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Panama Papers: Why doesn’t Canada measure the ‘tax gap?’

Panama Papers: Canada, other countries launch probe into tax haven scandal
WATCH: The so-called Panama Papers has claimed its first victim. Iceland’s prime minister has stepped away from his post in the wake of the document leak about offshore tax havens, and countries including Canada have launched probes into the scandal. Vassy Kapelos reports.

As the fallout from the Panama Papers scandal continues to spread across the globe, Ottawa is facing increased pressure to crack down on offshore tax evasion.

One of the most frequent criticisms of the federal government’s approach to tax-dodging is that it doesn’t calculate the “tax gap,” which could give it a better idea of how much money is being lost each year.

READ MORE: Panama Papers: Why should Canadians care?

Simply put, the gap is the difference between the amount of money the government thinks it should be getting in tax revenue, and the amount it actually collects. The gap can be the result of tax evasion, people making errors on their tax filings, or unpaid liabilities.

WATCH: At least 350 Canadians linked to Panama Papers scandal

At least 350 Canadians linked to Panama Papers scandal
At least 350 Canadians linked to Panama Papers scandal

Right now, estimates of the chunk of money in the gap attributable specifically to offshore tax havens hover between $6 billion and $8 billion per year. The precise number is unknowable.

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So why doesn’t Canada calculate the overall tax gap?

Basically it boils down to this: Ottawa thinks it’s too difficult and too costly, and the end result isn’t going to be very accurate anyway.

“There is no internationally agreed-upon methodology, making comparisons impossible,” explains the Canada Revenue Agency on its website.

“Jurisdictions commonly cite limitations and challenges to the accuracy of the calculation, including the difficulty in estimating the impact of the informal economy and international or offshore transactions.”

The CRA also points out that Canada isn’t the only country that doesn’t bother with the tax gap. Over half of the member countries in the Organisation for Economic Co-operation and Development (OECD) don’t attempt to calculate it. Even fewer (13 of 52) make their estimates public.

So, do these arguments against calculating the gap hold water?

Not really, according to Dennis Howlett, the executive director of Canadians for Tax Fairness.

“The OECD has done a whole report on this,” Howlett said. “The assessment is that it is a valuable tool. There is a lot that can be learned from other countries about how to do it.”

Canada wouldn’t necessarily do it every year, he said, because the calculation does mean a lot of work, “but doing it every four or five years provides a good way to assess how you’re improving things.”

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Even if the estimates aren’t extremely accurate, Howlett argued, as long as the government doesn’t change how it does the calculation (using macro-indicators like Gross Domestic Product, as well as micro-targeted auditing of certain sectors) it could produce an overall “trend-line” that would help it figure out where it is losing the most money. The CRA could then deploy its resources more efficiently, he said.

READ MORE: Iceland PM reportedly resigns after Panama Papers fallout

Howlett’s not alone in his assessment. Charlottetown Sen. Percy Downe has been arguing in favour of calculating the tax gap for years. He announced plans this week to introduce a bill on April 13 in the Senate that would require Ottawa to do so.

In the United Kingdom, Her Majesty’s Revenue and Customs agency (the British equivalent of the CRA) also calls the tax gap a “useful tool” for understanding and tracking tax-dodging patterns in that country.

“Thinking about the tax gap helps the department to understand how non-compliance occurs and how the causes can be addressed,” the agency notes on its website, in stark contrast to the CRA’s page.

“Secondly, drawing on information on how other countries manage their tax gaps, our tax-gap analysis provides insight into which strategies are most effective at reducing the tax gap.”

Howlett said he is “hopeful” that the CRA will at least hand over some of its records to the Parliamentary Budget Officer (PBO), which can then calculate the tax gap on behalf of the government. The CRA has refused to do this in the past, he said, citing privacy concerns. But the PBO has already done a lot of the groundwork, so “all they need is CRA’s cooperation.”

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Meanwhile, a spokesperson for the office of Minister of National Revenue Diane Lebouthillier said in a prepared statement on Tuesday that the government allocated over $440 million to the CRA in its recent budget “in order to combat tax evasion and aggressive tax avoidance, including offshore.”

Finance Minister Bill Morneau also addressed the Panama Papers scandal on Tuesday, saying “we want to make sure that people are not moving their funds offshore and avoiding tax” and that the government will “remain focused” on the problem.

“I don’t have enough detail at this stage to know specifically any Canadian issues, but we have charged the CRA with focusing on this issue in order to make sure that Canadians pay their fair share of tax and they don’t avoid tax inappropriately,” Morneau said.

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