Payment Tax Gap and Collection Efforts

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Executive Summary

In April 2016, the Government of Canada committed to estimating the federal tax gap to encourage an open and transparent discussion on tax non-compliance. Acting on this commitment a dedicated unit was established at the Canada Revenue Agency (CRA) to examine and publish a series of reports analyzing different components of Canada’s tax gap. Including this report, the CRA has now published seven tax gap reports with detailed information of the methodologies used and the activities the Government is undertaking to reduce non-compliance. This information, combined with other indicators of compliance and non-compliance, provides valuable insights into the general health of Canada’s tax system. This report examines the tax gap resulting from payment non-compliance – when assessed taxes are not fully paid by taxfilers for a particular taxation year. In other words, the payment tax gap (also referred in this report as the "payment gap") measures the amount of tax liability that has not been paid or collected after taxes have been assessed by the CRA . In this report, the payment gap includes outstanding tax debt and write-offs (i.e., uncollectible tax liability), but excludes interest and penalties since they are not considered tax liabilities. In addition, this report considers certain uncollected provincial taxes as part of the federal tax debt because the CRA always pays the provincial taxes due first under federal-provincial tax collection agreements (before any collection actions are completed). Footnote 1 The payment gaps for tax years 2008 to 2014 were calculated for four types of taxfilers – individuals, corporations, Goods and Services Tax/Harmonized Sales Tax (GST/HST) registrants, and excise tax and duty licensees/registrants. Since the payment deadline can vary for different types of filers, the first instance of payment non-compliance can also vary. For example, the due date for the GST / HST return is determined by a registrant’s reporting period which can be on a monthly, quarterly, or annual basis. The payment due date for corporations can also vary depending on their reporting periods. Since there can be many different payment deadlines, it was necessary to choose a common starting point to analyze the payment gap. In order to capture the payment gap for all taxfilers, this report’s analysis begins one year after each taxation year (as of December). For example, one year after tax year 2008 would be the payment gap as of December 2009 and one year after tax year 2014 would be the payment gap as of December 2015. Since the payment gap is constantly changing due to reassessments (e.g., audits and appeals) and payments by taxfilers, the payment gap was calculated for multiple years. As of 2020, the total payment gap for each tax year has declined significantly. In general, the payment gap amounts from earlier tax years tend to be smaller than more recent years due to multiple reasons: the tax base has increased over time, tax rates have changed, and taxfilers have had more time to pay their debt. For example, payments to the CRA generally goes towards the oldest tax debt and therefore earlier tax years tend to have lower payment gaps.

The Total Payment Gap for Tax Years 2008 to 2014, After One Year and As of 2020*

*Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars. Source: CRA ’s accounting systems as of July 30, 2020

In some cases, the payment gap may rise before falling due to audits, objections, and appeals that may increase the amount of outstanding tax liability. This is particularly true for corporations since it can take multiple years to complete a comprehensive audit. While the total payment gap starts higher for more recent tax years, it declines over time to previous tax years’ payment gap levels (see graph below). The payment gap tends to stabilize once most of the tax debt is collected by the CRA and certain tax debt becomes uncollectible (i.e., write-offs).

Evolution of the Total Payment Gap*

*Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars. Source: CRA’ s accounting systems as of July 30, 2020 In 2015, the total payment gap for tax year 2014 was $5.29 billion. In 2020, the total payment gap had declined to $2.19 billion, a decline of 59%. For tax year 2014, the payment gap from individuals decreased at a faster rate (-76%) than the payment gap from corporations (-38%) and GST / HST registrants (-30%). The payment gap from excise licensees/registrants was negligible due to high levels of regulation and compliance. Specifically, excise licensees/registrants are subject to frequent audits and revenue identified through these audits are generally low, pointing to a highly compliant group of taxfilers. Given that only a small number of excise licensees/registrants tend to be non-compliant for any given tax year, the exact payment gap amounts are not reported publically to maintain confidentiality. Additional information on excise non-compliance can be found in the CRA ’s report titled, "Tax Gap for Federal Excise Duty on Cigarettes", which was released concurrently with this report.

*Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars.
** The excise duty and tax payment gap for tax year 2014 was negligible due to high levels of regulation and compliance. The exact tax gap amount is not reported to maintain taxpayer confidentiality. Source: CRA ’s accounting systems as of July 30, 2020.

Evolution of Payment Gap Components for Tax Year 2014*

*Does not include non-residents. All amounts are in nominal dollars.
Source: CRA ’s accounting systems as of July 30, 2020 There are key features of the payment tax gap that make it different from the CRA ’s previous tax gap estimates. For example, payment gaps presented in this report account for audit results (also referred to as the net tax gap) while many of previous tax gap estimates are before audit (gross tax gap). As a result, the payment gap cannot be directly added to previous tax gap estimates without special considerations (see Section 2.2 for more details). One approach would be to calculate the gross payment gap which can then be added to previous estimates. These considerations, including additional information on the impact of audits for other tax gaps, will be explored in greater detail in a future tax gap report. The CRA ’s collection efforts have been crucial in reducing outstanding debt and thus reducing the payment tax gap. For example, during 2018–19, CRA measures resolved just under $68 billion in outstanding tax debt for multiple taxation years, an increase of 17.6% over 2017–18. Of this total, $64.7 billion was collected and $3.3 billion was written-off. During 2019–2020, the CRA resolved just over $65 billion in outstanding tax debt. Of this total, $61.7 billion was collected and $3.3 billion was written off by the Collections programs. The CRA continued to maximize its use of Budget 2016 funding by resolving an additional $2 billion in outstanding tax debt. Footnote 2 Write-offs, in most cases, do not release the taxpayer from their obligation to pay off the debt. It means legal actions will not be undertaken to collect the debt unless the taxpayer’s financial situation improves. Since, write-offs still represent forgone tax revenue, they are included in the payment gap calculations in this report. Interest and penalties within write-offs are excluded from the payment gap results. The CRA is committed to openness and transparency as a world-class tax and benefit administrator. Therefore, the CRA will continue to examine and report on Canada’s tax gaps while engaging with domestic and international partners. As well, the CRA is committed to improving its tax gap methodologies to leverage all of the data and methods available to produce the most accurate estimates possible.

