potential taxable income and finally the estimation of potential federal tax loss. The second line of the figure represents the steps used to estimate the Personal Income Tax international reporting gap. The first step is an estimate of global offshore wealth as well as the Canadian share. Next are the estimations of investment income earned, and unreported income, and finally an estimate of potential federal tax loss. The third line of the figure represents the steps used to estimate the Corporate Income Tax Small and Medium Enterprises reporting gap. The first step consists in using the random audit results to project for more recent tax years. Next, an indicator of the rate of non-compliance is used to estimate the potential federal tax loss. The fourth line of the figure represents the steps used to estimate the Corporate Income Tax large corporation reporting gap. The first step is using risk-based audit results to estimate the level of non-compliance. These results are then projected for more recent tax years to estimate the potential federal tax loss. The fifth line of the figure represents the steps used to estimate the GST/HST reporting gap. The first step is to estimate the total theoretical tax liability. Next, the federal GST/HST assessed is calculated. Finally, the difference between the theoretical tax liability and the amount of tax assessed is calculated. The sixth line of the figure represents the steps used to estimate the Federal cigarette duty gap. The first step is to estimate the total consumption and then the legal consumption. It is then possible to estimate the illegal consumption to finally obtain an estimate of potential federal tax loss. The seventh line of the figure represents the steps used to estimate the payment tax gap. First is the establishment of payment due dates. Next is a calculation of payment gap from the outstanding balance and finally, an estimate of payment gap by tax type. The last line of the figure represents the steps used to estimate the net tax gap. First is the estimate of initially reported amounts, then the estimate of the impact of compliance. Next is an estimate of the impact of collections and finally, an estimate of net gaps by tax type.

Through an ongoing effort to reduce the tax gap, the CRA will continue to preserve the integrity of the tax system and protect Canada’s revenue base, which supports programs and benefits that improve the quality of life for all Canadians.

Glossary

Term

Definition

Canadian resident

Individuals are Canadian residents for tax purposes if they maintain or establish residential ties to Canada.

Capital gains

The total amount that is earned when capital property (for example, land, buildings, shares, bonds, and fund and trust units) is sold or transferred for proceeds that exceed its costs. The income inclusion for capital gains is calculated in Schedule 3 of the personal income tax return. A taxpayer can claim a capital loss when the sale price of the capital property is lower than its cost. However, capital losses cannot be claimed against other sources of income. 

Cluster analysis

Cluster analysis refers to a broad set of statistical techniques for identifying subgroups or "clusters" in a population, where objects in the same cluster are more similar to each other than to those in other clusters. In the context of tax gap analysis, clustering techniques were used to determine whether large corporations could be organized into relatively distinct groups or clusters on the basis of certain key variables to estimate the potential level of non-compliance within each cluster.

Dividend

Profits received from owning shares in a corporation. An individual can receive profits based on the shares they own. Under Canadian tax rules, there are three types of dividends:

  • Eligible: any taxable dividend paid after 2005 to a Canadian resident by a Canadian corporation that has been designated by that corporation as an eligible dividend,
  • Other than eligible: generally all other taxable dividends, and
  • Capital dividends: tax-free dividends that represent, generally, the untaxed portion of capital gains earned at the corporate level.
Extreme value methodology

In the context of tax gap analysis, the extreme value methodology assumes that the majority of tax non-compliance in the large corporate population is concentrated in a relatively small number of corporations. It also assumes that the magnitude of non-compliance will tend to drop off exponentially when ranking corporations according to their level of non-compliance as one moves down the ranks of corporations from the most to the least non-compliant (highest to lowest). Based on the ranking of audited large corporations and the amount of federal tax adjustments identified from audit, a regression analysis is then used to extrapolate tax non-compliance to the rest of the large corporate population in order to obtain an estimate of the tax gap for large corporations.

Federal cigarette duty gap

Federal revenue losses resulting from products (imports or domestic production) for which excise duties have not been paid. It represents the difference between actual excise revenue and potential excise revenue.

Federal marginal effective tax rate

The EMTR is the tax rate bearing on the incremental dollar of income that is earned, or the next dollar earned, by an individual. For individuals, comprehensive EMTR measures take into account the income thresholds and statutory rates of the personal income tax system, as well as the impacts of tax deductions and credits and income-tested federal and provincial benefits.

Gap analysis

A method used to estimate tax non-compliance by estimating the difference between total or actual consumption of a product and tax-paid sales.

Large corporation

For the purpose of this report, large corporations are incorporated businesses with gross revenues of more than $20 million, except those in certain designated industries where the limit is more than $50 million (i.e., manufacturing, transportation and allied services, wholesale trade, and retail and services).

Non-resident

A non-resident either:

i) normally, customarily, or routinely lives in another country and is not considered a resident of Canada; OR

ii) does not have significant residential ties in Canada; and lives outside Canada throughout the tax year or stays in Canada for less than 183 days in the tax year.

Offshore investment income

Income earned from investments located outside Canada. Canadian residents must report investment from both Canadian and foreign sources.

Outstanding debt

When there is a positive balance owing, a taxfiler must pay this amount to the CRA by the due date. Otherwise, the outstanding debt becomes part of the payment gap.

Rate of return

Generally, the gain or loss on an investment over a specified time period, expressed as a percentage of the investment’s cost. Gains on an investment is income received plus any capital gains realized on the sale of the investment.

Securities

Tradable financial assets, including debt and equity securities. Debt securities (for instance, government bonds) are generally issued for a fixed term where the holder is entitled to the principal amount and interest income. Equity securities (for instance, stocks) are generally issued to signify an ownership position in a company and can provide dividend income. If securities are sold at a higher price than they were purchased, it results in a capital gain.

Small and medium-size enterprises (SME)

SMEs are incorporated businesses with gross revenues of less than $20 million, except those in certain designated industries where the limit is less than $50 million (i.e., manufacturing, transportation and allied services, wholesale trade, and retail and services).

Stock of offshore wealth

For the purposes of this report, the stock of offshore wealth is comprised of the total portfolio of securities and offshore bank deposits held outside of Canada by Canadian residents.

Underground economy (UE)

The UE is commonly understood as economic activity or income that is purposely hidden from public authorities, which can include working under the table or skimming (when revenues are under-reported or costs over-reported to understate net income). A variety of definitions for the UE exist – depending on the context, it may include activities that are officially measured and unmeasured, taxable and non-taxable, legal and illegal, or even very small-scale economic activities that generate income. From the CRA’s perspective, the UE includes any activity that is unreported or under-reported for tax purposes.

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