Canadian corporations failed to pay between $9.4 billion and $11.4 billion in taxes in 2014, according to the first comprehensive analysis of the country’s corporate “tax gap” — the difference between taxes legally owed and those collected — being released today by the Canada Revenue Agency.
That means 24 to 29 per cent of all the corporate income tax legally due in Canada didn’t get paid that year.
The long-awaited calculations — which follow on similar studies in more than a dozen other Western countries — show the scope and source of unpaid taxes by delinquent corporations that keep billions of dollars from federal tax coffers every year.
“The results that we’re getting on corporate income tax … are quite similar to other countries in terms of per cent of revenues,” said Mireille Ethier, a director general with the CRA.
The country’s tax hit was reduced significantly by CRA audits that found $6.1 billion of the unpaid bills — reducing the tax gap by 55 to 65 per cent — the report says.
“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. The companies appealed and a tax judge ruled them onside.
Ted Gallivan, a CRA assistant commissioner, said in an interview that there are challenges collecting all of the money the agency demands from corporations it believes have underpaid their taxes.
“You’re going to lose some of it in court and you’re not going to collect all of it. But the CRA is attacking aggressive tax planning, full stop. And … we do believe a deterrence message has been sent to that taxpayer.”
Much of the “aggressive tax planning” corporations use to lower their tax bills involve complex offshore structures that exist in a legal grey area. While the corporate accountants may believe they’re above-board, the CRA doesn’t always agree.
Over the last five years, the CRA has more than doubled the number of offshore audits it has completed annually, finalizing 285 last year. And despite the difficulties, during the same time period the CRA has increased the amount of additional tax it has collected from audits by more than 60 per cent.
However, the tax gap study brings no clarity to the question of how much tax income is being lost to the legal offshore flow of Canadian wealth — issues highlighted by the Panama Papers and Paradise Papers investigations.
That analysis is “highly complex,” the CRA report says, because it is “often difficult to distinguish between legitimate and abusive activities based on information available to tax administrations. Many techniques are fully compliant with the laws of the countries involved.”
Giroux says that while the report focused on offshore wealth movement that is illegal, it fails to address that which is “questionable from a moral perspective. … It remains a big question mark still. It’s difficult (to calculate), yes. But to say there’s no way for CRA to know, that’s probably too big a stretch. There is a way, but it involves collaboration with multiple partners.”
Giroux says he raised his concerns with CRA officials after reviewing the report.
“They looked at us and said, ‘It is what it is.’ ”
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.
Sen. Percy Downe, who has called for greater transparency around the country’s tax gap and better enforcement of tax laws, said the CRA findings “low ball” the reality of Canadian corporate tax evasion and avoidance.
“They don’t want people to know what a lousy job they’re actually doing,” he said in an interview. “There’s no question there’s a major problem here — even the CRA admitted that with their numbers — but the reality is Canadians need an outside analysis to get the true figure.”
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 only pay 46 per cent of all corporate tax collected, while the small number of large Canadian corporations pay the other 54 per cent.
The billions lost in unpaid corporate taxes in Canada can be traced to both intentional and unintentional tax avoidance and evasion, the report says, including, “deliberately under-reporting income or over-claiming deductions” and “ignorance of filing, reporting or payment obligations.”
About half of small and medium-sized companies randomly audited by the CRA made at least one reporting error on their corporate income tax returns in 2011, the report says.
Whistleblowers — lured by the promise of payment — are a relatively new method of detecting offshore tax avoidance and evasion being used by the CRA, the report says.
Since 2014, the agency has been gathering tips from the public about Canadians engaging in offshore tax avoidance and evasion through its Offshore Tax Informant Program. Informants who provide “credible and specific information about major international tax non-compliance” stand to receive award payments based on a percentage of the recovered taxes.
To date, the program has received more than 1,200 calls, 500 written submissions and produced 30 contracts with informants, identifying $29 million in federal taxes and penalties, the report says. Of that, the CRA has collected more than $19 million and paid out $1 million in rewards to informants.
This is the latest round in a series of tax gap estimates prepared by the CRA since the Liberal government took power in 2015 and reversed the previous government’s position that the tax gap was unreliable and useless.
The first report found tax lost to GST/HST fraud was $4.9 billion in 2014.
The second report looked at individual domestic tax evasion and pegged it at $8.7 billion, mostly due to unreported income. That meant that 6.4 per cent of all personal income tax revenues went uncollected in 2014.
The third report focused on individual offshore tax evasion by individuals and estimated that between $800 million and $3 billion in tax is lost each year. But it did not include corporate offshore taxes.
When all the reports are added together, tax evasion costs Canadians between $21.8 billion and $26 billion per year. Put another way, 10 to 13 per cent of all tax legally due in Canada doesn’t get paid.
Legal avoidance of tax costs Canadians more than illegal tax evasion, according to a study put out by last year by one of the world’s leading experts on tax havens. An academic paper co-authored by Berkeley University economist 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 Zucman’s paper.
In 2017, the Star and Corporate Knights Magazine published a comprehensive analysis of corporate tax avoidance that found Canada’s 102 biggest companies avoided 8.9 per cent of their tax bills.
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.
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.
In March, Christine Lagarde, the managing director of the International Monetary Fund, penned a column in the Financial Times calling for a rethinking of how corporations are taxed.
“The current international corporate tax architecture is fundamentally out of date,” she wrote. “The ease with which multinationals seem able to avoid tax and the three-decade-long decline in corporate tax rates compromise faith in the fairness of the international system.”