1. Introduction

• Tax Gap in Canada: A Conceptual Study (June 2016);
• Estimating and Analyzing the Tax Gap: Related to the Goods and Services/Harmonized Sales Tax (June 2016);
• Tax Assured and Tax Gap for the Federal Personal Income Tax System (June 2017);
• International Tax Gap and Compliance Results for the Federal Personal Income Tax System (June 2018);
• Tax Gap and Compliance Results for the Federal Corporate Income Tax System (June 2019);
• Tax Gap for Federal Excise Duty on Cigarettes (December 2020); and
• Payment Tax Gap and Collection Efforts (December 2020).

Previous reports mainly focused on estimating the tax gap resulting from reporting non-compliance – when taxfilers fail to provide complete and/or accurate information on their tax return by under reporting income and/or claiming deductions or credits to which they are not entitled. In general, reporting non-compliance accounts for the majority of the overall tax gap. This report is unique from many of the previous publications as it focuses on non-compliance after taxfilers have been assessed by the CRA with taxes owing. The tax gap arising from payment non-compliance – when assessed taxes are not fully paid on time by taxfilers for a particular taxation year – is the subject of this report.

This report is organized as follows. Section 2 provides a brief overview of the tax gap, the three stages of non-compliance, and scope of payment tax gap results. Section 3 presents payment gap results for individuals, corporations, GST / HST registrants, and excise licensees/registrants. Section 4 highlights key collection efforts by the CRA to manage and reduce the outstanding tax debt. Section 5 provides concluding remarks and summarizes the main findings of the report.

2. Background

Like many other developed countries, Canada’s tax system is based on self-assessment – whereby taxfilers complete a tax return each year to report their income and claim any deductions and tax credits to which they are entitled. This process determines whether taxfilers owe taxes, are entitled to a refund, or neither.

The CRA administers the tax laws for the Government of Canada and for most provinces and territories. It is responsible for collecting taxes such as personal income tax, corporation income tax, GST / HST , and excise duties, taxes, and other specific levies. The CRA also delivers various benefits to Canadians through the tax system (e.g., Canada Child Benefit, GST Credit). During the tax administration process, non-compliance may occur resulting in tax revenue loss and a tax gap. This section briefly reviews the concept of tax gap, three stages of non-compliance, and the scope of this report’s tax gap results.

2.1 Tax Gap and the Three Stages of Non-Compliance

Broadly defined, 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. While the tax gap is sometimes seen as a measure of tax evasion or fraud, it is a result of both intentional and unintentional non-compliance. For instance, non-compliance can be due to:

• deliberate choices (such as hiding income or over-claiming deductions/credits);
• mistakes;
• ignorance of filing, reporting, and payment obligations; and
• inability to comply (such as when a taxpayer declares bankruptcy and cannot pay their tax debt).

In general, non-compliance can occur at three key stages in the tax administration process – registration/filing, reporting, and payment. Registration/filing non-compliance occurs when people or corporations fail to register or file their tax return when they are required to do so. In Canada, registration/filing non-compliance is expected to be a relatively minor source of the tax gap. Footnote 3 Nevertheless, there are those that do not register or file their taxes either intentionally or unintentionally. Tax gap resulting from this type of non-compliance may be examined in a future study.

Once a tax return is filed, there is potential for reporting non-compliance. Taxfilers may fail to provide complete and/or accurate information on their tax return by under-reporting income and/or claiming deductions or credits to which they are not entitled. Reporting non-compliance generally accounts for a large share of the tax gap and is often difficult to identify because it is by definition not directly visible (e.g, hidden income). Previously published tax gap reports focused on estimating the reporting tax gaps for individuals (domestic and international), corporations, GST / HST , and excise duties and taxes. Footnote 4

After taxfilers have been assessed by the CRA and it is determined that taxes are owed, payment non-compliance may occur when assessed taxes are not fully paid for a particular taxation year. Unlike reporting non-compliance, the tax gap from payment non-compliance can be calculated based on CRA ’s accounting records. The tax gap resulting from payment non-compliance is the subject of this report.

2.2 Scope of Payment Tax Gap Results

This report presents the payment tax gap results for four different taxfilers: individuals, corporations, GST / HST registrants, and excise licensees/registrants. Footnote 5 In general, the payment gap includes federal and certain provincial taxes owed and amounts written off as uncollectible (i.e., write-offs). Footnote 6 Although taxpayers are required to pay interest and penalties, the payment gap does not include these amounts since they are not tax liabilities (see Box 1). Footnote 7 Interest and penalties within write-offs are also excluded from the payment gap results.

The payment tax gap is calculated from the accounting data and it equals to outstanding debt plus write-offs and minus interest and penalties.

Outstanding debt occurs when there is a positive balance owing, which a taxfiler must pay to the CRA by the due date. Otherwise, the outstanding debt becomes a part of the payment gap.

While write-offs are deemed uncollectible, they are unpaid tax liabilities. Write-offs include amounts that are legislatively uncollectible such as the expiry of the collections limitation period and accounts that have an insolvency event under the Bankruptcy and Insolvency Act. Therefore, they are included in the payment gap, and they are one of the reasons why the tax gap can never be zero.

The CRA charges interest and/or penalties if a taxfiler makes late or insufficient payments. Interest and penalties are removed because these amounts do not represent tax liabilities.

