About

This document is the second edition of the Methodological Annex on tax gap, accompanying the overall federal tax gap report, published in 2026. The first edition of the Methodological Annex was published in 2022 together with Canada’s first overall federal tax gap report.

Purpose of the methodological annex

This document presents the methodologies utilized to estimate the overall federal tax gap and its components. The methodological annex details both upper- and lower-bound estimates for each tax gap component. All estimates are included in the Annex of the overall tax gap report.

The methodological annex is intended for a technical audience, including academics and analysts from other tax revenue agencies engaged in tax gap research. Additionally, it serves as a valuable resource for anyone interested in understanding the technical aspects underlying tax gap estimates.

What is new?

The methodologies in this second edition of the methodological annex are consistent with the previous edition. It includes updates on methodological adjustments and two new methodologies. Two new methodologies were developed for the payment payroll gap and reporting excise gap on cannabis, which are new subcomponents in the second overall tax gap report.

All estimates were updated up to tax year 2022, including previously published tax gap estimates (from tax year 2014 to 2018). Some differences can be observed in the updated estimates compared to the previously published estimates. This is mainly due to the fact that all estimates were updated using the latest available data.

Canada’s tax gap methodologies follow international best practices, and the Canada Revenue Agency (CRA) regularly participates in meetings on tax gap with the members of the Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration. Through CRA’s tax gap research, Canada has become one of the international leaders in tax gap. For additional information on tax gap international best practices, the OECD published a chapter on how tax administrations are estimating tax gaps as a part of the Tax Administration series (2024) with support from the CRA.

1. Introduction

Although it may appear to be a relatively simple concept, tax gap estimation is complex and requires nuanced analysis depending on the unique circumstances of each tax administration. For example, the tax gap can be evaluated from a number of perspectives such as domestic vs. international, types of tax, and forms of non-compliance, each of which may require a unique methodology.^{Footnote 1} In addition, tax gap estimates often require the analysis of historical data, particularly when examining compliance and collection activities which can take multiple years to complete. For example, comprehensive audits of large corporations can take about eight years to finish. As a result, tax gap estimates often have a time lag between the tax years being examined and the publication year. In certain instances, a projection method is applied for more timely estimates. However, it is important to balance timeliness with other considerations such as the quality of tax gap estimates.

All tax gap estimates are subject to varying degrees of uncertainty based on multiple factors, including the type of gap being estimated, the limitations of a particular methodology, and the quality of available data. To navigate these challenges, the CRA allocates dedicated resources to examine the different components of Canada’s federal tax gap, including updating methodologies and estimates on an ongoing basis.

This methodological annex contains technical details related to the methods used to estimate different components of the overall federal tax gap. In the overall tax gap report, two main forms of non-compliance are captured for personal income tax (PIT), corporate income tax (CIT), goods and services tax/harmonized sales tax (GST/HST), and excise revenue:^{Footnote 2}

• Reporting non-compliance – When taxpayers fail to provide complete or accurate information on their tax returns by under-reporting income or claiming deductions or credits to which they are not entitled.^{Footnote 3}
• Payment non-compliance – When assessed taxes are not fully paid on time by taxpayers for a particular tax year.

Reporting non-compliance is generally difficult to measure since it involves income, assets, and economic activities that are deliberately hidden, or errors that can be difficult to detect. Therefore, it usually requires complex statistical or econometrical approaches. In contrast, the payment gap can be calculated directly using CRA accounting records – taxpayers have either paid or have not paid their taxes owing.

In general, there are two main approaches to estimating the reporting gap (refer to Figure 1):

• A top-down approach uses independent external data, such as macroeconomic data, to estimate the theoretical value of tax which is then compared with the actual tax amount reported. This approach is often used to estimate gaps related to indirect taxes such as GST/HST and excise revenue.
• In contrast, a bottom-up approach uses internal tax administration data, such as audit data, to extrapolate the level of non-compliance to the rest of the population. This approach is often used to estimate gaps related to direct taxes such as corporate income tax.

Figure 1: Illustration of a top-down vs. bottom-up method

Currently, five tax gap components related to reporting non-compliance are estimated using a top-down approach and two components are estimated using a bottom-up approach. The payment gap is calculated using CRA accounting records. In addition, the overall tax gap report examines the impact of CRA’s compliance and collection activities that identify and reduce the tax gap for each tax type, referred to as the net tax gap. This reduction is calculated using CRA’s compliance and collection data, including additional federal tax adjustments from audits and additional tax revenue collected. It is important to note that all tax gap estimates are based on a “tax year” and in 2022 constant dollars to account for inflation. Therefore, figures in this year’s tax gap report are not directly comparable with other public figures previously published on Canada.ca.

Figure 2: Overview of tax gap methodologies

This methodological annex is organized as follows. Sections 2 to 5 present reporting gap methodologies related to PIT, CIT, GST/HST, and excise revenue. Sections 6 and 7 present the methodologies related to the payment gaps and the net tax gaps for all tax types. Each of these sections highlights tax gap estimates, scope of analysis, key data sources, estimation and projection methods, key sources of uncertainty, and public references. Section 8 provides concluding remarks.

2. Personal income tax (PIT): reporting gap methodology

This section outlines the methodologies used to estimate PIT reporting non-compliance related to the domestic underground economy and hidden offshore investment income. For the domestic component, Statistics Canada’s underground economy estimates were used to approximate hidden sources of taxable income and the corresponding federal tax revenue loss. For the international component, global financial statistics and international banking data were used to estimate potential federal tax loss from hidden offshore investment income. The methodologies for these tax gap components remained largely consistent with the previous PIT gap reports (published in 2017 and 2018) and the first overall tax gap report (published in 2022). For both components, the estimates were updated using the latest available data at the time of writing this report.

An overview of the reporting PIT gap methodologies is illustrated below. Additional details on these methodologies can be found in sections 2.1 and 2.2.

2.1 Domestic underground economy

Footnote *

Public Accounts Canada was used to calculate the percentage of federal tax revenue. Data updated as of March 2025.

Return to footnote * referrer

Scope:

• Potential federal PIT revenue loss from individuals not reporting income earned through the underground economy for tax years 2014 to 2022.
• The underground economy includes economic transactions in goods or services which are unreported, resulting in failure to comply with tax laws administered by the CRA.^{Footnote 4}

Key data sources:

• Statistics Canada: underground economy estimates (as of March 2025)
• Department of Finance Canada: marginal effective tax rates

Estimation and projection method:

The methodology for the domestic component of the reporting PIT gap is consistent with the one developed in CRA’s 2017 tax gap report and the overall tax gap report (2022). Tax gap estimates for this report were updated using the latest data from Statistics Canada and Department of Finance Canada.

Step 1: Statistics Canada's underground economy estimates

The domestic component of the reporting PIT gap is commonly related to underground economic activities that are hidden from public authorities. This can include individuals working under the table or when net income is understated by under-reporting income or over-reporting costs. The starting point for this tax gap component is Statistics Canada’s underground economy estimates. These estimates aim to identify missing or unreported productive activity that is not captured in the official Gross Domestic Product (GDP) statistics. These estimates were first prepared by Statistics Canada on an expenditure-by-sector approach to arrive at a GDP estimate related to the underground economy. Subsequently, an income-based GDP related to the underground economy was developed by benchmarking the expenditure-based estimates to factors such as compensation to employees, gross operating surplus, and gross mixed income. These income-based estimates provide a general sense of the potential hidden income in Canada’s underground economy.

Step 2: Potential taxable income in the underground economy

Statistics Canada’s income-based GDP related to the underground economy is not perfectly aligned to the concept of hidden taxable income for individuals. As a result, it was necessary to take certain steps to transform the estimates to approximate the hidden taxable income base related to individuals. For example, this transformation requires removing elements related to corporations (for example, gross operating surplus) and leaving only the components relevant for individual taxpayers.

The potential taxable income in the underground economy for individual taxpayers are estimated based on two groups of individuals:

• Individuals that are not self-employed (compensation to employees).
• Self-employed individuals (mixed income).

The table below shows the breakdown of key underground economic components for these groups of individuals.^{Footnote 5}

Table 2: Estimated taxable income (billions) in the underground economy by components and share of total, 2014 to 2022^{Footnote *}

Footnote *

Totals may not add due to rounding. All amounts are in 2022 constant dollars. Source: Statistics Canada’s Underground Economy estimates.

Return to footnote * referrer

Step 3: Potential federal tax loss

To determine the federal taxes that would have been assessed if the income earned in the underground economy had been reported, the federal marginal effective tax rates of individuals in similar circumstances were applied. Therefore, each of the seven underground economy components (outlined in Table 2) had their own marginal effective tax rates for each tax year. They were then applied to the estimated taxable income in these sectors. These rates were calculated by the Department of Finance Canada using a microsimulation model to account for statutory income tax rates, deductions and credits, and, when applicable, the clawbacks of federal income-tested benefits.

Key sources of uncertainty:

• Due to the nature of the underground economy estimates, it is difficult to obtain information on underground economic activities, so the estimates necessarily rely on assumptions, indicative information and various indirect methods.
• This top-down method approximated the marginal effective tax rates of individuals participating in the underground economy. Therefore, the tax gap estimates may fluctuate based on these assumed marginal effective tax rates.
• It was not possible to consider hidden income that is earned by activities outside the scope of the Statistics Canada’s estimates, such as unreported income from capital gains on the sale of assets.
• The reporting PIT gap implicitly captures non-compliance related to non-filers who would have a tax liability if they had filed their tax returns. Due to the top-down nature of this methodology, it was not possible to separate the non-filing gap from the tax gap estimate.

