If your client is self-employed, she represents a higher tax-compliance risk, says CRA in a new study.
For Canadian taxpayers, non-compliance at the federal tax level resulted in a gap of about $8.7 billion or 6.4% of personal income tax revenues in 2014, reveals the study. That’s 0.4% of GDP.
The gap calculation is based on estimates of taxes that were assessed but not collected and on unreported income from the underground economy (UE).
“Of note,” says the report, “self-employment income is a completely non-assured income base, due to a near-complete lack of third-party reporting and a more complex reporting process.”
The study’s analysis suggests self-employed taxpayers “may contribute disproportionately to tax loss resulting from UE activity.” Such a finding helps “inform CRA outreach and the design of compliance efforts in this area of higher compliance risk.”
The report says CRA has a dedicated UE strategy and tactical plan. For instance, CRA will mobilize “a range of data, information and legislative tools, initiatives and partnerships to correct non-compliant behaviour and address persistent non-compliance.”
In addition, CRA conducts special UE projects in certain sectors or regions, where “the risk of non-compliance has been determined or is thought to be high.” But no further details are provided in the report.
The report also puts a focus on high-net-worth taxpayers, saying they represent “a significant threat to the tax base in Canada and in other countries. […] Some wealthy individuals and related parties use private corporations and/or complex schemes to purposefully and inappropriately reduce or defer tax.”
In response, Budget 2016 expanded the scope of CRA’s audit program for high-net-worth taxpayers — the related party initiative (RPI). The RPI focuses on those who alone, with family or together with related entities control business activities in multiple entities and control at least $50 million of net worth. Enhancements include new risk assessment strategies and more audit teams.
The report says CRA is also monitoring offshore activities in an effort to curb tax evasion and avoidance. For instance, CRA reviews high-value money transfers and collaborates with international partners.
CRA in action
The tax gap is likely even greater than estimates, says the report, because of data limitations.
Over the last two budgets, the government has spent almost $1 billion to help CRA crack down on tax evasion and avoidance. Preliminary results show that the agency is on track to generate more than $13 billion from audit efforts for the most recent fiscal year ending March 31, 2017.
Further, CRA has established a team to examine other aspects of the tax gap, and a study to be released in 2018 will focus on international tax evasion.
Read the full study.