There are key features of payment non-compliance that makes the payment tax gap different from previously published tax gap estimates. First, the payment gap can be directly calculated and therefore does not need to be estimated. Unlike previous tax gap estimates which tried to measure what is not directly observed by the CRA (e.g., hidden income), payment gaps can be calculated based on CRA ’s accounting records – taxfilers have either paid or have not paid their taxes owing. Second, previous reports focused on estimating the federal tax gaps and did not include any provincial tax non-compliance. In contrast, this report considers certain provincial tax liabilities to be part of the federal tax debt since the CRA is responsible for collecting certain provincial taxes and always pays the provincial taxes due first under federal-provincial tax collection agreements (before any collection actions are completed). Footnote 8 Third, the payment gap for a given tax year is constantly changing due to reassessments by the CRA (e.g., audit results increasing or decreasing the balance owing) and payments by taxfilers (e.g., reducing the tax debt by making payments to the CRA ). Therefore, the payment gaps in this report are snapshots at given point in time. For example, the payment gap from corporate filers is often highest after the fifth or sixth year as complex audits with high adjustments are completed around that time. From there, the payment gap starts declining as taxfilers payoff their tax debt.

In addition, there is no single unit of time when the payment gap begins since the payment deadline is not the same for different types of taxfilers. For example, the payment deadline for individuals is usually in April of the following tax year. However, GST / HST registrants must file a return and remit taxes regularly. The due date for the GST / HST return is determined by a registrant’s reporting period which can be on a monthly, quarterly, or annual basis. The payment due date for corporations can also vary depending on their fiscal periods and they generally pay taxes in instalments. Since there can be many different payment deadlines (even within the same tax type such as in the case of GST / HST and corporate income tax), it was necessary to choose a common starting point to analyze the payment gap. In order to capture the payment gap for all taxfilers, this report’s analysis begins as of December of the following year and ends as of July 2020. Footnote 9

Given these unique features, it is important to interpret the results in this report with caution. For example, since payment gaps presented in this report account for reassessments (e.g. audits and appeals) and collection efforts, it cannot be directly added to other tax gap estimates unless they too account for reassessments. As such, the payment gap can be viewed as a net tax gap as opposed to being a gross tax gap, particularly for payment gaps as of 2020. It is also important to be cautious when comparing Canada’s payment gap results internationally. A direct comparison of tax gap figures across countries can be misleading due to significant differences in tax gap methodologies, tax systems and economies. For instance, the United Kingdom’s non-payment gap is based on tax debts that are written off and acts as a net tax gap. Footnote 10 Meanwhile, the United States calculates their underpayment gap by aggregating the amount of taxes that were not paid by the payment due date, acting as a gross tax gap. Footnote 11 The CRA will explore the best approach to align the payment gap with previous tax gap estimates so that they can be added together in the overall tax gap report.

When a taxpayer files a tax return and it is initially assessed by the CRA , there could be a reporting tax gap: taxfilers may fail to provide complete and/or accurate information on their tax return by under-reporting income and/or claiming deductions or credits to which they are not entitled. The reporting tax gap is by definition not directly visible (e.g., hidden income) and therefore must be estimated. The reporting tax gap before CRA compliance actions is referred to as the gross tax gap while the remaining tax gap after compliance actions is referred to as the net tax gap.

In contrast to the reporting tax gap, payment non-compliance can occur at different stages and can be calculated using CRA ’s accounting data. For example, if a tax return is assessed by the CRA but assessed taxes are not fully paid by the taxfiler by the due date, there would be a payment tax gap. However, payment non-compliance may also occur after reassessments, such as audits, objections, or appeals, are completed. For example, if an audit determines that a taxfiler owes additional taxes but this amount is not fully paid, the payment gap would increase. On the other hand, if an appeal reduces taxes owing, this could reduce the payment gap once the appeal is completed. Therefore, it was important to analyze the evolution of the payment gap in this report. When tax liabilities are deemed uncollectible (e.g., due to a bankruptcy), it can be written off. However, write-offs, in most cases, do not release the taxpayer from their obligation to pay off the debt and could be reinstated by the CRA ; thus, contributing to the foregone tax revenue. Therefore, this report includes write-offs in the payment gap.

3. Payment Tax Gap Results

When taxes are owed and taxfilers fail to pay their balance owing by the deadline, there is a payment tax gap. This section presents payment gap results for four types of taxfilers: individuals, corporations, GST / HST registrants, and excise licensees/registrants. The payment gap is calculated using CRA ’s accounting data for tax years 2008 to 2014. The payment gap amounts presented in this section include outstanding debt and write-offs, but exclude interest and penalties (see Box 1). Given the importance of looking at the evolution of payment gaps, the analysis begins one year after the taxation year and ends as of July 2020. This is particularly true for corporations since it can take multiple years to complete a comprehensive audit. Since it takes several years of data to analyze the evolution of the payment gap, tax year 2014 is the latest year of analysis. A brief summary of descriptive statistics on non compliant filers is provided for tax year 2014.

3.1 Individuals

Individuals are generally required to file an Income Tax and Benefit Return (T1 return) and pay their balance owing by April 30th of the following year. Footnote 12 For example, the T1 return for tax year 2018 was due April 30, 2019. Footnote 13 By completing a return, individuals may receive benefits or get a refund for any overpayments of tax they made during the year. If individuals did not pay enough taxes during the year, they may have a balance owing. In addition to unpaid taxes, individuals may have a balance owing because they claimed a benefit to which they were not entitled. In this case, repayable amounts of deductions and credits also contribute to the balance owing. If the balance owing is not paid by the deadline, daily interest is charged starting May 1 st on any outstanding balance and penalties may apply. Footnote 14 The CRA administers and collects personal income taxes for the federal government and all provinces/territories, except for Quebec. In addition, the CRA also collects taxes on behalf of certain First Nations according to First Nations Personal Income Tax Administration Agreements. Footnote 15

3.1.1 Individual Payment Gap

In June 2017, the CRA published a report on the domestic personal income tax gap for tax year 2014 which included an estimate of the individual payment non-compliance. At that time, a specific methodology for calculating the payment gap was not fully established and therefore, an estimate of payment non-compliance was provided by looking at all outstanding tax debt at initial assessment by the CRA . Based on this, the individual payment gap for tax year 2014, including interest and penalties, was estimated to be around $2.2 billion as of 2017. Since that time, the CRA has revised its payment tax gap methodology for individuals (see Annex 1 for more details). This approach is more consistent with the definition of tax gap as it focuses on unpaid tax liabilities.