2.2 Hidden offshore investment income

Footnote *

Public Accounts Canada was used to calculate percentage of federal tax revenue. Data updated as of January 2025.

Return to footnote * referrer

Scope:

• Potential federal PIT revenue loss from hidden offshore investment income for tax years 2014 to 2022.

Key data sources:

• Global financial statistics:^{Footnote 6}
  • Total Portfolio Investments, portfolio investment positions by counterpart economy
  • Bank of Canada exchange rate
  • World Bank, GDP data
• International banking data:
  • Bank of International Settlements, locational banking statistics
  • Federal Reserve Economic data
  • World Bank deposit interest rate
  • Dividends and capital gains data

Estimation and projection method:

The methodology of the international component of the reporting PIT gap is consistent with the one developed in CRA’s 2018 tax gap report and the overall tax gap report (2022) with updated data sources and minor adjustments to certain assumptions.

Step 1: Global offshore wealth stock

In order to estimate unreported offshore investment income held by Canada’s individuals,^{Footnote 7} the first step was to estimate the global stock of offshore financial wealth held by individuals.^{Footnote 8} Since offshore investment income is earned in the following year, it was necessary to use estimates of offshore wealth for 2013 to 2021 in order to estimate the tax gap for tax years 2014 to 2022. It was estimated that the global offshore financial wealth ranged between $8.9 trillion in 2013 to $17.5 trillion in 2021.^{Footnote 9} To compare it in proportional scale, the global financial wealth was between 10% (in 2016 and 2018) to 15% (in 2020) of the global GDP.

Global offshore wealth was allocated into financial asset types in each tax year based on updates from key academic literature and portfolio investment data.^{Footnote 10} This update allowed the allocation of offshore portfolio securities held in debt and asset securities to vary from year to year (refer to Figure 3).^{Footnote 11} This is an improvement from the previous tax gap publication, where previously it was assumed that wealth distribution by asset types was the same for each year.^{Footnote 12}

Figure 3: Offshore wealth allocation by asset types for years 2013 to 2021

Source: Faye et al. (2023) and IMF portfolio asset data.^{Footnote 13}

Step 2: Canadian share of global offshore wealth

The next step is to estimate the portion of the global offshore wealth that belongs to Canadian individuals between 2013 to 2021. Three sources were used to create a minimum and maximum estimate for Canada’s share of global offshore wealth (refer to Figure 4).

• Faye et al. (2023): assumes that global hidden wealth is held in proportion to offshore bank deposits, similar to previous work by Zucman (2014, 2015) and Alstadsaeter et al. (2017).
• Pellegrini et al. (2016): uses the Canadian share of recorded portfolio investments to divide the total global offshore wealth estimate.
• Pellegrini et al. (2016) – GDP approach: uses countries’ shares of global GDP to divide the total global offshore wealth estimate.

Figure 4: Canadian global offshore wealth share according to different academics, years 2013 to 2021

Step 3: Investment income earned

Individuals in Canada are usually required to pay tax on investment income generated by their wealth, but not on their stock of wealth. The investment income earned by Canadian individuals is estimated by applying a rate of return on the estimated amount of hidden wealth held by Canadian individuals.

Rates of return were estimated separately for each asset type (refer to Table 4).

• Bank accounts are assumed to have an annual rate of return based on deposit interest rate data from the World Bank.^{Footnote 14}
• Debt securities are assumed to have an annual rate of return based on an average of corporate bond yield from the Federal Reserve Economic Data.
• Dividend payouts are assumed to represent the previous year-end asset security value, as supported by S&P 500 Index data.
• Realized capital gains are estimated based on the assumptions used in the previous tax gap reports.^{Footnote 15}

Step 4: Unreported offshore investment income

It is assumed that only a portion of the offshore investment income earned by Canadian individuals is reported to the CRA. Due to the absence of reliable data, there are many possible estimates for the share of unreported offshore investment income.

• Bank account under-reporting rates:
  • 80% (based on Zucman 2015 and Pellegrini et al. 2016)
  • 75% (based on ECORYS 2021, Alstadsaeter et al. 2018 and Zucman 2017)
  • 60% (based on Pellegrini et al. 2016)
• Debt and asset securities under-reporting rates:
  • 90% (based on Pellegrini et al. 2016)
  • 80% (based on Zucman 2015, Pellegrini et al. 2016)
  • 75% (based on ECORYS 2021, Alstadsaeter et al. 2018, Zucman 2017)

With the absence of actual under-reporting rates related to offshore investment income, all of these rates were incorporated into the analysis for tax years 2014 to 2017.^{Footnote 16}

For more recent years, the implementation of Automatic Exchange of Information (AEOI) agreements have impacted the risk of unreported offshore financial wealth. Recent academic research has begun to identify the impact of these agreements on the under-reporting rates.

• Bank account, debt and asset securities under-reporting rates (post-AEOI):
  • 57% to 73% (based on Boas et al. 2024)^{Footnote 17}

Since Canada implemented the largest of these agreements in 2017, the reduced under-reporting rates were incorporated for tax years 2018 to 2022.

Step 5: Potential federal tax loss

The international component of the reporting PIT gap is assumed to stem primarily from individuals with high levels of income. Therefore, the highest federal statutory marginal tax rate was used for each tax year, ranging from 29% in 2014 and 2015 to 33% starting in 2016. The tax rate was adjusted for each asset type. For instance, the highest marginal rate is applicable to foreign interest and dividend income. For capital gains, the 50% inclusion rate was taken into account which reduces the effective rate to 14.5% for tax years 2014 to 2015 and to 16.5% starting in 2016.

Using the parameters detailed in the previous steps, the tax loss was first estimated by asset type and then added together to obtain the total federal tax loss due to unreported offshore investment income. Refer to Table 5 for detailed calculations for tax year 2022.

Footnote *

Totals may not add due to rounding. The analysis is based on rates of return being realized on a US dollar-denominated wealth stock, resulting in US-denominated income, which is then converted into Canadian dollars for the estimated tax loss (the noon rate at the last day of the year from the Bank of Canada is used).

Unless specified otherwise.

Return to footnote * referrer

Key sources of uncertainty:

• While all tax gap estimates have some degree of uncertainty, the international component of the reporting PIT gap is particularly difficult to estimate since it relies on many assumptions that are difficult to verify. For example, the actual amount of unreported offshore investment income may fluctuate as a result of external factors such as the participation in exchange of information agreements with other jurisdictions. The CRA will continue to explore additional research and approaches related to international non-compliance to further refine this tax gap component.
• The offshore reporting gap may be reduced by Canada’s tax treaties with other jurisdictions. In general, the methodology for this component assumes that offshore income was unreported in the source jurisdiction as well as the jurisdiction it was invested in. However, there may be certain cases where offshore investment income was reported and taxed in the jurisdiction it was earned in, but was unreported to the CRA. In this case, a tax treaty may reduce the individuals tax liability associated to that offshore investment in Canada. Given the top-down approach used for this component, the current methodology was not able to account for this.
• Given the sources of uncertainty in the international component, a sensitivity analysis was conducted to assess the sensitivity of the tax gap estimates based on the assumptions chosen. Table 6 shows the impact of a 10% increase in each parameter for tax year 2022, holding all other parameters constant. For example, a 10% increase in realized capital gains would increase the tax gap by 4.5%. This analysis demonstrates that changing the assumptions can have a material impact on this tax gap estimate.

Key methodological adjustments from the 2022 overall tax gap report:

• The amount of global offshore financial wealth was updated for all years under this study. As the data for all years was available for this report, a growth rate no longer needed to be applied to estimate the global offshore financial wealth.
• Assumptions for the constant share of offshore financial wealth held in debt and securities was not applied in this report as it can vary each year, according to IMF data. This adjustment helped better reflect fluctuations in offshore investment portfolios.
• The estimates were adjusted to account for the impacts of the exchange of information agreements on the share of unreported offshore wealth. This update helped reflect risk reduction of non-compliance related to offshore financial investments.

3. Corporate income tax (CIT): reporting gap methodology

This section outlines the methodologies used to estimate CIT reporting non-compliance related to incorporated SMEs and large corporations. For the SME population, results from random audits conducted during fiscal years 2013-14 to 2014-15 were used to estimate the reporting gap. For large corporations, two different methods were used to extrapolate risk-based audit results while minimizing selection bias. The methodologies for these tax gap components remained largely consistent with the previous tax gap report on corporate non-compliance (published in 2019) and the first overall tax gap report (published in 2022). The estimates were updated using the latest CRA data with adjustments to better project the estimate for tax years beyond 2016.

An overview of the reporting CIT gap methodologies is illustrated below. Additional details on these methodologies can be found in sections 3.1 and 3.2.

3.1 Small and medium enterprises

Footnote *

Public Accounts Canada was used to calculate the percentage of federal tax revenue. Data updated as of January 2025.

