Lindsay Tedds and Lynne Siemens are Assistant Professors in the School of Public Administration at the University of Victoria
What kind of taxpayer are you? Steven Chase asked this question in a recent Globe and Mail article that reported on a recent survey conducted by the Canada Revenue Agency. The Canada Revenue Agency (CRA) has apparently identified six types of taxpayers ranked according to their probability of becoming a tax cheat. CRA is interested in this research as they are eager to bridge the tax gap: the shortfall between the taxes that should be paid and the taxes that actually are paid.
While no official measure of the tax gap exists in Canada, the Internal Revenue Service (IRS) estimates the U.S. tax gap amounts to nearly 20 per cent of total taxes paid voluntarily ($345-billion U.S. in 2001) and the noncompliance rate to be 16.3 per cent. Assuming a similar trend exists in Canada, a rough estimate of the Canadian tax gap, using 2009 tax filer data, would be approximately $30-billion and the number of noncompliant taxpayers would be more than 2.6 million.
The fact that some taxpayers fail to comply with tax laws will come as no shock to readers. We often hear of stories (or perhaps have our own tale to tell) about wilful tax cheats. However, for some taxpayers, tax noncompliance is an unintentional act stemming from a lack of understanding of the tax code.
Consider the hairdresser who was fined by CRA for not making a quarterly GST payment. She had stopped receiving the forms in the mail and had assumed that an annual payment would suffice. CRA found her to be non-compliant and imposed a large fine, yet she had always intended to make the payment and was unaware of the new internet-based transaction procedures.
Understanding and complying with your personal income tax responsibilities requires both knowledge and information, which contribute to taxpayer compliance costs. And it is costly to acquire information and knowledge in an era where the tax code weighs in at well over 1,400 pages, CRA interpretative bulletins can only be understood by tax professionals, and boutique tax credits (e.g. the Home Renovation Tax Credit, the Child Fitness Tax Credit, and the Tax Credit for Public Transit Passes) come and go with every budget and election cycle. Yet CRA’s six types of taxpayers provides no suggestion that the spectrum of taxpayers includes many shades of grey.
One of those shades rarely talked about in public policy circles is that some taxpayers actually pay more tax than is necessary. This occurs because they fail to claim tax credits, deductions, and benefits that they are legally entitled to solely due to a lack of knowledge and information. We hear regularly of seniors who are themselves “cheated” out of Guaranteed Income Supplement (GIS) payments because they fail to apply. But the same is true for others who lack the necessary knowledge to claim charitable donations, child care expenses, medical expenses, moving expenses and others that would reduce their tax bill.
In our work, we frequently come across examples of self-employed who fail to claim expenses associated with earning an income because they are unsure if the expenses are eligible and fear being audited and slapped with penalties. One such example is a nurse who delivered training sessions and was uncertain of the expenses she could declare. As a result, she did not claim any, even the legitimate ones associated with travelling to and from the training sessions, purchasing software to create the presentations, and printing course materials. In addition to these out-of-pocket expenses, she may have been eligible to declare a portion of the costs associated with her home office. In the end, by under-claiming the expenses and reporting the full amount of the income, she over-reported her net income and paid more tax than necessary.
While the individual overpayment amounts may be small, especially compared to the estimated amount of tax underpayment, overpayment is as concerning a problem. Just as with tax evasion, tax overpayment threatens the fairness of our tax system by leaving those who lack sufficient knowledge bearing more than their fair share of the tax burden. Perhaps CRA needs to add a seventh taxpayer type dubbed the Doormat Taxpayer. We wonder how much of the tax gap is bridged by these individuals.