The individual payment gap in this report includes unpaid federal personal income tax, unpaid provincial personal income tax (except Quebec), unpaid First Nations personal income tax, repayable deductions and credits, and all uncollectable debt (i.e., write-offs). As discussed previously, interest and penalties are excluded. There are two main sources of the payment gap for individual filers: payment gap from unpaid taxes and payment gap from repayable deductions and credits. The majority of the individual payment gap is due to unpaid taxes for each tax year.

In general, the payment gaps from earlier tax years tend to be smaller than more recent tax years due to factors such as the tax base increasing over time (due to a combination of more taxpayers and higher earnings), tax rates having changed, and taxpayers having had more time to pay their debt. Footnote 16 As shown in Figure 1, the payment gaps today (as of 2020) are much smaller than in the past (one year after the taxation year) for all tax years. The percentage decline tends to be smaller for more recent tax years since there are less years between the tax year and 2020.

Figure 1: Individual Payment Gap, Tax Years 2008-2014*

*Does not include non-residents. All amounts are in nominal dollars.
Source: Individual accounting system as of July 30, 2020.

It is important to emphasize that the payment gap is constantly changing. As taxfilers pay down their balance owing or the CRA takes compliance actions (e.g., audits resulting in additional taxes owed), the payment gap for any given tax year will fluctuate over time. Figure 2 provides a way to compare the evolution of the payment gaps between three tax years. In general, the individual payment gap is at its highest level after one year. Subsequently, the payment gap declines as taxfilers payoff their balance owing and the CRA begins its collection efforts. The payment gap will stabilize over time as a higher fraction of remaining amounts become uncollectible (i.e., write-offs).

Figure 2: Evolution of the Individual Payment Gap*

*The amounts in this graph (except the payment gap as of 2020) are based on an estimation procedure to remove interest and penalties. Does not include non-residents. All amounts are in nominal dollars.
Source: Individual accounting system as of July 30, 2020.

For tax year 2014, the payment gap from individual filers was $3.09 billion after one year (2015) before declining to $0.73 billion as of 2020, a decline of 76%. Around 88% of the current individual payment gap (as of 2020) is due to unpaid taxes while 22% is due to repayable deductions and credits. The individual payment gap for tax year 2014 has decreased over time and is reaching similar levels to previous tax years (see Figure 2). As the CRA continues to take compliance actions to collect the outstanding balance where possible, the individual payment gap for tax year 2014 is expected to decline further.

3.1.2 Descriptive Analysis of Non-compliant Individuals for Tax Year 2014

As of 2020, approximately 197,530 individuals, or 0.7% of all individual filers, still contribute to the payment gap for tax year 2014. The median payment gap is $780 per individual while the average payment gap is $3,710 per individual. The large difference between the median and the average is due to a small number of individuals with high payment gaps. This difference was more pronounced for unpaid taxes compared to repayable deductions and credits (see Table 1). Additional characteristics of non compliant individuals can be found in Annex 1.

Table 1: Summary of Individual Filers, Tax Year 2014 (as of 2020)*

All individuals

• Number of Filers: 28,136,040
• Number of Filers with a Payment Gap: 197,530 (0.7 %)
• Total Payment Gap: $0.73 billion
• Median Payment Gap: $780
• Average Payment Gap: $3,710

Unpaid Taxes

• Payment Gap: $0.64 billion (88%)
• Median Payment Gap: $740
• Average Payment Gap: $3,440

Repayable Deductions & Credits

• Payment Gap: $0.09 billion (12%)
• Median Payment Gap: $1,610
• Average Payment Gap: $2,040

*Figures may not correspond with similar published data due to different cut-off dates and the exclusion criteria considered in this study. Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars.
Source: Individual accounting system and assessed T1 income tax returns as of July 30, 2020.

3.2 Corporations

Corporations resident in Canada are required to file a Corporation Income Tax Return (T2 return) every tax year whether or not there is any tax payable. Footnote 17 In general T2 returns must be submitted no later than six months after the end of their fiscal year. For example, if a corporation’s fiscal year ends on March 31, the filing deadline would be September 30. Most corporations pay income tax in monthly or quarterly instalments and the balance owing is due within either two or three months after the end of the corporation’s reporting period. The reporting period can vary for each corporation. If corporations do not comply with CRA requirements, interest and/or penalties may apply. Footnote 18 The CRA administers and collects corporate income taxes for the federal government and all provinces/territories except Quebec and Alberta, where corporations file separate provincial corporate tax returns.

3.2.1 Corporation Payment Gap

The corporation payment gap includes unpaid federal corporate income tax, unpaid provincial corporate income tax (except in Quebec and Alberta), and all uncollectable tax debt (i.e., write-offs). Corporations can range from small businesses to multinational corporations. Therefore, additional analysis was conducted for two different groups of corporations: small and medium sized enterprises (SMEs) and large corporations. Footnote 19

As shown in Figure 3, the past and present corporate payment gaps do not follow a consistent pattern. For certain tax years for example, the payment gap is larger today (as of 2020) compared to the past (one year after the taxation year). This is mainly due to the CRA identifying additional taxes owed after multiple years of audits.