Return to footnote * referrer

Scope:

• Potential federal CIT revenue loss from SMEs due to reporting non-compliance for tax years 2014 to 2022.
• SMEs are defined as corporations with less than or equal to $20 million in total gross revenues regardless of the industry sector or with less than or equal to $50 million in total gross revenues in the following industry sectors: Manufacturing; Transportation and Allied Services; Wholesale Trade; and Retail and Services.
• Domestic and international non-compliance for corporations is included in the CIT gap. However, due to structure of the audit data and methodologies used, the international component could not be separated from the domestic component.

Key data sources:

• CRA 2013-15 stratified random audit results (for tax year 2011)
• CRA assessment data based on T2 Corporate Income Tax Returns (as of January 2025)
• Statistics Canada’s underground economy estimates (as of March 2025)

Estimation and projection method:

The methodology for the reporting CIT gap for SMEs is consistent with the one developed in CRA’s 2019 report and the first overall tax gap report (2022) with minor adjustments to account for changes in non-compliance behaviour.

Step 1: CRA's random audit results

The CRA’s most recent random audits of incorporated SMEs took place during fiscal years 2013-14 and 2014-15 and examined SMEs that filed a tax return for tax year 2011. Using a stratified random sampling methodology, the CRA completed over 4,500 full-scope audits of SMEs operating in 21 industry sectors.

Among audited taxpayers, about 37.6% of SMEs were assessed with additional federal tax liability by an average amount between $1,939 to $2,478 for tax year 2011.^{Footnote 18} Extrapolating the results to the SME population as a whole, the reporting tax gap was estimated to be between $2.8 billion to $3.6 billion for tax year 2011.^{Footnote 19}

Step 2: Projection to more recent tax years

In order to account for changes in the SME tax base due to economic growth and changes in certain tax laws, compound annual growth rates of the total federal tax payable as of one year after a tax year at initial assessment were applied to project the tax gap estimate for tax years 2014 to 2022. The table below shows the total federal tax payable at initial assessment and its growth rate for tax years 2014 to 2022.

Footnote *

2011 tax year was used as the baseline given that random audit results were for that year.

Return to footnote * referrer

Step 3: Non-compliance rate indicator

In the initial corporate tax gap report (2019), it was assumed that non-compliance rates remained relatively stable. The methodology was later refined to approximate potential changes in non-compliance rates and was included in the first overall tax gap report (2022). This non-compliance rate indicator was developed by looking at the ratio between the estimated growth of corporate income in the underground economy and the actual growth of reported taxable income. A positive growth rate of this ratio would suggest that the corporate income from the underground economy grew at a faster rate than the reported taxable income. In contrast, a negative growth rate would suggest that the corporate income from the underground economy grew at a slower pace. The table below shows changes in the non-compliance rate indicator for tax years 2014 to 2022.

Footnote *

2011 tax year was used as the baseline given that random audit results were for that year..

Return to footnote * referrer

Step 4: Potential federal tax loss

Using the two growth rates above, the SME reporting gap was calculated using the following formula for each tax year, i :

Key sources of uncertainty:

• The SME reporting gap is based on the most recent random audit results from fiscal years 2013-14 and 2014-15 which examined SMEs for tax year 2011. Therefore, it was necessary to project the tax gap estimate to more recent years using certain indicators. The growth rate of total federal tax payable is based on CRA’s internal data and looks at a similar population to those examined in the random audit. However, it was not possible to match the exact population due to data limitations.
• The non-compliance indicator that was used to approximate potential changes in non-compliance rates are based on a combination of Statistics Canada’s underground economy estimates and CRA’s assessing data. This indicator relies on the assumption that large corporations generally do not engage in the underground economy, and that other types of SMEs’ non-compliance have the same growth rate as non-compliance related to the underground economy.
• It is important to note that auditors may not always identify all sources of non-compliance when conducting audits due to various reasons. In some cases, this could lead to an underestimation of the tax gap. While certain countries have attempted to develop or incorporate “uplift factors” to account for undetected non-compliance, these remain imprecise and subjective. Additional research would be required to estimate an uplift factor for undetected non-compliance that could be applied in the Canadian context.

3.2 Large corporations

Footnote *

Public Accounts Canada was used to calculate the percentage of federal tax revenue. Data updated as of January 2025.

Return to footnote * referrer

Scope:

• Potential federal CIT revenue loss from large corporations due to reporting non-compliance for tax years 2014 to 2022.^{Footnote 20}
• Corporations may be able to reduce their audit adjustments by using accumulated tax credits (for example, the Scientific Research and Experimental Development Credit) and distort tax gap levels for a given tax year.^{Footnote 21} Therefore, the effects of these credits were removed from the analysis.
• Large corporations are defined as:
  • Corporations with total gross revenues from $20 million to $50 million that are not in the following industry sectors: Manufacturing; Transportation and Allied Services; Wholesale Trade; and Retail and Services
  • Corporations with total gross revenues of $50 million or more regardless of the industry sector.

Key data sources:

• CRA assessing data based on T2 Corporation Income Tax Returns (as of January 2025)
• CRA Business Number Registration System (as of January 2025)
• CRA risk-based audit data for large corporations completed for relevant tax years (as of January 2025)

Estimation and projection methods:

The methodologies for the reporting CIT gap for large corporations are largely consistent with the ones developed in the CRA’s 2019 report and the first overall tax gap report (2022). The estimates for the previously published tax years were updated to account for the most recent data.

Step 1: CRA's risk-based audit results

The CRA relies on risk-based audits for the large corporate population given the relatively small number of large corporations and higher dollar amounts if non-compliance occurs. Through these audits, the CRA closely examines relevant books and records of corporations to make sure they fulfill all of their tax obligations. While risk-based audits make efficient use of audit resources, non-compliance identified through these audits cannot be directly extrapolated to the population due to selection bias. Therefore, two statistical methodologies were applied to minimize selection bias and estimate the federal tax gap for large corporations. Due to the limitations of each method, one can underestimate the tax gap (extreme value methodology) while the other can overestimate it (cluster analysis). Therefore, both methods were used to create a range representing lower- and upper-bound estimates.

Step 2: Estimation

Extreme value methodology

The extreme value methodology in the context of estimating tax non-compliance has been employed by the US Internal Revenue Service to develop its large corporate tax gap estimates and it has been refined by key academics.^{Footnote 22}

The extreme value methodology relies on risk-based audit results to derive a tax gap estimate based on an assumed power law distribution. Under a power law distribution, the amount of federal tax adjustments from the audit is inversely related to a corporation's non-compliance ranking in the population. This implies that the magnitude of non-compliance will tend to drop off exponentially as one moves down the ranks of corporations from the most to the least non-compliant.^{Footnote 23}

The tax gap was estimated by applying ordinary least squares (OLS) regression based on the relationship between the logarithm of corporation non-compliance rank and the logarithm of audit adjustments. Figure 5 is an illustration of the OLS regression used to estimate the large corporate reporting gap for the latest year where the fully completed audits were used.^{Footnote 24} The main assumption for this methodology is that the taxpayers with the highest adjustments have already been audited by the CRA. However, since risk-based audit selection may not always identify the most non-compliant corporations, this method can underestimate the tax gap. Therefore, the tax gap estimate from this method was used as a lower-bound estimate.

Figure 5: OLS regression to estimate the large corporate tax gap for tax year 2016^{Footnote *}

Footnote *

The same regression analysis was applied to each tax year separately.

Return to footnote * referrer

Cluster analysis

In addition to the extreme value methodology, a clustering technique was used to determine whether large corporations could be organized into relatively distinct clusters on the basis of key characteristics and to estimate the potential level of non-compliance within each cluster.

Similar to the 2022’s overall tax gap publication, this year’s algorithm combined k-means (for numerical characteristics) and k-modes (for categorical characteristics) clustering. It also automatically selected the optimal number of clusters based on cluster distances. In addition, an iterative approach was taken to improve the accuracy of the estimate by estimating the gap multiple times and taking the average.

Once the clusters were formed, the potential tax gap for each cluster was estimated based on the ratio between the federal tax adjustments found by the audit and the reported revenues of audited corporations at initial assessment.

where i=1,2,…,k and k is the number of audited corporations in a cluster.

This ratio (different for each cluster) was then used to estimate the potential federal tax adjustment for every non-audited corporation for each cluster.

where i=1,2,…,m and m is the number of non-audited corporations in a cluster.

The main assumption is that the ratio between federal tax adjustments and reported revenues for audited corporations is likely to be the same for unaudited corporations within the same cluster.^{Footnote 25} The overall federal tax gap was estimated by aggregating the projected amounts of non-compliance across all clusters.

It is important to note that cluster analysis can overstate the tax gap since it does not account for the fact that large corporations selected for audit may still be more likely to have a higher level of non-compliance compared to those that are not audited within the same cluster. Therefore, the tax gap estimate from this method was used as an upper-bound estimate for large corporations.

Box 1: An illustrative example of cluster analysis

The left-hand side illustrates the entire large corporate population, some that have been subject to a risk-based audit (red dots) and others that have not been audited (yellow dots). A clustering algorithm is used to group the corporations into clusters (green, orange, blue circles) based on key characteristics including, among others, corporation type, industry sector, financial ratios, the presence of foreign affiliates, and the level of international transactions. Once they are grouped together, federal tax adjustments from already audited corporations (red dots) are extrapolated to the entire cluster to estimate the potential federal tax adjustment, including unaudited corporations (yellow dots).

