OTTAWA: The Canada Revenue Agency continues to struggle in collecting taxes it’s owed, with total uncollected tax debt soaring more than 110 per cent in the last decade to $38 billion and the cost of “doubtful accounts” unlikely to be recovered more than doubling to $13 billion.
While the CRA announced a series of new measures last week designed to crack down on tax evasion, an Ottawa Citizen analysis shows the problems the agency faces in collecting tens of billions of dollars in assessed taxes and penalties that could help fund federal programs and services.
The federal auditor general has flagged the CRA’s challenges twice over the past decade, but it seems the problem is only getting worse.
The CRA’s total undisputed tax debt — which includes taxes, penalties and other revenues assessed or estimated over several years by the agency, but not yet collected — increased to $38 billion in the 2014-15 fiscal year from $18 billion in 2004-05.
At the same time, the size of the “allowance for doubtful accounts” — debts viewed as having little potential for recovery — has grown more than 125 per cent to $13 billion from $5.7 billion a decade earlier. The CRA officially wrote off more than $3.5 billion in 2014-15 as uncollectable debts.
The size of the uncollected tax debt was, for many years, reported in the Canada Revenue Agency’s annual report to Parliament. However, the CRA stopped reporting the number a few years ago, at the same time the balance of the tax debt grew significantly larger. The Citizen requested and obtained the total undisputed tax debt from the CRA.
As well, the increase in total undisputed tax debt owed continues to significantly outpace the growth in revenues, which reveals the challenges the agency is having. Total revenue has increased from $258 billion in 2005-06 to about $376 billion in 2014-15, an increase of around 46 per cent.
Revenues not paid to the government from the underground economy are not included in the tax debt, nor are assessed amounts that taxpayers have challenged before the CRA or in court. The total disputed taxes owed that were being challenged by taxpayers was $13.3 billion in 2014-15.
The CRA has, however, made improvements in other areas. The amount of outstanding tax debt resolved increased to $52 billion in 2014-15 (although more than $3 billion was from write-offs), up significantly from around $30 billion five years earlier.
Both the tax debt recovered in a fiscal year and debts uncollected can date back several years, meaning both amounts can increase in any one particular year.
The auditor general identified several problems in the CRA’s tax debt collection activities in 2006. A follow-up report from current Auditor General Michael Ferguson in 2013 found the agency had improved the way it collects tax debts, but also highlighted the large growth in uncollected revenue.
“Timely collection of overdue accounts is important, because it is the final element in taxpayer compliance. If taxpayers do not believe the government will collect overdue taxes, they may be less motivated to pay,” says the auditor general’s 2013 report.
The Income Tax Act generally gives the CRA 10 years to collect outstanding taxes from Canadians, although there are factors that can suspend or restart the limitation periods, including if a taxpayer makes a partial payment towards their debt, filing an objection/appeal, the CRA initiating legal action to collect a debt, and a taxpayer acknowledging their tax debt in writing.
A spokeswoman for Revenue Minister Diane Lebouthillier noted that 90 per cent of individuals pay their reported tax on time.
The minister’s office says several external factors have increased pressure on the CRA’s collection program, including: individual and business tax bases increasing due to a growing population; new CRA responsibilities including provincial harmonization of corporate and retail sales taxes, which has increased the amount of taxes collected; and increasing investments in compliance activities for identifying unpaid taxes.
The federal budget promised $351.6 million over five years for the CRA to strengthen its ability to collect outstanding tax debt. The new funding is expected to generate an additional $7.4 billion in tax debt over five years.
“Minister Lebouthillier is confident that the funding provided through Budget 2016 will enable the CRA to maintain the tax debt at manageable levels,” the minister’s press secretary, Chloé Luciani-Girouard, said in an email.
Ian Lee, an assistant professor at Carleton University’s Sprott School of Business who previously worked on debt collections in the financial services sector, said the 10-year time limit and problems collecting from bankrupt companies and individuals are making it difficult for the CRA to recover the money it’s owed.
One of the best ways for the CRA to collect taxes owed is to ensure there are withholding taxes on cheques issued by the Government of Canada, such as Old Age Security, unemployment insurance, and Canada Pension Plan, he said.
“That’s where they should be going. Trying to get money after the fact from a company that is no longer viable because it’s no longer able to generate revenues, is no longer profitable, is really going to be very difficult,” Lee said.
“Likewise, a person who ends up on welfare, or ends up destitute. It’s really difficult to go after people like that.”
Aaron Wudrick, federal director of the Canadian Taxpayers Federation, said the huge growth in tax debt “is a problem.” But he said there’s a huge difference between the CRA going after larger corporations or wealthy Canadians that might owe millions of dollars compared to a struggling individual or small business owner.
“There are serious consequences when you take the same behaviour but apply it to a much smaller fish than a big one,” he said.
