Canada publishes results of GST/HST gap report

The Canada Revenue Agency (CRA) has recently published its latest federal tax gap report which covers the period 2014 – 2018. This report provides estimates and key findings for non-compliance in Canada in the period and includes insights into the federal Goods & Services Tax (GST) / Harmonised Sales Tax (HST) gap for both reporting and payment.

Tax gap studies typically quantify the amount of tax that should have been collected by national tax authorities but was not. The European Commission released the results of its latest (and eighth) “VAT Gap” study in December 2021. The Canadian federal GST/HST gap includes both the reporting and payment gaps. The reporting gap represents the difference between the federal GST/HST liability that would result from full compliance and the tax revenues assessed by the tax administrations, the CRA and Canada Border Services Agency (CBSA). The reporting GST/HST gap includes reporting non-compliance related to GST and the federal portion of HST. The payment gap represents the GST/HST amounts due but not remitted to the CRA by the payment due date.

Canada has sales taxes levied at both the federal and provincial level. GST is levied at a federal level but in the provinces that have harmonised their provincial taxes, it takes the form of HST (including the provincial sales tax element). The other non-harmonised provinces administer their own provincial sales taxes (PST).

• The GST/HST reporting gap averaged $4.1 billion in the period, representing around two thirds of the gross GST/HST gap
• The GST/HST payment gap averaged $2.3 billion and remained relatively stable in the period
• The gross GST/HST gap declined by around 40% on average over the period
• After accounting for the CRA’s compliance and collection efforts, the net GST/HST gap averaged $3.9 billion over the period
• The net GST/HST gap as a percentage of GST/HST revenue remained relatively stable for in the period, ranging between 8% to 10%

The CRA’s compliance and collection activities appear to have had a significant impact on reducing the GST/HST gap. The report highlights that the CRA has focused its efforts on auditing high-risk GST/HST registrants. Historically, most audits of smaller businesses were combined audits, with single audits covering both income tax and GST/HST. However, the CRA has shifted from this generalised approach to a more specialised compliance approach, with high-risk businesses facing full GST/HST audits. The GST/HST audits often target complex transactions or specific non-compliance initiatives such as the underground economy. They also involve comprehensive audit procedures and other evidence gathering techniques at the registrants’ premises.

The report highlights that Canada’s federal tax authority is, like virtually all tax authorities around the globe, looking to reduce the “VAT Gap” and maximise tax collections. As changing HST/GST and PST registration rules lower the nexus threshold for foreign businesses to be required to register for indirect taxes in Canada, we will likely see an increase in compliance activity and audits focused towards non-established companies. It is therefore important for businesses with customers in Canada to understand if they have a GST/HST registration requirement and/or sales tax registration requirement in individual provinces and territories.

To find out more about how Avalara can help with your global indirect tax compliance requirements, including Canada, get in touch today and speak to one of our experts.