Figure 3: Corporate Payment Gap, Tax Years 2008-2014*

*Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars.
Source: Standardized accounting system for corporations as of July 30, 2020.

Similar to the individual payment gap, it is important to examine the corporation payment over multiple years. As shown in Figure 4, the corporation payment gaps for earlier tax years reached their highest level after the fifth or sixth year as complex audits with high adjustments were completed around that time. From there, the payment gap declined as corporations paid down their tax debt. Unlike previous tax years, the 2014 tax year saw its highest payment gap amount after one year. This was mainly due to outliers where a small number of corporations had a significant payment gap after one year. However, this was mostly resolved after the second year and the payment gap is now below the payment gaps for tax year 2008 and 2011 as shown in Figure 4. Material changes to the payment gap could be a result of reassessments including audits, objections, appeal, and taxpayer requests. Due the small number outliers, additional information on these corporations could not be disclosed in order to protect taxpayer confidentiality.

Figure 4: Evolution of the Corporation Payment Gap*

*Does not include non-residents. All amounts are in nominal dollars.
Source: Standardized accounting system for corporations as of July 30, 2020.

For tax year 2014, the payment gap from corporations was $1.09 billion after one year (2015) before falling to $0.68 billion as of 2020, a decline of 38%. While SMEs accounted for 99% of all filers, both SMEs and large corporations accounted for approximately 50% of the corporation payment gap (see Table 2). The corporation payment gap for tax year 2014 has fluctuated over time in both directions as shown in Figure 4. For example, the payment gap for tax year 2014 decreased to $0.45 billion as of 2016 but increased to $0.71 billion as of 2018, mainly due to audits identifying additional taxes owing. Since that time, the corporation payment gap has declined to $0.68 billion as of 2020. As the CRA continues to take compliance actions to collect outstanding debts where possible, the corporation payment gap is expected to further decline.

3.2.2 Descriptive Analysis of Non-compliant Corporations for Tax Year 2014

For tax year 2014, approximately 34,490 corporations, or slightly under 2% of all corporate filers, still contribute to the payment tax gap as of 2020. The median payment gap is $1,715 per corporation while the average payment gap is $19,750. The large disparity between the median and average amounts indicates that a small number of corporations had very large payment gaps for tax year 2014. This is particularly true for large corporations where the average payment gap is much higher than the median payment gap (see Table 2). Additional characteristics of non compliant corporations can be found in Annex 2.

Table 2: Summary of Corporate Filers, Tax Year 2014 (as of 2020)*

All corporations

• Number of Filers: 2,188,160
• Number of Filers with a Payment Gap: 34,490 (2%)
• Total Payment Gap: $0.68 billion
• Median Payment Gap: $1,715
• Average Payment Gap: $19,750

SMEs

• Number of Filers: 2,161,740 (99%)
• Number of Filers with a Payment Gap: 34,100 (2%)
• Payment Gap: $0.37 billion (54%)
• Median Payment Gap: $1,725
• Average Payment Gap: $9,120

Large Corporations

• Number of Filers: 26,420 (1%)
• Number of Filers with a Payment Gap: 380 (1%)
• Payment Gap: $0.31 billion (46%)
• Median Payment Gap: $ 30**
• Average Payment Gap: $966,310

* Figures may not correspond with similar published data due to different cut-off dates and the exclusion criteria considered in this study. Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars.
**Most large corporations had a small payment gap and, as a result, the median payment gap was negligible for tax year 2014. For example, some large corporations had less than $2 in payment gap which is generally written-off by the CRA . Source: Standardized accounting system for corporations and assessed T2 corporation income tax returns as of July 30, 2020.

3.3 GST / HST

The GST / HST is a consumption tax that applies to a broad range of goods and services in Canada. The CRA administers GST / HST for all provinces and territories except for Quebec. For the four Atlantic provinces and Ontario that have harmonized their provincial sales tax with the GST , the HST applies. British Columbia used to be a participating province and had HST from July 1, 2010, until March 31, 2013. Other provinces collect their provincial sales tax (PST) directly. The CRA also administers the sales tax for certain First Nations governments and financial institutions. Footnote 20

The GST / HST is a multistage tax that applies to goods and services at every stage of the production and distribution chain. In general, registered businesses are entitled to offset their GST / HST costs through input tax credits. Except for certain exemptions, these registrants collect and remit the GST / HST owing to the CRA . Registrants must file a GST / HST return and remit taxes regularly. Footnote 21 The due date for the GST / HST return is determined by a registrant’s reporting period. In general, registrants report their GST / HST sales on a monthly, quarterly, or annual basis. The payment deadline depends on the frequency of the reporting period. Footnote 22 When GST / HST registrants do not pay their outstanding balance before the payment deadline, their accounts are considered to be in arrears and contributes to the GST / HST payment gap. In addition, interest and/or penalties may apply.

3.3.1 GST / HST Payment Gap

The GST / HST payment gap includes unpaid GST (federal sales tax), unpaid HST (harmonized sales tax of relevant provinces), unpaid sales tax for First Nations governments, unpaid sales tax for certain financial institutions, and all uncollectable tax debt (i.e., write-offs).

The GST / HST payment gap increased in tax year 2011 as the CRA began collecting both federal and provincial sales taxes for Ontario and British Columbia when they harmonized their provincial sales taxes with the GST . In addition, tax gaps from earlier tax years are generally smaller than more recent tax years due to factors such as the tax base increasing over time and taxfilers having more time to pay their older debts. The only exception is for tax year 2013 which can be explained by the fact that British Columbia discontinued the HST and returned to the GST and PST system that year. Therefore, it is important to acknowledge that fluctuations in the tax gap are not always related to compliance levels. As shown in Figure 5, the GST / HST payment gap today (as of 2020) is smaller than in the past (one year after the taxation year) for all tax years.

