Tax Enforcement: Are Subjective Views Helpful?

The results of a mid-month survey of CRA tax auditors by the Professional Institute of the Public Service of Canada (PIPSC) highlight the challenges of keeping Canada’s tax system fair for all. One of them is the easy headlines that pit one group of taxpayers – generally the “wealthy” - against another. But a deeper read of the survey uncovers relevant and possibly more purposeful insights.

What most media picked up was the apparent majority consensus that “It is easier for corporations and wealthy individuals to evade and/or avoid tax responsibilities than it is for average Canadians.” 

On closer examination, this “unanimous opinion” came from a minority of CRA workers that participated. Of the 11,599 members of the Audit, Financial and Scientific Group (AFS) who were surveyed—including auditors, managers, forensic accountants and ther tax professionals—only 2,170 (18.7 percent) responded. So although the results of the survey appear to indicate a strong opinion about whether the “rich” avoid paying tax, it actually represents a small base of CRA professionals. 

However, there were more significant responses on two further issues:

• Eighty-one percent agree that tax credits, exemptions and loopholes disproportionately benefit corporations and the wealthy, compared to average Canadians.
• Three-quarters of respondents (75 percent) agree that multinational corporations shift profits to low-tax jurisdictions even when there is minimal, or no, economic activity there.

The problem is, there is an important lack of context that would appear to make the survey responses subjective at best. First, what is the definition of a “wealthy individual”? Does this refer to income earned, or assets accumulated, or both? What is “average”? Without specific numbers and definitions, it is difficult to link these findings to a useful outcome: a case for fairness and equity, if that indeed was the purpose of this survey.

Is the purpose an argument for higher taxes on these wealthy individuals and corporations? If so, one must consider the potential drawbacks carefully. Will it have the effect intended? Rather than raising revenues, is there a risk of stifling economic growth, innovation, job opportunities and economic prosperity for all Canadians? Worse, if pressed too far with a punitive tax regime, will the wealthy simply leave Canada with their businesses and their investments, potentially hurting the average Canadians they employ and the Canadian economy in general?

Research by the Fraser Institute, for example, has shown that increasing top personal income tax rates discourages entrepreneurship and prevents hundreds of new businesses from starting; conversely, another Fraser Institute study points out that reducing the top personal income tax rate as well as corporate tax rates has the reverse effect, attracting investment and top talent rather than causing a brain drain. In fact, still more research from the Fraser Institute reveals that lowering capital gains taxes is the best way to encourage financing for entrepreneurs and to stem the declining growth rates in small business startups.

Or is the purpose a case for more aggressive audit activity for certain taxpayer profiles? Digging deeper, the survey noted that more than one-third of respondents believe that internal restructuring at the CRA following the last government’s budget cuts in 2012 have resulted in “average” Canadians, charities and small businesses being targeted more by CRA auditors, relative to wealthy Canadians and corporations.   But it doesn’t say why that would be so, or specifically what provisions were being reviewed.

Other important findings:

• Almost eight out of 10 (79 percent) say that training and technology improvements at CRA have not kept pace with the complexity of tax avoidance schemes.
• Eighty-four percent say the CRA could increase revenues without raising taxes, simply by doing a better job of enforcing existing tax laws.

That last point may be the most interesting finding of all: existing laws may indeed serve us well – and help us avoid the economic repercussions of more tax increases - if only taxpayers and the CRA could execute on them in a win-win scenario. What are the barriers to success for taxpayers and CRA?

The moral in all this may just be that it is time to take a step back and consider initiating a careful and thoughtful tax reform that modernizes the collection and redistribution of these precious tax resources with important ideals: fairness, equity, certainty and compliance for all taxpayers to the benefit of every member of Canadian society. To do it well, will take time and a principled effort defines successful outcomes for all stakeholders.

That will be the subject of next month’s poll. . .we hope you will weigh in with your opinions.

Additional educational resources: If you’re a professional working with businesses and the top income earners in Canada, Knowledge Bureau’s Master Financial Advisor – Business Tax Services Specialist designation can set you up for success and give you the tools you need to help your clients effectively manage their money and make tax-efficient choices. You also won’t want to miss the Fall CE Summits!

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