As Canada’s tax system continues to grow in complexity, it may be losing its ability to function as intended. The country lost an estimated $169 million in potential tax revenue on foreign digital products and services in 2017, according to an Auditor General’s report released on May 7, 2019.
The report
The Auditor General’s report, Taxation of E-Commerce, used publicly available data to determine that the Canadian sales tax system lost $169 million because it failed to keep track of the foreign digital products and services being sold in Canada, and could not properly collect sales taxes in e-commerce transactions.
The report notes that current tax legislation and the Canada Border Services Agency’s lack of data management gave foreign businesses an advantage over Canadian businesses, as some foreign courier companies were not likely reporting significant amounts of sales on “low-value shipments into Canada”.
The report also says that the Canada Revenue Agency failed to make sure e-commerce vendors – including accommodation sharing vendors – properly complied with sales tax regulations. Moreover, the CRA did not adequately pursue provincial initiatives that requested e-commerce platforms to collect and remit sales taxes on behalf of the vendors who use their services.
The report concludes that the CRA lacks the legislative authority to make sure the tax system is applied to foreign digital products and services in an expedient manner.
“In one case, the Canada Revenue Agency had to get a federal court order and needed two years to require a payment processing company to disclose information about business account holders that received or sent a payment through their accounts,” says the report.
In its 2018-19 corporate risk profile, the CRA had already noted that digital commerce was a major risk, but according to the Auditor General’s report, the CRA has done little to mitigate it.
While the Auditor General’s report criticizes the CRA’s inability to keep up with digital products and services, another recent report argues that Canada’s tax system itself is too complex.
Is the tax system too complicated?
The tax system is growing increasingly cumbersome and complicated and the government has done little to simplify it, says the April 25, 2019 report from the Fraser Institute, a non-partisan, Canadian policy think-tank.
The amount of text used by the Income Tax Act has increased in size by 72% from 1990 to 2018. Moreover, since the turn of the century, “the number of credits, deductions, exemptions, exclusions, and other preferences, the text length of tax legislation, and the size of the federal personal income tax guide all increased by double-digit percentages,” says the report. “Federal tax complexity is clearly increasing in Canada over time.”
The Fraser Institute argues that the taxpayers would benefit from a simpler tax system. Considering reports that the CRA gives taxpayers the wrong answer one out of three times and that it is slow to collect on e-commerce sales taxes, the organization has determined that the CRA would also run more smoothly if it were to embrace a less complicated tax evaluation structure.