Figure 5: GST / HST Payment Gap, 2008-2014 Tax Years*

*Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars.
Source: Standardized accounting system for GST / HST taxpayers as of July 30, 2020.

Similar to the other payment gaps, the GST / HST payment gap for any given tax year can fluctuate over time. As shown in Figure 6, the GST / HST payment gap tends to be at its highest level after the first two years. From there, the payment gap starts declining as taxfilers payoff their outstanding tax debt.

Figure 6: Evolution of the GST / HST Payment Gap*

*Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars.
Source: Standardized accounting system for GST / HST taxpayers as of July 30, 2020.

For tax year 2014, the GST / HST payment gap was $1.11 billion after one year (2015) before declining to $0.78 billion as of 2020, a decline of 30%. Like other payment gaps, the GST / HST payment gap for tax year 2014 has declined over time and is consistent with tax year 2011. The GST / HST payment gap for tax year 2008 (i.e., triangle line in Figure 6) is lower than tax years 2011 and 2014, mainly because Ontario and British Columbia joined the HST regime in 2010. In other words, non-compliance related to Ontario and British Columbia provincial sales taxes would only be captured after 2010 as part of the HST . Similar to previous tax years, the declining trend of the GST / HST payment gap for tax year 2014 is expected to continue.

3.3.2 Descriptive Analysis of Non-compliant GST / HST Registrants for Tax Year 2014

For tax year 2014, around 3.3 million GST / HST returns were filed and 5% of filers still contribute to the GST / HST payment gap as of 2020. Footnote 23 The median payment gap is $1,350 while the average payment gap is $4,700. Similar to other tax types, a small number of GST / HST registrants tend to have concentrated levels of the payment gap.

Table 3: Summary of GST/HST Registrants, Tax Year 2014 (as of 2020)*

GST / HST

• Number of Filers: 3,344,640
• Number of Filers with a Payment Gap: 165,470 (5% of filers)
• Total Payment Gap: $0.78 billion
• Median Payment Gap: $1,350
• Average Payment Gap: $4,700

* Figures may not correspond with similar published data due to different cut-off dates and the exclusion criteria considered in this study. Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars.
Source: Standardized accounting system for GST / HST taxpayers and assessed GST / HST returns as of July 30, 2020.

3.4 Excise Duties and Taxes

Excise duties and taxes are specific levies that are applied on a limited range of commodities and services. Excise duties are imposed under the Excise Act and the Excise Act, 2001 and apply to tobacco, alcohol, and cannabis. Excise taxes are imposed under the Excise Tax Act and apply mostly to fuel and gasoline. Excise duties and taxes are only levied after the product has been manufactured, packaged, or imported.

The producer or importer of the goods (referred to as excise licensees and registrants in this report) remits the excise duty or tax to the CRA . In general, the CRA collects excise duties and taxes for domestically-manufactured products while the Canada Border Services Agency (CBSA) collects them for imported products. Footnote 24 Licensees/registrants that remit excise duties and taxes are highly regulated and therefore are largely compliant. Excise duties and taxes are typically paid on a monthly or semi-annual basis. Footnote 25

3.4.1 Excise Payment Gap

The excise payment gap includes unpaid excise duties and taxes as well as all uncollectable tax debt (i.e., write-offs). Between tax years 2008-2012, the payment gap ranged from around $0.04 billion to $0.09 billion , the majority of which came from a very small number of licensees/registrants. When these outliers were no longer present, the excise payment gap was minimal for other tax years. Footnote 26 This was particularly true for tax year 2014 when the excise payment gap was negligible. Footnote 27 Given the small number of non-compliant licensees/registrants and the negligible payment gap, the exact amounts and descriptive statistics could not be reported to maintain taxpayer confidentiality.

Excise licensees/registrants are subject to regular audits and regulatory reviews by the CRA which have contributed to maintaining a high level of compliance for this group of taxfilers. Since excise licensees/registrants are highly regulated and compliant, the main source of excise non-compliance is generally related to illegal activities (e.g., contraband cigarettes). Additional information on the excise duty and tax gap can be found in CRA ’s "Tax Gap for Federal Excise Duty on Cigarettes" report.

3.5 The Total Payment Gap

Combining the payment gaps from individuals, corporations, GST / HST registrants, and excise licensees/registrants, the total payment gap for each of the tax year is presented in Figure 7. Footnote 28 In general, the payment gaps today (as of 2020) are much smaller than in the past (one year after taxation year). This is mainly due to CRA ’s collection efforts and taxfilers paying down their tax debt over time. One notable exception is for corporations where payment gaps tend to increase after complex audits are completed five to six years down the line. The total payment gap from earlier tax years tends to be smaller than more recent years for multiple reasons: the tax base has increased over time, tax rates have changed, and taxfilers have had more time to pay down their debt. Certain changes that are not related to compliance (e.g., British Columbia discontinuing the HST ) may also impact the level of payment gap. Therefore, it is important to acknowledge that fluctuations in the payment gap are not always related to compliance levels. In addition, the declining rate of the total payment gap tends to slow down for older tax years as certain amounts are uncollectible (e.g. due to bankruptcies). This is one of the reasons why the tax gap can never be zero.

Figure 7: The Total Payment Tax Gap between Tax Years 2008 to 2014*

*Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars.
Source: CRA ’s accounting systems as of July 30, 2020.

As mentioned throughout this report, the payment gap for any particular tax year is constantly changing due to reassessments (e.g., audits and appeals) and payments by taxfilers. Therefore, it is important to look at the evolution of the total payment gap for multiple years (see Figure 8). To compare payment gaps from different tax years, it is important to look at the number of years after a given taxation year.

