Tax Gap and Compliance Results for the Federal Corporate Income Tax System

From: Canada Revenue Agency

Backgrounder

The Canada Revenue Agency (CRA) has published a series of studies on Canada's tax gap. The tax gap is the difference between the taxes that would be paid if all obligations were fully met in all instances, and the tax actually paid and collected. A dedicated unit was established at the CRA to examine different parts of the gap and to date, the CRA has published five studies:

  1. Tax Gap in Canada: A Conceptual Study (June 2016)
  2. Estimating and Analyzing the Tax Gap Related to the Goods and Services Tax / Harmonized Sales Tax (June 2016)
  3. Tax Assured and Tax Gap for the Federal Personal Income Tax System (June 2017)
  4. International Tax Gap and Compliance Results for the Federal Personal Income Tax System (June 2018)
  5. Tax Gap and Compliance Results for the Federal Corporate Income Tax System (June 2019)

The CRA has followed through on its commitment to estimate the tax gap and to publish these estimates. It will continue to engage with external experts and stakeholders to ensure Canadians are informed about tax compliance.

Tax Gap and Compliance Results for the Federal Corporate Income Tax System (June 2019)

The CRA's fifth report in the tax gap series focuses on corporate income tax. This report builds on the work already completed in the first four reports on the tax gap.

Key highlights of the latest study include:

  • Tax gap: Before accounting for results from audits, the overall federal corporate income tax gap is estimated to be between $9.4 and $11.4 billion in tax year 2014. This includes the tax gap for incorporated small and medium enterprises (SMEs), which is estimated to be between $2.7 billion and $3.5 billion, and the tax gap for large corporations, which is estimated to be between $6.7 billion and $7.9 billion.
    • The CRA’s compliance efforts are instrumental in reducing the corporate tax gap. The corporate income tax gap, after considering audit results, is expected to be reduced by between 55% and 66% to between $3.3 billion and $5.3 billion in tax year 2014.
  • Tax gap methodology: Given the complexity of tax gap estimation and data availability, multiple methodologies are required to adequately measure Canada’s corporate income tax gap. The CRA consulted other tax administrations, government departments, and experts to refine the methodologies used in the report, and will continue to engage with them on methodology and research moving forward.
    • For SMEs, the CRA used a random sample, which was representative of the population as a whole, to estimate the tax gap.
    • For large corporations, two statistical methodologies were applied to risk-based audit results to determine lower-bound and upper-bound estimates of the tax gap. Further details on these methodologies are contained in the report.
  • The CRA uses analytical tools to risk-assess 100% of large business corporate tax returns on a yearly basis, improving its ability to identify high-risk transactions and decide which taxpayers to audit each year.
  • The CRA intends to build on this research by producing reports on other areas of non-compliance and updating its tax gap estimates on a three-year cycle.

Cracking down on tax evasion and aggressive tax avoidance

Budget 2016, 2017 and 2018 investments in better tools, alongside enhanced information sharing with international partners, are helping the CRA crack down on corporate tax evasion and aggressive tax avoidance. Budget 2019 investments will allow the CRA to fund new initiatives and extend existing programs.

We automatically access and review international electronic funds transfers over $10,000 entering or leaving the country. This represents 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.

We use analytical tools to risk-assess 100% of large business corporate tax returns on a yearly basis, improving our ability to identify high risk transactions. This helps us decide which taxpayers to audit each year.

Canada is one of over 70 jurisdictions sharing Country-by-Country (CbC) reports. CbC reports provide automatic access to information about multinational corporations’ activities in every country they operate in, giving us a deeper understanding of the operations of these large companies. The first exchanges of information in the CbC initiative took place in June 2018. By fulfilling our commitment to our partners to share information, we are making it more difficult for corporations to shift their profits offshore to avoid paying their fair share of tax.

We also gained easier access to information on Canadians’ overseas bank accounts, having undertaken our first exchanges under the Common Reporting Standard (CRS) in the fall of 2018. With the implementation of the CRS, Canada and over 100 other jurisdictions have begun exchanging financial account information. This information will help us connect the dots and identify instances where taxpayers have not complied with Canadian tax laws.

The CRA has reviewed and limited access to the Voluntary Disclosures Program. Since March 1, 2018, taxpayers who intentionally avoided their tax obligations are no longer able to benefit from the same level of relief as taxpayers who apply for relief to correct an unintentional error.

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