Wealthy Canadians with hidden offshore accounts are evading up to $3 billion in tax every year, according to the first ever estimate of the international tax gap by the Canada Revenue Agency, obtained by the Star.

In a report to be made public Thursday, the government estimates Canadian individuals are hiding between $75.9 billion and $240.5 billion in offshore tax havens and elsewhere, and not paying tax on it.

The analysis “gives a sense of the potential magnitude of forgone tax revenues associated with the unreported offshore investment income earned by Canadians,” states the report. “Understanding how and why taxpayers are non-compliant is critical to help preserve the integrity of the tax system and to protect Canada’s revenue base, which supports programs and benefits delivered to Canadians.”

Allison Christians, a tax professor at McGill University, said the fact that so much wealth is being hidden offshore reveals a dangerous attitude among the wealthy.

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“It’s disheartening to know that the scale of hiding assets offshore is so large. You want to believe people understand the importance of paying taxes. To find out that those with the greatest ability to pay are concealing such large sums offshore is just disappointing.”

For Sen. Percy Downe, who has been lobbying the CRA to publish this information since 2013, the report has been a long time coming.

“There’s no question there’s a major tax evasion problem,” Downe said. “Based on the CRA’s track record, I would think this number is a lowball estimate.”

After years of refusing to estimate how much tax was being lost to cheating — going so far as to fight the Parliamentary Budget Officer in court to prevent the release of the data — the CRA did an about-face and started issuing partial tax gap estimates in 2016, shortly after the Panama Papers were made public.

“I committed to Canadians that the CRA would study the tax gap and that is exactly what we are doing,” said National Revenue Minister Diane Lebouthillier in a written statement sent to the Star. “Estimating the international tax gap is challenging and publishing such an estimate makes Canada a pioneer in this field.”

The estimate pegs offshore tax evasion at between $800 million and $3 billion per year. It is based on global financial statistics, international banking data and academic studies that have looked at the total amount of wealth hidden in tax havens and determined what proportion belongs to people from each country.

“Tax gap estimation is challenging because it requires assessing tax loss due to behaviours that cannot be directly observed and may be intentionally hidden,” says the report.

The offshore tax gap looks only at public revenue lost to undeclared foreign bank accounts and securities, and does not include tax lost to other sources of hidden income like rent or capital gains from international real estate and insurance plans.

The current estimate, based on the 2014 tax year, builds on previous studies that identified $4.9 billion in uncollected GST/HST and $8.7 billion in uncollected income tax from individuals participating in the underground economy domestically, bringing the total tax gap to $16.6 billion for that year alone. This does not include corporate tax evasion, which will be the subject of a future study.

“In today’s globalized world, offshore entities and complex cross-border transactions can make it difficult for tax administrations to identify individuals’ worldwide income or assets, and to distinguish between legitimate and non-compliant activities,” the report says. “Even with stringent controls in place to ensure individuals comply with tax laws, additional measures are needed to ensure that tax administrators can accurately determine and verify foreign income.”

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After the Panama Papers were made public in 2016, governments around the world vowed to crack down on offshore tax evasion, which has been depriving public coffers of trillions of dollars every year.

In Canada, the government announced almost $1 billion for increased enforcement at the CRA and the tax gap report contains extensive details of how those compliance efforts have born fruit, especially in finding undeclared offshore assets.

“Internationally focused audits of individuals and their related entities resulted in significant income changes and additional reassessed taxes, particularly in corporations and trusts linked to individuals, even while covering a relatively small taxpayer population,” states the report.

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Between 2014 and 2017, the CRA conducted 1,000 international audits and found 57 per cent of those audited were under-declaring their foreign assets and income.

On average, their tax bills went up 41 per cent after the audit. This amounted to about $225,000 per individual and about $755,000 per corporation.

In total, the CRA assessed $284 million in additional taxes. Private corporations were hit the hardest by the offshore audits as they were found to be responsible for two-thirds of the unpaid tax. Individuals had 23 per cent of the unpaid tax and trust funds had 11 per cent.

Dennis Howlett, executive director of Canadians for Tax Fairness, said this correlates with his group’s tax gap estimate put out last year.

“So far their main focus has been on the individual, but the corporate side is much bigger, potentially twice as large,” said Howlett, adding that corporate tax avoidance is easier to address.

“The problem of individuals hiding their money in tax havens requires complex co-ordination between countries. But cracking down on corporate tax avoidance could be solved with legislative changes at home.”

The CRA report also highlights that Canadians are disclosing their foreign holdings in increasing numbers, tripling in the decade up to 2014. An analysis of voluntary declarations in 2014 shows 210,750 Canadians declared $429 billion in international assets, $9 billion in foreign income and $13.2 billion in capital gains in 2014.

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Approximately half of these people were in the top 10 per cent of incomes, making at least $93,000 a year, and most of them — 69.5 per cent — live in Ontario and B.C.

Individuals tended to hold more modest international assets, while corporations and trust funds had much bigger foreign stockpiles. The average trust fund held $10.4 million in foreign assets; the average corporation had $2.8 million; and the average person held $757,000 outside the country.

The report also notes that the CRA has released raw data to the Parliamentary Budget Officer, who is preparing his own tax gap estimate, expected next fall.

Senator Downe expects that estimate to be more accurate.

“It’s too early to declare victory. The CRA’s numbers can’t be trusted,” Downe said. “The CRA has skin in the game: the lower the number the better they look.

“I look forward to hearing the Parliamentary Budget Officer’s estimate — which would be an independent estimate — and we’ll see at that time who has the lower and higher number.”

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