Step 3: Projection

Comprehensive risk-based audits can take multiple years to complete, particularly for large corporations, due to the complex and often global nature of their business activities. For this report, the tax gap year 2016 was the latest year with fully completed audit results,^{Footnote 26} and the tax gaps for tax years 2017 to 2022 were projected based on historical audit data, applying a similar method used by the US.

The projection method is based on estimating the voluntary reporting rate (VRR) and an assumption that this rate remained relatively consistent from year to year. The VRR was calculated from reported federal taxes and the estimated tax gap for tax years 2011^{Footnote 27} to 2016 for each year separately, and then the average VRR tax years was used, which was 74%.

where n is the number of years from 2011 to 2016, inclusively.^{Footnote 28}

Step 4: Potential federal tax loss

The reporting CIT gap from large corporations was projected for tax years 2017 to 2022, using the VRR (calculated at Step 3) and reported federal taxes for each tax year, i:

Key sources of uncertainty:

• Since this tax gap estimate relies on risk-based audit results, there are factors that can both overstate or understate the tax gap. For example, there may still be a selection bias within the estimate, which can overstate the tax gap. In addition, auditors may not always identify all sources of non-compliance when conducting audits due to various reasons. This could lead to an underestimation of the tax gap. While certain countries have attempted to develop or incorporate “uplift factors” to account for undetected non-compliance, these remain imprecise and subjective. Additional research would be required to estimate an uplift factor for undetected non-compliance that could be applied in the Canadian context.
• Due to data limitations, the projection method assumes that the voluntary reporting rate remained relatively stable.

Key methodological adjustments from the 2022 overall tax gap report:

• The tax gap for large corporations was projected using audit results from tax years 2011 to 2016 instead of 2010 to 2011 as in the previous publication. This larger time series was possible because more audits were completed at the time of writing this report that provided a more robust foundation for the projection.

4. Goods and services tax/harmonized sales tax (GST/HST): reporting gap methodology

This section outlines the methodology used to estimate the federal reporting GST/HST gap. The methodology for this tax gap component remained largely consistent with the previous tax gap report on GST/HST (2016) and the overall tax gap report (2022). The estimates were updated using the latest available data from the Department of Finance Canada, Statistics Canada, Canada Border Services Agency (CBSA), and the CRA. An overview of the reporting GST/HST gap methodology is illustrated below. Additional details on this methodology can be found in the following pages.

Footnote *

Public Accounts Canada was used to calculate the percentage of federal tax revenue. Data updated as of January 2025.

Return to footnote * referrer

Scope:

• Estimating the potential federal GST/HST revenue loss from reporting non-compliance for 2014 to 2022.
• The reporting GST/HST gap includes reporting non-compliance related to GST and the federal portion of HST.

Key data sources:

• Department of Finance Canada
  • Data from the HST Revenue Allocation Framework
• Statistics Canada
  • Provincial Economic Accounts and Provincial Supply and Use Tables
  • Underground economy estimates
• Canada Revenue Agency
  • GST Returns data
  • GST Audit data
• Canada Border Services Agency
  • Declared GST/HST revenue

Estimation and projection method:

The difference between the theoretical tax liability and the federal portion of the assessed GST/HST represents the federal reporting GST/HST gap. Amounts for assessed GST/HST were based on data for declared GST/HST revenue from the CRA and the CBSA for tax years 2014 to 2022.

Step 1: Estimate total theoretical tax liability

The first step is to estimate the total theoretical federal GST/HST liability. It is estimated by determining the tax base that would result from full compliance using a number of economic and administrative data sources (as noted below) and then multiplying the base by the federal GST/HST rate.

The tax base is comprised of household expenditures, residential construction, and the expenditures of entities that produce GST/HST exempt services,^{Footnote 29} including public sector bodies, listed financial institutions, and certain other businesses.

• Household expenditures are derived from personal expenditure data contained in Statistics Canada’s Provincial and Territorial Economic Accounts and Provincial Supply and Use Tables. The household expenditure base is estimated by applying an interpretation of the legal taxability to net expenditures by households on goods and services taking into consideration whether commodities are fully taxable, zero-rated, or exempt.
• Investment in residential construction comprises new housing construction, alterations and improvements and transfer costs such as real estate commissions and legal fees. The tax base for residential construction is calculated from an estimate of the GST/HST on housing provided by Statistics Canada. This estimate accounts for the value of land (which is subject to GST/HST) and records the GST/HST on new construction at the time of ownership or possession (which is when GST/HST is levied) rather than at the time of construction (as it is recorded in the Provincial Economic Account).
• The tax base related to public sector bodies captures taxable expenditures from municipalities, universities, schools, hospitals, colleges, charities and qualified non-profit organizations. The estimation of this tax base is based on administrative GST/HST rebate data from the CRA and yields more robust results than estimating this base using statistical/survey data.
• The tax base of listed financial institutions stems from taxable expenditures by chartered banks, insurance corporations, credit unions and trust companies related to their provision of exempt services. This tax base is estimated using data from the CRA and Statistics Canada.
• The tax base of other businesses producing exempt services captures other exempt producers including physicians, dentists and private education. Due to the confidential nature of the data, this base is estimated by Statistics Canada based on the Supply and Use Tables.

Moreover, since economic activities taking place in the underground economy are not fully captured in the National and Provincial Economic Accounts, each of the estimated tax base components are adjusted to account for the underground economy. The adjustment factors are derived from Statistics Canada's estimates of the underground economy. For example, the consumer expenditure tax base is grossed up by a factor ranging from 2.8 per cent to 3.1 per cent depending on the year, which is derived by dividing the estimated GDP in the underground economy by reported GDP related to household final consumption expenditure.

Step 2: Calculate federal GST/HST assessed

Assessed taxes are based on data for declared federal-provincial GST/HST revenue from the CRA and CBSA. Certain adjustments are required to account for revenues forgone due to intentional tax policy design that would otherwise count towards assessed taxes (and are included in the theoretical tax liability). These adjustments include:

• Point-of-sale rebates adjustment: Provinces participating in the HST offer rebates of the provincial portion of the HST (“Provincial Value-Added Tax” or “PVAT”) to consumers at the point of sale for certain items, such as books, children's clothing and footwear, diapers and heating oil. Since these items are part of the tax base, an adjustment based on Statistics Canada data and surveys is added to revenues to account for the forgone PVAT due to point-of-sale rebates.
• Small supplier threshold adjustment: The small supplier threshold rule allows businesses with annual gross taxable sales under $30,000 to not register for GST/HST. A small supplier that chooses not to register for GST/HST does not collect GST/HST on goods and services sold and is ineligible for input tax credits. Because the activities of small suppliers are included in the estimated theoretical tax base as if they were taxable, a corresponding notional amount is added to the revenues.
• Section 87 of the Indian Act adjustment: Purchases by status Indians on or delivered by the vendor onto a reserve are eligible for a GST/HST exemption under Section 87 of the Indian Act, and are therefore not subject to GST/HST. This adjustment is a notional estimate of the GST/HST that would be assessed on purchases in the absence of the section 87 exemption.
• Grandparented housing adjustment: An adjustment is made for PVAT relieved on grandparented housing purchases that arise from provinces joining the HST or increasing their rates. This adjustment captures PVAT forgone due to sale agreements of new housing being signed before a tax change is announced for which the purchaser takes ownership or possession after the tax change is implemented. Information on these amounts is collected by the CRA.
• Transborder flights adjustment: Canada-US transborder flights are subject to the GST but not to the provincial portion of the HST. An estimate of the associated forgone PVAT based on Statistics Canada data is added to revenues.

Once the federal-provincial GST/HST revenues have been adjusted by the above elements, the federal portion of the revenues is determined using the HST Revenue Allocation Framework, which determines the revenue shares of the federal government and HST provinces using economic data from Statistics Canada and administrative data from the CRA and the CBSA.

Step 3: Difference between the theoretical tax liability and assessed tax

The reporting federal GST/HST gap is estimated by the difference between the theoretical tax liability that would result from full compliance and assessed GST/HST:

Key sources of uncertainty:

• As with any tax gap estimated using a top-down approach, the reporting GST/HST gap estimates are highly dependent on third-party statistical aggregate data that can be subject to revisions from time-to-time.
• Like other tax gap components, reporting GST/HST gap estimates may vary from year-to-year, some of which may be due to factors other than non-compliance. For GST/HST in particular, part of the volatility in tax gap estimates reflects the normal operation of the tax system.
• The estimates for tax years 2021 and 2022 have higher levels of uncertainty because they were projected using the growth rate of GST/HST revenue due to data limitations. In the future, the CRA plans to explore potential improvements for these estimates.

Key methodological adjustments from the 2022 overall tax gap report:

• GST/HST gap for tax years 2021 and 2022 was projected based on the growth rate of the GST/HST revenue. This was due to a higher degree of uncertainty in the quality of national statistics during the pandemic. Other countries have experienced similar challenges.^{Footnote 30} The estimates for these years will be reviewed in the future when more data becomes available.

5. Excise: reporting gap methodology

This section outlines the methodologies used to estimate the reporting excise duty gap related to the illegal production/smuggling of cigarettes^{Footnote 31} and cannabis. The methodology for cigarette duty gap is consistent with previous publications. The cannabis duty gap is a new component added in this overall tax gap report and the methodology was adapted to consider specific nuances in the cannabis industry. The estimates were updated using the latest data from Statistics Canada, Health Canada, the CRA, and the CBSA.