Figure 8: Evolution of the Total Payment Gap*

*Does not include non-residents. Totals may not add due to rounding. All amounts are in nominal dollars.
Source: CRA ’s accounting systems as of July 30, 2020.

To be consistent with previous tax gap reports, additional analysis is provided for tax year 2014 (see Table 4 and Figure 9). In the past (as of 2015), the total payment gap was $5.29 billion . Today (as of 2020) the payment gap has declined to $2.19 billion, a decline of 59%. A breakdown of the total payment gap for tax year 2014 shows that the payment gap decreased at a faster rate for individuals (-76%) compared to corporations (-38%) and GST / HST registrants (-30%). For excise licensees/registrants, the payment gap was negligible due to high levels of regulation and compliance. Given that only a small number of excise licensees/registrants were non-compliant for any given tax year, the exact payment gap amounts could not be reported in this report.

* Totals may not add due to rounding. Does not include non-residents. All amounts are in nominal dollars.
** The excise duty and tax payment gap for tax year 2014 was negligible due to high levels of regulation and compliance. The exact tax gap amount is not reported to maintain taxpayer confidentiality.
Source: CRA ’s accounting systems as of July 30, 2020.

Figure 9: Evolution of Payment Gap Components for Tax Year 2014*

*Does not include non-residents. All amounts are in nominal dollars.
Source: CRA ’s accounting systems as of July 30, 2014

4. CRA ’s Collection Efforts

The CRA ’s mandate is to make sure Canadians pay the correct amount of taxes and receive their rightful share of benefits. In fulfilling its core responsibilities, the CRA administers Canada’s tax laws and collects taxes on behalf of the federal government, provinces/territories, and certain First Nations. When taxfilers do not pay their assessed taxes, the CRA takes action to collect outstanding debts. This section briefly highlights CRA ’s collection efforts.

Box 3: What is Outstanding Debt?

In general, outstanding debt refers to collectible balance owing by a taxfiler including tax liabilities, interest, penalties, and other debt. Other debt includes reassessed credits that can increase or decrease the total debt. Because the focus is on collectible debt, outstanding tax debt does not include write-offs* (i.e., uncollectible debt) and includes interest and penalties. In contrast, the payment gap includes write-offs and does not include interest and penalties because the focus is on tax liabilities.

Outstanding Debt = Payment Tax Gap+Interest & Penalties—Writeoffs

Therefore, CRA ’s collection efforts not only focus on reducing the payment gap where possible, but also ensures that other amounts owing are collected.

*Write-offs include amounts that are legislatively uncollectible such as the expiry of the collections limitation period and accounts that have an insolvency event under the Bankruptcy and Insolvency Act.

4.1 When you owe money – collections at the CRA

Paying the balance owing in full helps taxfilers avoid interest and other legal and financial consequences. When taxfilers cannot pay the full amount, the CRA works with them to resolve their tax debt. For example, a taxfiler can make partial payments over time or agree to another payment arrangement until they have fully paid off their tax debt. During that time, any interest and penalties that apply will continue to accrue on the debt. The CRA has discretion to cancel or waive penalties and interest when taxfilers cannot meet their tax obligations due to circumstances beyond their control.

If taxfilers disagree with an assessment or a reassessment, they can contact the CRA to discuss the matter. If it still cannot be resolved, they have the right to a formal review including filing an objection and subsequently filing an appeal. In certain circumstances, the CRA may still collect taxes. For example, the CRA can start collecting 50% of assessed income tax for large corporations even if they have filed for an objection or an appeal. Footnote 29

If a taxfiler does not pay their debt or refuse to cooperate, the CRA may take legal action which could result in serious financial or legal consequences. The CRA may garnish income, garnish bank accounts, seize and sell assets, or use any other means permitted by law. In general, the CRA will not start legal action until 90 days after the mailing date of the notice of assessment or reassessment. Before starting legal action, the CRA must do the following:

• Make one attempt to give verbal legal warning by phone.
• Send one written legal warning letter.

In some cases, certain tax debt becomes uncollectable such as when a taxfiler goes bankrupt. Therefore, after the CRA has taken all reasonable collection action and exhausted all possible means of collection, uncollectible taxes are written-off (i.e., deleted from active inventory of accounts receivable).

During 2018–19, CRA measures resolved just under $68 billion in outstanding tax debt for multiple taxation years, an increase of 17.6% over 2017–18. Of this total, $64.7 billion was collected and $3.3 billion was written-off. During 2019–2020, the CRA resolved just over $65 billion in outstanding tax debt. Of this total, $61.7 billion was collected and $3.3 billion was written off by the Collections programs. The CRA continued to maximize its use of Budget 2016 funding by resolving an additional $2 billion in outstanding tax debt.

4.2 Collections and Verification at the CRA

The Collections and Verification Branch (CVB) protects the integrity and fairness of Canada’s tax system for all Canadians by delivering national validation, compliance, and collections programs that:

• foster taxpayer understanding of their tax obligations and promote voluntary registration, accurate and timely filing, and remittance;
• validate tax returns and benefit entitlements and enforce compliance with Canada’s tax laws for filing, declaring, withholding, registering, and remitting;
• identify compliance risks and address non-compliance using advanced verification techniques and world class analytics; and
• collect outstanding debts owed to the Crown through progressive and targeted enforcement approaches.

4.2.1 Compliance and Collections

The CRA promotes compliance by supporting taxfilers who want to resolve their debt, working with those who cannot pay the full debt amount, and addressing non-compliance through enforcement interventions for a small minority of deliberate non-compliers.

The CRA is maximizing investments from Federal Budgets to modernize business approaches that will increase capacity to address a higher volume of collections, improve communication channels with taxpayers and third parties, and increase the focus to deter non-compliance. For example, the CRA is invested in applying behavioural economics to improve responsiveness to compliance interventions, such as letter campaigns or automated messages.

