Canada’s tax gap for individuals’ offshore investment income was as high as $3 billion for the 2014 tax year, representing as much as 2.2% of personal income tax revenues, says a CRA report.
The report, released Thursday, says the gap between the taxes that would be paid if all obligations were fully met and what’s actually collected in offshore investment income is in the range of $0.8 billion to $3 billion per year. That amounts to between 0.6% and 2.2% of personal income tax revenues.
Since 2016, CRA has been analyzing different components of Canada’s tax gap, including GST/HST and domestic personal income tax compliance. Combined with the domestic numbers, the personal income tax gap is estimated to be between $9.5 billion and $11.7 billion in 2014 (7% to 8.6% of personal income tax revenues)
When the gap for GST and HST are added, Canada’s tax gap is up to $14.6 billion for the 2014 tax year (8.3% of corresponding revenues), the report says.
T1135 statistics
Canadian residents must file a Foreign Income Verification Statement (Form T1135) if they own $100,000 or more in foreign property, and the number of T1135 filers has been increasing, the report says.
In 2014, about $429 billion in assets, $9 billion in foreign income and $13.2 billion in capital gains were reported, with the U.S. and U.K. as the top countries where Canadians’ foreign income was reported.
In the 2014 tax year, 210,750 individuals filed Form T1135, reporting offshore assets with a total value of approximately $160 billion. Since 2004, there’s been a 12.3% annualized increase in filers, the report says.
However, while individuals made up 78% of T1135 filers, they only accounted for 37% of the total value of assets reported. The majority of assets, income and capitals gains came from corporations, trusts and partnerships, the report says.
CRA uncovered almost $1 billion in income from 370 individuals, 200 corporations and some trusts in international audits between 2014-15 and 2016-17. Those audits found $284 million in additional taxes—23% from individuals and 77% from corporations and trusts.
The report highlights that estimating the international tax gap is challenging, since assets can be purposely hidden outside national boundaries. The report relies on assumptions and global financial data developed by academics to estimate the tax gap related to hidden offshore investment income. Also, the potential revenue loss is a range, given the different assumptions used in the report.
Recent federal budgets have included measures to cut down on tax avoidance. New approaches include being able to automatically access and review international electronic funds transfers over $10,000 entering or leaving Canada. CRA is also focusing more on high-net-worth taxpayers, and will begin to use the OECD’s common reporting standard to gain access to information on Canadians’ overseas bank accounts.
The next tax gap study, to be published in 2019, will focus on incorporated businesses. Further, the Parliamentary Budget Officer is expected to release a separate report on Canada’s tax gap—potentially using a different methodology and presenting different figures—but the timing for its release is unknown.