An overview of the reporting excise duty gap methodologies is illustrated below. Additional details on these methodologies can be found in sections 5.1 and 5.2.

5.1 Reporting excise duty gap related to cigarettes

Footnote *

Public Accounts Canada was used to calculate the percentage of federal tax revenue. Data updated as of January 2025.

Return to footnote * referrer

Scope:

• Estimating the potential federal excise duty revenue loss from illegal production/smuggling of cigarettes.
• Includes cigarettes and roll-your-own (RYO) cigarettes.
• Excludes e-cigarettes and vaping products. Excise duty on vaping products was implemented on October 1, 2022^{Footnote 32} and therefore, had a minimal impact on tax years up to 2022. These duties may be explored in the future.

Key data sources:

• Statistics Canada
  • Canadian Community Health Survey (CCHS)
• Canada Revenue Agency
  • Administrative data on legal domestic tobacco product production (as of January 2025)
  • Excise duty rates
• Canada Border Services Agency
  • Administrative data on legal commercial tobacco product importations
• Health Canada
  • Wholesale sales data: cigarettes and fine-cut sales in Canada

Estimation and projection method:

The reporting excise gap related to cigarettes is measured by estimating the potential production of illegal cigarettes by comparing total production levels with legal production levels. The excise duty rate is then applied to the assumed level of illegal production to estimate the potential federal tax loss.

Step 1: Total production estimate

In this step, the main assumption is that the total cigarette consumption is equivalent to its total production. Survey results from Statistics Canada related to smoking prevalence rates (percentage of smokers in Canada) and smoking intensity (average number of cigarettes smoked per day by daily and occasional smokers) were used to estimate the total cigarette consumption.

Total consumption is calculated separately for daily and occasional smokers. It is the product of the number of smokers and the consumption intensity. The number of smokers is calculated as the product of the population aged 15 and over and the smoking prevalence rate. The consumption intensity is calculated as the product of the average number of cigarettes smoked per day and the number of smoking days.

An uplift factor is then applied to correct for under-reporting related to smoking prevalence.^{Footnote 33} This adjustment is consistent with the United Kingdom’s approach to estimating their cigarette excise duty gap. This report used the 35% under-reporting rate calculated by Guindon et al. (2017), corresponding to an uplift factor of 1.54. The uplift factor is calculated as:

The total production is calculated as the product of the total estimated consumption and the uplift factor.

Step 2: Legal production

The number of tax-paid cigarettes was calculated using tax information on manufacturers in Canada, importers of cigarettes, and duty-free shops. To estimate RYO cigarettes, we used cigarettes fine-cut tobacco sales data, expressed in units of weight (kilograms), as reported by tobacco manufacturers to Health Canada.

The number of cigarettes that resulted in refunds and exported are subtracted since there are quantities for which producers or importers are entitled to claim reimbursements. There could be multiple reasons for refunds such as expired or destroyed cigarettes and amounts paid in errors.

Step 3: Illegal production estimate

Illegal production is estimated by taking the difference between estimated total production and legal production of cigarettes.

Step 4: Potential federal tax loss

To estimate the reporting excise gap related to cigarettes, the average federal cigarette duty rate per tax year needed to be calculated as the duty rate changed multiple times. The average federal duty rate corresponds to the average of the official duty rates on a daily basis between January 1st and December 31st of each year. It is calculated using a weighted average method based on the number of days each duty rate was in effect.

The cigarette excise gap was estimated by multiplying the illegal production (number of illegal cigarettes), estimated in Step 3, by the average cigarette duty rate (for five cigarettes) for each tax year separately.

Details of the calculations are presented in the table below.

Footnote *

Amounts are in nominal dollars.

Return to footnote * referrer

Footnote **

Amounts are in constant 2022 dollars.

Note: numbers may not add up due to rounding. Data updated as of January 2025.

Return to footnote ** referrer

Key sources of uncertainty:

• Total production is estimated based on the total consumption. Therefore, it could be an underestimate due to some products being produced, where duties would need to be paid, but not actually consumed.^{Footnote 34}
• The estimated total production does not include all cigarettes purchased abroad (such as cigarettes purchased by travellers returning to Canada) but includes cigarettes purchased by visitors to Canada who are smokers.
• It is assumed that the cigarette consumption habits of the population excluded from CCHS sampling frame are identical to those of the rest of the Canadian population aged 15 years and older.^{Footnote 35}
• Smokers of illicit tobacco may reduce their consumption if they have to pay for cigarettes at a higher legal price that includes tobacco duty, if all illicit cigarettes were eliminated. Therefore, the federal cigarette duty gap may not be fully recoverable.
• The most important limitation of this method is that it is sensitive to the assumption which determines the uplift factor used to estimate total consumption of cigarettes, and as a result, total cigarette production. Based on Guindon et al. (2017), it was assumed in this report that 35% of cigarettes were unaccounted for in the survey data due to under-reporting by survey respondents. However, if this assumption is modified, the federal cigarette duty gap is subject to significant change. Refer to Table 14 for details on the sensitivity analysis.

Footnote *

Figures may not add due to rounding. Data updated as of January 2025.

Return to footnote * referrer

5.2 Reporting excise gap related to cannabis (new component)

Footnote *

Public Accounts Canada was used to calculate the percentage of federal tax revenue. Data updated as of January 2025.

Return to footnote * referrer

Scope:

• Estimating the potential federal excise duty revenue loss from illegal production of cannabis for tax years 2019 to 2022. Since cannabis was legalized in October 2018, the analysis was conducted starting in tax year 2019.
• Includes dried cannabis only as it is considered one of the major sources of cannabis excise duty revenue. Other cannabis products may be explored in the future.
• Includes cannabis for non-medical use only due to data limitations.
• Excludes cannabis cultivated for personal use that is “grow your own” cannabis as it is not subject to cannabis excise duties.

Key data sources:

• Health Canada
  • Canadian Cannabis Survey (CCS)
• Statistics Canada
  • Canadian Community Health Survey (CCHS)
  • Census data
• Canada Revenue Agency
  • Administrative data on legal domestic cannabis product production (as of January 2025)
  • Excise duty rates

Estimation and projection method:

The reporting gap for federal cannabis duty was estimated using the gap analysis methodology, similar to the cigarette duty gap. Several adjustments were made to account for nuances in the underlying data and cannabis industry. The gap analysis included comparing the total theoretical cannabis duty liability and the reported cannabis duty (from legal production).

Step 1: Total production estimate

Similar to the cigarette excise gap, the total consumption was used as a proxy for the total production. Consumption was measured in terms of grams of dried cannabis used in Canada based on survey data. The main assumption is that the total consumption of cannabis is equivalent to its total production, and import has a minimal impact on the Canadian cannabis consumption. Total consumption is calculated by multiplying the number of cannabis users by the number of consumption days in a year and by the average amount consumed per day.

The process of estimating the total consumption accounted for certain nuances in the cannabis data and included the following:

• Number of users: The total number of cannabis users was estimated by multiplying the population aged 16 and over^{Footnote 36} by the overall prevalence of cannabis use,^{Footnote 37} and then by a percentage of dried cannabis users (non-medical only) among all cannabis users. The calculations were separate for each user type based on the frequency of cannabis use.^{Footnote 38} The number of users was adjusted to exclude those who primarily consume “grow your own” cannabis, as this type of cannabis is not taxed.
• Consumption intensity: Consumption intensity was determined by multiplying the total amount of consumption days in a year by the average amount of cannabis consumed per day, measured in grams. The calculations were completed separately for each user type based on the frequency of cannabis use.
• Uplift factor: An uplift factor, reported by PBO (2016) based on academic papers, was used to correct for typical underreporting in surveys. The uplift factor differed by user type (refer to Table 16).

• Total production: Consumption for each user type was calculated as the multiplication of the number of users, consumption intensity and uplift factor for each user type separately. The total consumption was the summation of consumption for all user types. The total production is assumed to be equal to the total estimated consumption.

Step 2: Theoretical cannabis duty liability

The theoretical total cannabis duty liability was estimated by multiplying the total production derived in Step 1 by the excise duty rate for dried cannabis. A flat-rate duty was applied exclusively because the survey data did not have sufficient information on whether the flat-rate or ad-valorem duty needed to be applied. The main reason for using a flat-rate duty is that the majority of cannabis excise licensees/registrants, who report their duties to the CRA, calculate these duties using a flat-rate duty.

Step 3: Cannabis duty reported

Instead of measuring legal production and then calculating the reported duty on it as in the cigarette methodology, the reported duties were derived directly from the CRA’s administrative database. It included cannabis excise duties reported by taxpayers on the Cannabis Duty and Information Return.^{Footnote 39} The amount of cannabis duty refunded was subtracted from the total legal duty reported as it did not have an impact on the legal production. The cannabis duty may be refunded due to various reasons such as amounts paid in error, reworked cannabis, and destruction of the product. In addition, cannabis imported for medical or scientific reasons was excluded from the legal duty estimates because the cannabis duty gap only considers non-medical (recreational) cannabis.

Step 4: Potential federal tax loss or cannabis excise gap

Finally, the federal cannabis reporting duty gap was estimated by subtracting the cannabis excise duty reported (calculated at Step 3) from the theoretical cannabis duty liability (calculated at Step 2).

Details of the calculations are presented in Table 17 below.

