Question Period Note: TAX GAP

What is the Canada Revenue Agency doing to estimate Canada’s tax gap?

• The Government is fulfilling its commitment to ensuring a tax system that is fair and responsive to all Canadians.

• That is why the Canada Revenue Agency has studied and published five reports on Canada’s tax gap, making Canada a leader in tax gap estimations.

• We know that the Agency’s compliance efforts are instrumental in reducing the tax gap.

• The investments of over $1 billion to fight tax cheats has given the Agency the tools it needs to tighten the gap and we are starting to see results.

• On April 11, 2016, the Government of Canada announced that it would enhance the Canada Revenue Agency’s (Agency) ability to detect, audit, and prosecute tax evasion, as well as begin work to estimate Canada’s tax gap.
• In June 2016, the Agency took the first step to follow through on its commitment to estimate Canada’s tax gap with the publication of a conceptual study on tax gap estimation and an estimate of the tax gap in respect of the Goods and Services Tax/Harmonized Sales Tax, prepared by the Department of Finance.
• On June 2, 2017, the Agency released a report on personal income tax compliance in Canada. The study provided two tax gap estimates for the 2014 tax year: 1) assessed taxes that are not collected by the Agency at about $2.2 billion; and 2) the tax loss related to unreported income earned in certain underground economy activities at about $6.5 billion. Together these tax gaps amount to $8.7 billion or 6.4% of personal income tax revenues in 2014.
• On June 28, 2018, the Agency released a report examining international personal income tax compliance. The report estimated the offshore investment income tax gap to be between $0.8 billion to $3.0 billion for 2014, or 0.6% and 2.2% of personal income tax revenues. Canada was one of the only countries to estimate its offshore tax gap.
• On June 18, 2019, the Agency released the fifth report in its tax gap series, estimating Canada’s corporate tax gap using Agency’s audit data and applying appropriate estimation methodologies for incorporated small and medium enterprises (SMEs) and large corporations. The report estimates that the corporate tax gap after audits is between $1.6 and $2.4 billion for SMEs and between $1.7 billion and $2.9 billion for large corporations. The overall federal tax gap, after audit results, for corporations is estimated to be between $3.3 billion and $5.3 billion or 8% and 13% of federal corporate income tax revenues in 2014. The report also presented the Agency’s efforts to combat corporate tax evasion and aggressive tax avoidance. It is estimated that audits reduced the estimated tax gap by $6.1 billion.
• Combining the corporate income tax gap with other tax gap components previously published by the Agency, Canada’s federal tax gap before considering the impact of audit for tax year 2014 is estimated to be between $21.8 billion and $26.0 billion or between 10.6% and 12.6% of corresponding revenues.
• The Agency intends to build on this research by producing reports on other areas of non compliance and updating its tax gap estimates to a more recent year. The Agency will also continue to engage with other countries on tax gap methodologies and research.
• In November 2017, Senator Percy E. Downe introduced Bill S-243: An Act to amend the Canada Revenue Agency Act (reporting on unpaid income tax) in the Senate. The Bill proposed to amend the Canada Revenue Agency Act to require the Minister of National Revenue to provide the PBO with the data collected and compiled on the tax gap and that the Agency publish tax gap estimates annually. In November 2018, the Bill was amended to require that the Agency estimate the tax gap every three years, rather than annually. The Bill was defeated during Second Reading in the House of Commons on May 29th 2019.
• The Agency is also engaging with external experts and interested stakeholders to further the Agency’s work in this area in transparent manner. Indeed, the Agency has provided the Parliamentary Budget Officer with the information it requested to estimate the tax gap – as well as making relevant tax gap information available to Canadians through the Government of Canada’s Open Data portal.

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