Canadian corporations failed to pay between $9.4 billion and $11.4 billion in taxes in 2014, the difference between taxes legally owed and those collected – according to a study released Tuesday by the Canada Revenue Agency (CRA).
That means 24 to 29 per cent of all the corporate income tax legally due in Canada didn’t get paid that year.
This most recent CRA report examines the federal corporate income tax gap for the tax year 2014. Tax year 2014 was examined to remain consistent with previous CRA published tax gap estimates.
The CRA has published four previous studies on the tax gap in Canada:
- 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)
This first report identified key issues related to tax avoidance and outlined different approaches taken by tax administrations in other countries.
The second report, also released in June 2016, estimated the tax gap related to Goods and Services Tax/Harmonized Sales Tax (GST/HST). It found that the GST/HST gap was $4.9 billion in 2014, of which the federal component was $2.9 billion, representing the loss of 7.1% of all GST revenues. The provincial component of the loss was $2 billion.
In June 2017, the CRA released its third tax gap report – this one on domestic personal income tax losses in Canada. The study provided two tax gap estimates for the 2014 tax year: 1) personal income taxes that are not collected by the Agency at about $2.2 billion; and 2) the tax loss related to unreported income earned by individuals involved in underground economy activities at about $6.5 billion. Together these two tax gaps amount to $8.7 billion or 6.4% of personal income tax revenues in 2014.
In June 2018, the Agency released the fourth report in its tax gap series by examining international personal income tax compliance. The estimated range of the federal personal income tax gap related to hidden offshore investment income was between $0.8 billion to $3.0 billion for tax year 2014.
Building on these four previous reports, the fifth report released Tuesday focused on corporate tax avoidance. The CRA broke its analysis down into small corporations, which make up more than 99 per cent of all Canadian companies, and large corporations. Despite the vast number of small corporations, they pay only 46 per cent of all corporate tax collected, while the small number of large Canadian corporations pay the other 54 per cent.
Again, the CRA found that smaller and larger Canadian corporations combined, failed to pay between $9.4 billion and $11.4 billion in taxes in 2014.
When all the different categories of tax avoidance detailed in the five reports are added together, tax evasion costs Canadians between $21.8 billion and $26 billion per year. This means that 10 to 13 per cent of all tax legally due in Canada doesn’t get paid.
Difficulty in tracing undeclared income and off-shore tax havens.
While useful as a first step, Tuesday’s report sheds little light on the question of how much Canadian corporate tax income is being lost to the legal, but morally questionable, creation of corporate, off-shore tax shelters and other, possibly legal, tax avoidance schemes.
This is important because legal avoidance of paying taxes costs Canadians more than the illegal tax evasion reported in the CRA reports, according to a study put out last year by leading academic experts in the field. An academic paper co-authored by economists Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman, estimated that 9 per cent of corporate taxes in Canada went uncollected because of corporate profit shifting to tax havens.
Canadian companies actually avoid much less tax than companies in the US (14 per cent), UK (18 per cent), France (21 per cent) or Germany (28 per cent), according to the paper.
The off-shore tax have issue was central to the Panama Papers and Paradise Papers investigations.
The CRA report acknowledges the findings may be conservative given the complexity of tracing undeclared income.
“The actual tax gap may be somewhat higher than the estimates presented in this report,” it reads.
Then there is the question of court challenges to CRA notices. According to the Toronto Star, Parliamentary Budget Officer Yves Giroux, who reviewed the CRA’s report in advance of the release, commented:
“Companies will not just take the CRA’s notice of assessment and write a cheque,” says Giroux. “Most will appeal … And when it comes to appeals by multinational enterprises, it can take years to conclude that.”
In two cases last year involving large corporations BMO and Cameco, the CRA said their offshore tax structures were not legitimate and deprived Canada’s tax coffers of more than $3 billion.
However, the companies appealed and the Tax Court of Canada ruled them onside.
Much of the “aggressive tax planning” corporations use to lower their tax bills involves these complex offshore structures that exist in a legal grey area. According to the CRA report:
Profits shifted abroad by corporations lower the amount of corporate taxes governments can collect. The Organisation for Economic Co-operation and Development (OECD), of which Canada is a member, reports that more than 100 empirical studies have been published, all of which suggest that such practices are an issue as they erode the tax base of higher-tax jurisdictions.
Government efforts to close loopholes meet with business resistance
The CRA’s report also does not include many of the legal small business practices that the Liberal government attempted to shut down in 2017 and that are often taken advantage of by wealthy individuals using shell companies. These practices include ‘income sprinkling,’ which spreads profits to family members, including children, and which are then taxed at a lower rate. The Liberals were forced to water down some of these reforms which met with considerable business resistance.
There’s a growing international movement to crack down on these legal ways that corporations avoid paying tax. In 2017, Canada signed onto an international pact that aims to co-ordinate approaches to corporate taxation to minimize opportunities to play countries off each other.
Many of the schemes take advantage of Canada’s world-leading number of 93 tax treaties and 22 tax information exchange agreements (TIEAs), which allow corporations to claim profits in tax havens — where there is little or no tax — then move the money into Canada tax free.
This technique, called treaty shopping, “defeats the purpose of bilateral tax treaties and poses risks to the Canadian and international tax bases,” according to an information backgrounder put out by the finance ministry.
The new international standards, referred to as the BEPS treaty, ‘is intended to prevent the inappropriate use of bilateral tax treaties by third-country residents as an instrument to reduce or eliminate taxation,” the Ministry of finance has said.
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