Footnote *

Amounts are in nominal dollars, except the cannabis excise gap, as of January 2025. Totals may not add due to rounding.

Return to footnote * referrer

Key sources of uncertainty:

• The analysis only considers dried cannabis, as it is assumed to be the largest contributor to cannabis excise gap. Consequently, the cannabis excise gap is an underestimate as it does not currently include non-compliance related to other cannabis products.
• Estimated total consumption, which is a proxy to total production, is measured in grams since excise duty applies to grams of dried cannabis. Survey respondents may struggle to accurately quantify their consumption in grams, introducing some uncertainty in the survey results.
• The estimation of cannabis gap is sensitive to survey assumptions and the representation of the cannabis user group.
• The cannabis excise gap was estimated based on individuals aged 16 years and older^{Footnote 40} as this population was included in the main data source, the CCS.
• The cannabis excise gap was estimated based on non-medical use of cannabis; thus, illegal medical cannabis consumption is not accounted for in the current estimate.
• A flat-rate duty was used exclusively for estimating total production, which may result in an underestimate since some duties may result in higher amounts when ad-valorem rate is applied. However, the impact is expected to be minimal because few taxpayers typically use the flat-rate.
• Consumption from cannabis users who primarily use “grow your own” cannabis was excluded from the total production estimates. While the grow your own cannabis is not subject to tax, these users’ consumption of other dried cannabis could lead to an underestimation of the gap.
• The cannabis excise gap is sensitive to specific variables, most notable to the cannabis prevalence rate.

6. Payment gap methodology

This section outlines the methodology for calculating payment gaps for each tax type. The methodology is consistent with the previous overall tax gap report (2022). In this report, a new payroll subcomponent was added to the payment gap estimates, and its methodology is aligned with other payment gaps. The payment gaps for previously published estimates were updated with more recent CRA data (as of January 2025).

An overview of the payment gap methodology and its steps is illustrated below. Additional details on the methodology can be found in the following pages.

Footnote *

Public Accounts Canada was used to calculate the percentage of federal tax revenue. Data updated as of January 2025.

Return to footnote * referrer

Scope:

• Uncollected tax revenues from individuals (PIT), payroll accounts (part of PIT), corporations (CIT), GST/HST registrants, and excise tax and duty licensees/registrants due to payment non-compliance for tax years 2014 to 2022.
• In general, the payment tax gap includes federal and certain provincial taxes owed and amounts written off as uncollectable, in other words, write-offs.^{Footnote 41} Although taxpayers are sometimes required to pay interest and penalties, the payment gap does not include these amounts since they are not tax liabilities.^{Footnote 42} Interest and penalties within write-offs are also excluded from the payment gap results. Payment tax gap also excludes interest, penalties, unresolved appealed amounts, and payment gap related to non-residents.^{Footnote 43}

Key data sources:

• CRA Accounting data as of January 2025

Estimation and projection method:

Step 1: Define payment due dates

Payment tax gap occurs when assessed taxes are not fully paid on time by taxpayers for a particular tax year. A gross payment tax gap was calculated right after the payment due date, which can vary depending on the tax type. The payment due date may coincide with a filing due date but in some cases, it can be different.^{Footnote 44} Since each transaction (for example, payment) may take several days to be posted in the CRA’s accounting system, the gross payment tax gap was calculated 10 days after the actual payment due date to account for potential processing times.^{Footnote 45} The payment due dates for each tax type are outlined below.

Figure 6: Payment due dates by tax type^{Footnote 46}

Step 2. Calculate payment gaps from accounting data

Before presenting how the payment gaps are calculated, it is important to highlight certain key features of payment non-compliance that helped shape the methodology. First, payment non-compliance from a tax gap perspective is different from a tax administration’s perspective. From a tax gap perspective, payment non-compliance is related to forgone tax revenue regardless of whether it is collectable or not. In contrast, from a tax administration’s perspective, what matters is collectable outstanding debt, whether or not it is a tax, interest, or penalties. Therefore, the payment gaps in this report do not measure the overall outstanding debt (which can include interests and penalties) and instead calculates uncollected tax revenue, even when it becomes uncollectable.

Second, the CRA is responsible for collecting certain provincial taxes and always pays provincial tax liabilities first under federal-provincial tax collection agreements (before any collection actions are completed).^{Footnote 47} Therefore, all of the payment gap is generally considered to be part of the federal tax debt from a tax gap perspective.^{Footnote 48} This is why certain provincial taxes owed are included in the scope of the payment gap. Finally, the payment gap for a given tax year is constantly changing due to reassessments by the CRA (for example, audit results increasing or decreasing the balance owing) and payments by taxpayers (for example, reducing the tax debt by making payments to the CRA). Therefore, it is particularly important to treat the payment gap as an evolving measure rather than a static figure at a point in time. To better account for these changes, the gross and net payment gaps were calculated separately. This was also necessary in order to add the payment gaps to reporting gap estimates to avoid double counting.

Given these unique features, a methodology was specially developed to derive the payment gap from outstanding tax debt.

where:

• Outstanding debt is the amount that occurs when a taxpayer does not pay (partially or fully) their positive balance owing which can include taxes, interests, and penalties owed to the CRA, and where write-offs were removed.^{Footnote 49}
• Interest & penalties are the amount that the CRA charges for late or insufficient payments, or other types of non-compliance.
• Write-offs (WO) is the debt amount that is uncollectable. However, since it still contributes to uncollected tax revenue, it is included in the payment tax gap.

Given that the payroll data system is structured differently, the payment gap related to the payroll was calculated differently while ensuring consistency with other payment gap components.

where:

• Assessed payroll deductions consist of all payroll deductions that were supposed to be collected by an employer.
• Total remittances include all amounts contributing to reducing the debt.^{Footnote 50}

Step 3: Payment gap by tax type

The payment PIT gap in this report includes payment non-compliance related to unpaid taxes and payroll.

• The payment gap related to unpaid taxes includes unpaid federal personal income tax, unpaid provincial personal income tax (except Quebec), unpaid First Nations personal income tax, repayable deductions and credits, and all uncollectable debt (that is, write-offs). According to the findings from the previous tax gap study, the individual payment gap is generally at its highest level after one year.
• The payment gap related to payroll (new component) includes unpaid federal personal income tax, unpaid provincial personal income tax (except Quebec), and unpaid First Nations personal income tax that were collected by an employer on the employee’s behalf. The payment gap related to payroll also includes all uncollectable debt similar to other payment gaps.

The payment CIT gap includes unpaid federal corporate income tax, unpaid provincial corporate income tax (except in Quebec and Alberta), and all uncollectable tax debt. Corporations can range from small businesses to multinational corporations. The corporation payment gaps for earlier tax years reached their highest level after the fifth or sixth year as complex audits with high adjustments were completed around that time. From there, the payment gap declined as corporations paid down their tax debt.

The payment GST/HST gap includes unpaid GST (federal sales tax), unpaid HST (harmonized sales tax of relevant provinces), unpaid sales tax for First Nations governments, unpaid sales tax for certain financial institutions, and all uncollectable tax debt (that is, write-offs). The payment GST/HST gap tends to be at its highest level after the first two years. From there, the payment gap starts declining as taxpayers pay off their outstanding tax debt.

The payment excise gap includes unpaid excise duties and taxes as well as all uncollectable tax debt. Between tax years 2017-2022, the payment gap ranged from 1% to 2% of the total payment gap, and most of it came from a small number of licensees/registrants. Given the small number of non-compliant licensees/registrants and the negligible payment gap for tax years 2014 to 2016, the exact amounts could not be reported for previous tax years to maintain taxpayer confidentiality.

The total gross payment gap includes payment gaps for individuals, employers, corporations, GST/HST registrants, and excise licensees/registrants. Over the study period, the payment gap stemmed largely from individuals and employers under the PIT gap (around 68% on average, with mostly an upward trend) and GST/HST registrants (around 23% on average, with mostly a downward trend). Corporations had relatively low levels of payment non-compliance (on average, 8%)^{Footnote 51} and the payment excise gap was mostly minimal (on average, 1%).

Figure 7: Gross payment gap by tax type for tax years 2014 to 2022, in billions^{Footnote *}

Footnote *

All amounts are in constant 2022 dollars. Totals may not add due to rounding. Does not include non-residents except for payroll and excise. Source: CRA’s accounting systems as of January 2025. The payment excise gap was minimal for tax years 2014 to 2016. Given the small number of non-compliant licensees/registrants, the exact payment excise gap amounts for tax years 2014 to 2016 could not be reported to maintain taxpayer confidentiality.

Return to footnote * referrer

Key sources of uncertainty:

• Payment gaps are continuously evolving due to the normal tax administration process (for example, audits, payments, transfers, appeals)., The gross payment gap considers payment non-compliance at the due date before other actions occur. The impact of activities on reducing the payment gap is captured in the net tax gap.
• Different taxpayers have different payment due dates which could impact the timing of payment non-compliance. For example, the payment gap for payroll was calculated at three months after the payment due date to capture late filings. Therefore, fluctuations in the payment gap must be interpreted carefully.

