Canada misses out on nearly $50 billion in tax each year

The federal government forgoes as much as $47.8 billion in uncollected taxes every year, according to a new report that Ottawa has yet to release.

These billions represent only a fraction of all taxes that go unpaid because they don’t include taxes owed to the provinces and municipalities — all of which are in need of additional revenues to close budget deficits and deliver on major public works projects.

“Everyone wants to make sure that everyone else is paying their fair share of taxes,” said Matthew Stewart, who oversaw the research for the report, published by the Conference Board of Canada on Monday.

“We wanted to use an initial study to push the (Canada Revenue Agency) into doing more work on this. . . . The first step is figuring out what the gap is, then you can come up with a plan to crack down on it.”

Despite a promise during the last election campaign, Ottawa hasn’t produced an official figure for the tax gap — an estimate of the difference between all tax due on paper and the actual tax revenue collected by the government.

In the interim, researchers used techniques developed by tax agencies in the U.K. and U.S. to estimate a Canadian tax gap of between $16 billion and $47.8 billion for the 2010 tax year. This lost revenue would have provided a significant boost to the $160 billion the CRA collected in federal taxes that year.

“This figure is just for the federal government, and we know how strapped for cash they are right now in terms of being able to fund social programs,” Stewart said. “I think it’s surprising how large it is and how much it could fund.”

Last July, instead of determining the entire tax gap, the CRA released a report saying $4.9 billion in GST and HST isn’t collected each year.

Beyond sales taxes, tax gaps calculated by foreign governments include tax evasion, both “onshore” and using the offshore tax havens that featured prominently in the Panama Papers revelations.

Those reports brought offshore tax evasion into the public eye, demonstrating how it impoverishes public coffers while exacerbating inequality, said Carl Hammersburg, an analyst with SAS Analytics, who consulted on the report.

“Offshore is really big dollars from a smaller number of entities, but the majority of the tax gap is actually small amounts from a large number of people,” Hammersburg said.

Aggressive tax avoidance — techniques that comply with the letter of a law, but contravene its spirit — as well as simple mistakes on tax filings and nonpayment of taxes round out the causes of lost tax revenues in the tax gap, according to the report.

Although $50 billion sounds like lots of money, even this high-end estimate could be too low, Hammersburg said.

“I think they all underestimate the problem, which may be bigger than the upper end,” he said.

The true measure of lost government revenues should include the cost of identity theft and fraud, which have been growing rapidly, he said.

Senator Percy Downe, who has been agitating for an official tax gap estimate for years, said he’s happy the report has finally put a number on uncollected taxes because the government hasn’t done so.

“When Canadians see how big the tax gap is, they see how incompetent their tax authorities are,” Downe said.

The CRA wasn’t able to respond to the report on Monday.

The tax gap is important because the federal government needs a statistical basis to determine how much to invest in tax enforcement, Downe said. “For every dollar you invest, it’s thousands back to taxes.”

Hammersberg, who has worked on tax gap estimates in countries around the world, says governments will never recoup all of their uncollected taxes, but that shouldn’t dissuade them from trying.

“There are too many cheaters to close the whole tax gap, but gosh, if you only get half of it, that’s billions of dollars,” he said. “This is the low hanging fruit. It’s right there today. All we have to do it analyze the data and target the right enforcement.”