Tax gap for Federal Excise Duty on Cigarettes and Payment Tax Gap Reports

The Canada Revenue Agency (CRA) has published a series of studies on Canada's tax gap.

The Canada Revenue Agency (CRA) has published a series of studies on Canada's tax gap. 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. A dedicated unit was established at the CRA to examine different parts of the gap.

The CRA has followed through on its commitment to estimate the tax gap and to publish these estimates. It will continue to engage with external experts and stakeholders to ensure Canadians are informed about tax compliance and collection.

Tax gap for Federal Excise Duty on Cigarettes (December 2020)

The CRA's sixth report in the tax gap series focuses on federal cigarette excise duties. Key highlights include:

• Tax gap: The report estimates the excise duty gap for cigarettes using two methods which rely on administrative tax data and external data sources.
  • Based on the first method called gap analysis, the federal excise duty gap for cigarettes was estimated to be about $483 million for tax year 2014.
  • An alternative approach, an econometric model, was also used to estimate the gap. It estimated the federal excise duty gap for cigarettes to be about $490 million for tax year 2014.
  • Since the two estimates are relatively close in dollar value, an average was used (each was given equal weight).
  • The federal cigarette duty gap is estimated to be around $486 million for tax year 2014. This represents 16% of cigarette excise duty revenue, or about 4% of the overall federal excise duties, taxes and other specific levies revenue.
• Tax gap methodology: Given the complexity of tax gap estimation and data availability, multiple methodologies are required to adequately measure Canada’s tax gap related to excise duties and taxes. The CRA consulted other tax administrations, government departments, and experts to refine the methodologies used in the report, and will continue to engage with them on methodology and research moving forward. For the federal cigarette excise duty gap, the CRA used a gap analysis and an econometric modelling to estimate the tax gap. Further details on these methodologies are contained in the report.

Payment Tax Gap and Collection Efforts (December 2020)

The CRA's seventh report in the tax gap series focuses on the payment gap. Key highlights include:

• Tax gap: The total payment gap for tax year 2014 amounted to $5.29 billion after one year (2015), before declining by 59% to $2.19 billion in 2020.
  • In particular, the payment gap from individuals decreased at a faster rate (-76%) than the payment gap from corporations (-38%) and GST/HST registrants (-30%).
  • 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 filers payment gap was due to unpaid taxes, while 22% was due to repayable deductions and credits.
  • The corporation payment gap for tax year 2014 was $1.09 billion after one year (2015) before falling to $0.68 billion as of 2020, a decline of 38%.
  • While Small and Medium Enterprises (SMEs) accounted for 99% of all filers, the corporation payment gap was about evenly split between SMEs and large corporations.
  • 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%.
  • The excise payment gap for tax year 2014 was negligible due to the small number of non-compliant licensees/registrants; the exact amounts could not be reported to maintain taxpayer confidentiality.
  • The payment gap amounts presented in this report include outstanding debt and write-offs, but exclude interest and penalties. 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) and collection efforts as of 2020.
• Tax gap methodology: While previous tax gap estimates required advanced statistical or econometrical approaches to measure what is not directly observed by the CRA (e.g., hidden income), payment gaps can be calculated based on the CRA’s accounting records because taxfilers have either paid or have not paid their taxes owing.
  • Accounting records track the balance of outstanding debt, total write-offs, and reassessment amounts for all taxpayers.
  • The payment tax gap is the sum of assessed taxes that are not fully paid by the payment deadline for a particular tax year.
  • In general, the payment gap includes federal and certain provincial taxes owed (the portion collected by the CRA), as well as amounts written off as uncollectible (i.e., write-offs). However, the payment gap excludes all interest and penalties, including those written-off, as they do not represent tax liabilities.
• Total Payment Gap
  • The total payment gap for each tax year was calculated by aggregating the payment gap amounts for all four types of taxfilers.
  • There are key features of the payment tax gap that make 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.
• Federal Tax Gaps Estimated to Date: Combining the federal cigarette excise duty gap with other tax gap components previously published by the CRA, Canada’s federal tax gap in 2014 is estimated to be between $20.1 billion and $24.3 billion or between 9.2% and 11.2% of corresponding revenues – before considering the impact of audits and excluding the payment gap.