Key methodological adjustments from the 2022 overall tax gap report:

• The payment gap methodology was developed for a new subcomponent – payment tax gap related to the payroll. This subcomponent was not a part of the first overall tax gap report (2022).
• In the previous overall tax gap report (2022), the payment PIT gap for tax year 2014 was significantly lower. With further research, the timeframe of the analysis was adjusted due to unexpected changes in the deadline for tax year 2014, and the numbers in this report reflect a more accurate estimate.
• Payment gaps were adjusted to reflect extension of payment due dates that was implemented to support Canadians when the COVID-19 pandemic started in 2020. The extension mostly impacted tax year 2019 and for some taxpayers, tax year 2020.

7. Net tax gap methodology

This section outlines the methodology used to calculate the net tax gaps for each tax type. The CRA data as of January 2025 was used. Certain projections were required for reassessments (for example, audits) and collections that can take multiple years to complete.

An overview of the net tax gap methodology and its steps is illustrated below. Additional details on the methodology can be found in the following pages.

Footnote *

Public Accounts Canada was used to calculate the percentage of federal tax revenue. Data updated as of January 2025.

Return to footnote * referrer

Scope:

• Potential tax revenue loss PIT, CIT, GST/HST and excise due to reporting and payment non-compliance for tax years 2014 to 2022 after accounting for CRA’s compliance and collection actions.
• The compliance results were measured as additional federal taxes reassessed due to audits.
• The collection results were measured as the difference between a gross payment gap (payment gap at the due date) and a net payment gap (payment gap ten years after a tax year).^{Footnote 52} This can include voluntary payments, transfers or other amounts that reduced the gross payment gap.^{Footnote 53}

Key data sources:

• CRA Accounting data for individuals, employers, corporations, GST/HST registrants, and excise taxes and duties registrants as of January 2025
• CRA Assessing data as of January 2025 based on T1 Income and Benefit Return, T2 Corporate Income Tax Return, Goods and Services Tax / Harmonized Sales Tax (GST/HST) Return
• CRA audit data for individuals, corporations, and GST/HST registrants
• CRA collection data for individuals, employers, corporations, and GST/HST registrants

Estimation and projection method:

Step 1: Initially reported amounts

Given that compliance activities have not all been fully completed for more recent tax years, it was necessary to project the impact of these activities. To develop projection methods, it was first necessary to examine how taxpayers initially report taxes on the first submission of their tax returns. These amounts were examined to establish a baseline of how the taxpayer population and the tax system (for example, tax rates) have changed during more recent tax years. For consistency, initial assessments up to one year after a given tax year were examined, specifically:

• Individuals: net federal tax (line 42000 on the T1 Income Tax and Benefit Return)
• Employers: income tax deducted (line 22 on the T4 Summary of Remuneration Paid)
• Corporations: total federal tax^{Footnote 54} (on page 9 of the T2 Corporate Income Tax Return)
• GST/HST registrants: net tax (line 109 of the GST/HST Return)
• Excise licensees/registrants: given that the small number of licensees/registrants were found to be largely compliant, the projection of compliance and collections was not necessary. Therefore, the actual payment gap as of January 2025 was a proxy for a net payment gap for excise.

For the current report, some projection methods were adjusted to provide more robust results. Moreover, since this report covers tax years impacted by the COVID-19 pandemic, it was also necessary for the projections to account for pauses in some CRA actions, when resources were redirected to better support Canadians, such as administering new emergency benefits.

Step 2: Impact of compliance

The impact of compliance activities mainly includes adjustments to taxes found by audits.^{Footnote 55} Since audits may take several years to complete, especially for taxpayers with large and complex adjustments, it was important to consider audit results as of eight years after a given tax year. The eight-year period was selected because the assessed tax amounts do not change significantly after this time period. However, given that the trend for adjustments from the audit for GST/HST registrants was slightly different, those adjustments were projected using the results as of five years after a given tax year.

Given that the current overall tax gap report examines tax years 2014 to 2022, it was necessary to examine historical data to project the impact of CRA compliance actions for tax years where some activities might still be ongoing.

In the current publication, the projection methods were reviewed and the previous approach was applied to the compliance results for large corporations,^{Footnote 56} including the following:

A. Calculate a ratio of compliance results and initially reported taxes (CRR, for compliance results ratio) for tax years 2013 to 2016^{Footnote 57} and find an average for those years:

where i = 2013, 2014, 2015, 2016

B. Project compliance results based on the ratio calculated in step A and initially reported taxes:

where i = 2017, 2018,…,2022

The main assumption of this projection approach is that the ratio of compliance results to the initially reported taxes is relatively constant over time. This assumption will be monitored and the impact of compliance will be updated as more recent compliance data becomes available.

For certain components, regression analysis was utilized to provide a more robust analysis of historical data.^{Footnote 58} The adjusted projection methods also accounted for pauses in CRA compliance activities during the COVID-19 pandemic.^{Footnote 59} Models with different predictor variables were tested for each tax gap component, with the final models chosen based on their predictive power of historical trends.

The projection included the following steps:

A. Using the data for tax years where the compliance results are considered to be fully completed for the tax gap purposes, a regression model was built for each tax gap component. For PIT and CIT (SMEs only), the compliance data was used for tax years 2007 to 2016, and for GST/HST, the data for tax years 2007 to 2019 was utilized.^{Footnote 60}

B. The models were used to project the compliance results for tax years where audits are not fully completed:

where i = 2017, 2018,…,2022^{Footnote 61}

x_1, x₂ are variables used in the regression to project the compliance results that differ depending on the tax gap component.

Step 3: Impact of collections

The impact of collections includes all the changes related to the payment gap starting from the payment due date to ten years after a given tax year, with the exception of the payroll, which was as of five years after a given tax year. These periods were selected based on the CRA’s internal assessment on the evolution of the payment gap. This also helped account for certain compliance activities that may impact the payment gap and avoid double counting. It is important to note that the payment gap can change due to factors other than CRA collection activities, such as reassessments and voluntary payments. For example, audit reassessments may increase the payment gap, while appeal reassessments and voluntary payments may decrease it.

Given that projecting the impact of collections involves identifying both increases and decreases to the payment gap, it was necessary to project a net payment tax gap rather than actual collection results. The net payment gap is defined as the payment gap ten years after a given tax year to account for all actions to reduce the gap.^{Footnote 62} For the purpose of the tax gap study, the collection impact on the tax gap is measured as a difference between the gross payment gap and net payment gap.

The projection methods remain consistent with the previously published tax gap reports with slight adjustments to improve the projection and to account for the impact of the COVID-19 pandemic. The following steps were taken for the projection approach:

A. Calculate a ratio for a payment gap for each tax year,^{Footnote 63} where the actual net payment gap exists, and then calculate the average over these years. The main improvement of the existing methodology was that several ratios were tested and the one with the highest prediction power based on historical trends was chosen. For example, for individuals and payroll, the projection is based on the ratio of net payment gap to gross payment.

Project net payment tax gap based on the ratio calculated in step A for tax years where compliance actions have not been fully completed:

where i = 2015, 2016,…,2022

B. xi is a variable used in the ratio calculation and is available for years without full compliance results such as gross payment gap or reported taxes at initial assessment. Collection results were calculated as the difference between the gross and net payment gaps (actual or projected) for each tax gap component:

where i = 2014, 2015,…,2022

The main assumption of the projection methods for collection results is that the trend in taxpayer payments is consistent over for the assessed and projected period. This assumption will be monitored and the impact of collections will be updated as more recent collections data becomes available.

Step 4: Net gaps by tax type

Calculate the net tax gap for each tax year and tax gap component using the actual or projected compliance results, depending on a tax year:

where i = 2014, 2015,…,2022

The table below presents the net tax gaps by tax types. For more information on the tax gap results, refer to the overall federal tax gap report on Canada.ca.

Footnote *

All amounts are in constant 2022 dollars. Totals may not add due to rounding. Data updated as of January 2025.

Return to footnote * referrer

Key sources of uncertainty:

• Net tax gap is subject to change if the underlying projection assumptions are not satisfied. The CRA will continue monitoring and updating the impact of compliance and collection activities as they finalize over time.

Key methodological adjustments from the 2022 overall tax gap report:

• The projection methods were reviewed and the improvements were implemented where possible. Moreover, projection methods of compliance and collection results were adjusted to account for pauses in CRA actions during the COVID-19 pandemic.

8. Conclusion

The CRA is committed to openness and transparency as a world-class tax and benefit administration. Therefore, the CRA continues to study and publish Canada’s federal tax gaps, including the methodologies underlying each tax gap component. This methodological annex outlined technical details related to these methods, including the scope of analysis, data sources, estimation and projection methods, sources of uncertainty, key updates from the last publication, and public references. High-level summaries of Canada’s tax gap methodologies are presented below:

Figure 8: Tax gap components and their estimation steps

Through an ongoing effort to put downward pressure on the tax gap, the CRA will continue to preserve the integrity of the tax system and protect Canada’s revenue base, which supports programs and benefits that improve the quality of life for all Canadians.

Glossary

Asset securities

These are financial instruments backed by a pool of underlying assets, such as loans, mortgages, or receivables. Investors in asset securities receive payments from the cash flows generated by these assets.

Bottom-up approach

Generally uses a tax administrator’s internal taxpayer data to estimate the amount of taxes theoretically owing. Often, for tax gap purposes, a statistically representative sample of audits is used to estimate the rate of non-compliance, which is then extrapolated to the overall population to produce a tax gap estimate.

Canadian resident

Individuals are Canadian residents for tax purposes if they maintain or establish residential ties to Canada.