4.2.2 Service

Good service is key to promoting compliance within a tax system based on self-assessment. The CRA ’s objective is to provide quality services and interactions, including responsible enforcement, while offering a positive experience for all taxfilers. Therefore, the CRA is continually improving its services to ensure that the CRA is fairer, more helpful, and easier to interact with.

New programs and outreach activities aim to provide taxfilers with clear, accurate, and timely information and tools to make it easier to comply with tax laws. For example, through its numerous education/outreach and compliance activities, the CRA ensures laws are respected and taxpayers are given the information they need to be and stay compliant. This helps maintain a low level of payment non-compliance and improve public trust in the fairness and integrity of the CRA and the Canadian tax system.

4.2.3 Innovation

Encouraging innovation and new ideas is crucial to the ongoing growth and improvements of the CRA ’s compliance, collections, and verification efforts. Innovation enables the CRA to improve its programs and services to Canadians by pursuing greater efficiency and effectiveness in the way the programs are administered. Examining international and industry best practices, while strengthening partnerships with other tax administrations and stakeholders, allows the CRA to improve compliance methods and remain up-to-date with emerging techniques.

To remain innovative means to make smart use of new technologies, business intelligence, and data analytics. Therefore, the CRA seeks to improve research, better understand trends, identify risks, and predict taxpayer behaviour to enhance compliance processes. For example, the CRA experimented with the development of a new forecasting model to further understand the impacts that the Canadian economy has on the tax debt. The CRA will continue to use leading edge practices to modernize and improve compliance efforts while optimizing business operations to collect and manage the tax debt.

5. Conclusion

This report examined the payment tax gaps for individuals, corporations, GST / HST registrants, and excise duty and tax licensees/registrants for tax years 2008 to 2014. The payment gap amounts presented in this report include outstanding debt and write-offs, but exclude interest and penalties (see Box 1). In this report, certain provincial taxes were considered federal tax debt because the CRA always pays the provincial taxes due first under federal-provincial tax collection agreements (before any collection actions are completed). The payment tax gap was calculated using CRA ’s accounting data and the tax gap results account for the latest reassessments (e.g., audits, appeals) as of 2020.

It is important to examine multiple years after each taxation year since the payment gap may fluctuate over time. For example, audits, objections, and appeals may increase the amount of outstanding tax liability and consequently the payment tax gap. This is particularly true for corporations since it can take multiple years to complete a comprehensive audit. Since it takes several years of data to analyze the evolution of the payment gap, tax year 2014 was the latest year of analysis in this report. More recent tax years will be examined in a future tax gap report.

For tax year 2014:

• The individual payment gap was $3.09 billion as of 2015 and $0.73 billion as of 2020, a decline of 76%.
• The corporation payment gap was $1.09 billion as of 2015 and $0.68 billion as of 2020, a decline of 38%.
• The GST / HST payment gap was $1.11 billion as of 2015 and $0.78 billion as of 2020, a decline of 30%.
• The excise payment gap was negligible because excise licensees/registrants were highly compliant.
• Together, the total payment gap for tax year 2014 was $5.29 billion as of 2015 and $2.19 billion as of 2020, a decline of 59%.

CRA ’s collection efforts have been instrumental in reducing payment non-compliance and are reflected in the overall trend of declining payment gaps.

• During 2018–19, the CRA resolved just under $68 billion in outstanding tax debt for multiple tax years, which represents an increase of 17.6% over what was resolved in 2017–18.
• During 2019–2020, the CRA resolved just over $65 billion in outstanding tax debt. Of this total, $61.7 billion was collected and $3.3 billion was written off by the Collections programs.

There are key features of the payment tax gap that makes it difficult to compare with CRA ’s previous tax gap estimates. Therefore, the payment gap cannot be directly added to previous tax gap estimates without special considerations. The CRA will continue studying the tax gap while engaging with stakeholders and external experts to further the Agency’s work in this area. The CRA will also provide regular updates to Canada’s tax gaps to ensure they remain relevant and include additional information such as the impact of audits in reducing the tax gap. Through an ongoing effort to understand different components of Canada’s tax gap, the CRA will continue to preserve the integrity of the tax system.

Annex 1: Individual Payment Gap

Methodology

In June 2017, the CRA published a report on the domestic personal income tax gap for tax year 2014 which included an estimate of the individual payment non-compliance. At that time, a specific methodology for calculating the payment gap was not fully established and therefore, an estimate of payment non-compliance was provided by looking at all outstanding tax debt at initial assessment by the CRA . Based on the 2014 tax year assessing and accounting data, 16% of the $13.6 billion in debt at the Notice of Assessment stage remained outstanding. Accordingly, the payment non-compliance (including interest and penalties) amounted to $2.2 billion for tax year 2014 (as of January 2017). Footnote 30

Since that time, the CRA has revised its payment tax gap methodology for individuals. This approach is more consistent with the definition of tax gap as it focuses on unpaid tax liabilities. In this report, the payment gap for individuals was calculated based on CRA ’s accounting system which tracks the balance of the outstanding debt, total write-offs, and reassessment amounts. The target population under analysis was all individual taxfilers who contributed to the payment gap for taxation years 2008 to 2014. Non-residents were excluded from the study to remain consistent with previously published tax gap reports. Given the change in methodology, the payment gap from the 2017 report cannot be compared to the individual payment gap in this report.

There are two main sources of the payment gap for individual filers: payment gap from unpaid taxes and payment gap from repayable deductions and credits (see Table A1). The individual payment gap in this report includes unpaid federal personal income tax, unpaid provincial personal income tax (except Quebec), unpaid First Nations personal income tax, repayable deductions and credits.