Tax gap estimates in Canada
The Canada Revenue Agency (CRA) is publishing a series of studies on Canada's tax gap. To do this, a dedicated unit was established at the CRA to examine different parts of the gap. To date, the CRA has published four studies:
- A conceptual study on tax gap estimation (June 2016)
- An estimate of the tax gap for goods and services tax / harmonized sales tax (GST/HST) (June 2016)
- A report on domestic personal income tax (PIT) compliance in Canada (June 2017)
- International Tax Gap and Compliance Results for the Federal Personal Income Tax (PIT) System (June 2018)
The CRA is committed to continue estimating the tax gap, while engaging with external experts and interested stakeholders to further the CRA’s work in this area. The CRA has made information relevant to tax gap available to the Parliamentary Budget Officer and to Canadians through the Government of Canada’s Open Data portal.
The next tax gap study will focus on the domestic and international business tax gap, which will allow the CRA to provide its first estimate of Canada’s overall tax gap in 2019.
International Tax Gap and Compliance Results for the Federal Personal Income Tax System (June 2018)
The CRA's fourth report covers the international component of the tax gap for individuals and their related entities. This report allows the CRA to:
- set the context and review past reports
- explain reporting obligations and voluntary compliance
- report on audit activities related to international non-compliance
- estimate the tax gap related to offshore investment income
- describe the CRA’s compliance tools, activities and results
Key highlights of study:
Tax gap: Of individual income tax revenue (2014), $0.8 billion to $3 billion or 0.6% to 2.2%. Combined with the tax gap for domestic individual income tax, the personal income tax gap would be up to $11.7 billion in 2014. The combined personal income tax and GST tax gap is estimated to be up to $14.6 billion for 2014.
Tax gap methodology: Offshore non-compliance is particularly difficult to measure because individuals may be intentionally hiding income and assets using sophisticated means. This study used an approach recently developed by international experts based on international financial and banking data to estimate tax loss due to unreported hidden offshore investments. Canada is the first G7 country to publish an international tax gap study using this method.
Foreign reporting: Canadians are reporting their offshore income and assets in greater numbers. Between 2004 and 2014, foreign reporting using Form T1135, Foreign Income Verification Statement, increased to 268,910 in 2014, from 81,300 in 2004. Individuals accounted for 78% of total filers. The rest were corporations, trusts or partnerships.
Foreign assets, income and capital gains: In 2014, about $429 billion in assets, $9 billion in foreign income and $13 billion in capital gains were reported. Top countries where assets were held and foreign income was reported tended to be the U.S. and the U.K.
Offshore audits: Based on international audits completed between 2014 to 2015 and 2016 to 2017, close to $1 billion in income was uncovered and assessed from 370 individuals, 200 corporations and a small number of trusts. In additional taxes, $284 million was identified, of which 23% was attributable to individuals and 77% to corporations and trusts linked to those individuals.
Holistic approach: Results show the importance of emphasizing networks rather than only individuals when doing audits. Since the completion of the audits examined for this study, funds from Budget 2016, 2017 and 2018 have enabled the CRA to invest in its audit capacity to better identify non-compliance in the international context.
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