Capital gains

The total amount that is earned when capital property (for example, land, buildings, shares, bonds, and fund and trust units) is sold or transferred for proceeds that exceed its costs. The income inclusion for capital gains is calculated in Schedule 3 of the personal income tax return. A taxpayer can claim a capital loss when the sale price of the capital property is lower than its cost. However, capital losses cannot be claimed against other sources of income.

Cluster analysis

Cluster analysis refers to a broad set of statistical techniques for identifying subgroups or “clusters” in a population, where objects in the same cluster are more similar to each other than to those in other clusters. In the context of tax gap analysis, clustering techniques were used to determine whether large corporations could be organized into relatively distinct groups or clusters on the basis of certain key variables to estimate the potential level of non-compliance within each cluster.

Collection activities

The range of activities the CRA can undertake to recover unpaid amounts from individuals and businesses. Recovery options range from voluntary payment plans to legal action.

Compliance activities

The range of activities that follow an escalating approach from encouraging compliance through respectful and empathetic service (for example, educational outreach) to enforcing it (for example, audits). For the purpose of this report, compliance activities are measured by audit reassessments only.

Compound annual growth rate (CAGR)

The CAGR is the average annual growth rate at which a quantity would need to grow over a period of time to go from its starting value to its ending value, assuming the growth is compounded each year.

Constant dollars

Constant dollars represent monetary values that have been adjusted for changes in the price level over time that is inflation, so that they reflect the real purchasing power in terms of a specific base year. It allows for more accurate comparisons over time.

COVID-19 pandemic

It refers to the global outbreak of the COVID-19 virus, which began in December 2019. On January 30, 2020, the World Health Organization (WHO) declared this novel coronavirus outbreak a public emergency of international concern. A few weeks later, on March 11, 2020, it declared COVID-19 as a pandemic. Governments implemented measures like lockdowns, social distancing, and travel restrictions to slow virus the spread.

The pandemic significantly impacted economies, healthcare systems, and everyday activities worldwide. Though the pandemic was declared in the last month of the reporting period, it was a significant disruption for the CRA as well.

Dividend

Profits received from owning shares in a corporation. An individual can receive profits based on the shares they own. Under Canadian tax rules, there are three types of dividends:

• Eligible: any taxable dividend paid after 2005 to a Canadian resident by a Canadian corporation that has been designated by that corporation as an eligible dividend,
• Other than eligible: generally all other taxable dividends, and
• Capital dividends: tax-free dividends that represent, generally, the untaxed portion of capital gains earned at the corporate level.

Extreme value methodology

In the context of tax gap analysis, the extreme value methodology assumes that the majority of tax non-compliance in the large corporate population is concentrated in a relatively small number of corporations. It also assumes that the magnitude of non-compliance will tend to drop off exponentially when ranking corporations according to their level of non-compliance as one moves down the ranks of corporations from the most to the least non-compliant (highest to lowest). Based on the ranking of audited large corporations and the amount of federal tax adjustments identified from the audit, a regression analysis is then used to extrapolate tax non-compliance to the rest of the large corporate population in order to obtain an estimate of the tax gap for large corporations.

Federal cigarette duty gap

Federal revenue losses resulting from products (imports or domestic production) for which excise duties have not been paid. It represents the difference between actual excise revenue and potential excise revenue.

Federal marginal effective tax rate (METR)

The federal METR is the tax rate bearing on the incremental dollar of income that is earned, or the next dollar earned, by an individual. For individuals, comprehensive METR measures take into account the income thresholds and statutory rates of the personal income tax system, as well as the impacts of tax deductions and credits and income-tested federal and provincial benefits.

Gap analysis

A method used to estimate tax non-compliance by estimating the difference between total or actual consumption of a product and tax-paid sales.

GST/HST (Goods and Service Tax/Harmonized Sales Tax)

These are sales taxes applied to most goods and services sold in Canada. The GST is a federal tax, while the HST is a combined tax that includes both federal and provincial sales taxes in certain provinces. These taxes are collected by businesses on behalf of the government and are typically added to the price of products and services.

Large corporation

For the purpose of this report, large corporations are incorporated businesses with gross revenues of more than $20 million, except those in certain designated industries where the limit is more than $50 million (that is, manufacturing, transportation and allied services, wholesale trade, and retail and services).

Lower-bound estimate

A lower-bound estimate in tax gap analysis refers to the minimum possible tax gap based on available information and conservative assumptions. This approach provides a cautious or conservative figure for the overall tax gap.

Net tax gap

Tax gap estimate after subtracting compliance and collection results from the gross tax gap. The total net tax gap is estimated by combining all previously published tax gap components, after accounting for compliance and collection actions.

Non-resident

A non-resident either:

i) normally, customarily, or routinely lives in another country and is not considered a resident of Canada; OR

ii) does not have significant residential ties in Canada; and lives outside Canada throughout the tax year or stays in Canada for less than 183 days in the tax year.

Offshore investment income

Income earned from investments located outside Canada. Canadian residents must report investment from both Canadian and foreign sources.

Organisation for Economic Co-operation and Development (OECD)

This is an international organization that promotes policies for improving the economic and social well-being of people around the world. The OECD provides a platform for countries to work together on issues like trade, education, health, and tax policies, sharing data and setting standards to help boost growth and development.

Outstanding debt

When there is a positive balance owing, a taxfiler must pay this amount to the CRA by the due date. Otherwise, the outstanding debt becomes part of the payment gap.

Payment non-compliance

It arises when assessed taxes are not fully paid on time by taxpayers for a particular tax year.

Prevalence rate

The percentage of a population that has a certain characteristic, condition, or behaviour at a specific point in time or over a given period. It is generally calculated by dividing the number of individuals in a population who exhibit the characteristic by the total population, then multiplying by 100 to express it as a percentage. In the context of this tax gap report, the prevalence rate refers to the proportion of people who use cigarettes or cannabis within the population.

Random audit

An audit where the entity audited is selected based on a random and representative sample of the target population.

Rate of return

Generally, the gain or loss on an investment over a specified period, expressed as a percentage of the investment's cost. Gains on an investment is income received plus any capital gains realized on the sale of the investment.

Reporting non-compliance

When taxpayers fail to provide complete or accurate information on their tax returns by non- or under-reporting income or claiming deductions or credits to which they are not entitled.

Risk-based audit

An audit where the entity audited is selected based on risk factors determined by the tax administration.

Securities

Tradable financial assets, including debt and equity securities. Debt securities (for instance, government bonds) are generally issued for a fixed term where the holder is entitled to the principal amount and interest income. Equity securities (for instance, stocks) are generally issued to signify an ownership position in a company and can provide dividend income. If securities are sold at a higher price than they were purchased, it results in a capital gain.

Selection bias

Selection bias occurs when the individuals or data points included in a study or analysis are not representative of the broader population, leading to skewed or inaccurate results. This can happen if certain groups are more likely to be selected for the study, based on factors like their characteristics, behaviours, or outcomes, which may influence the findings.

Small and medium-size enterprises (SME)

SMEs are incorporated businesses with gross revenues of less than $20 million, except those in certain designated industries where the limit is less than $50 million (that is, manufacturing, transportation and allied services, wholesale trade, and retail and services).

Stock of offshore wealth

For the purposes of this report, the stock of offshore wealth is comprised of the total portfolio of securities and offshore bank deposits held outside of Canada by Canadian residents.

Tax treaty

A tax treaty is an agreement between two or more countries that aims to avoid double taxation and prevent tax evasion on income earned across borders. It typically outlines which country has the right to tax specific types of income (such as wages, dividends, or royalties) and often provides for reduced tax rates or exemptions to ensure that individuals or companies are not taxed twice on the same income by both countries. Tax treaties help clarify tax responsibilities, promote international trade, and encourage cross-border investment.

Theoretical tax liability

This is the amount of taxes that would be owed if all taxpayers fully complied with tax laws and reported their income and deductions accurately.

Top-down approach

Broadly speaking, top-down methodology uses independent external data (usually national accounts data) to estimate the tax base, a figure that is then used to calculate a theoretical value of tax that should be paid and collected, by applying the appropriate tax rate to a high-level figure.

Underground economy (UE)

The UE is commonly understood as economic activity or income that is purposely hidden from public authorities, which can include working under the table or skimming (when revenues are under-reported or costs over-reported to understate net income). A variety of definitions for the UE exist – depending on the context, it may include activities that are officially measured and unmeasured, taxable and nontaxable, legal and illegal, or even very small-scale economic activities that generate income. From the CRA's perspective, the UE includes any activity that is unreported or under-reported for tax purposes.

Under-reporting rate

In this report, the under-reporting rate refers to the percentage of tobacco or cannabis consumption that survey respondents fail to report accurately, often due to social desirability bias or fear of legal repercussions. This rate reflects the gap between actual consumption and what is disclosed in surveys.

Uplift factor

This is a multiplier to observed or reported data to account for missing non-compliance. In this report, it is applied to survey data to account for under-reporting of tobacco and cannabis consumption by survey participants.

Upper-bound estimate

An upper bound estimate in tax gap analysis refers to the maximum possible value of the tax gap, based on strong assumptions and available information. This estimate provides an upper limit for the overall tax gap.

Write-offs

Write-offs are amounts that were assessed as taxes payable but for various reasons are deemed to not be collectable. Write-offs include amounts that are legislatively uncollectable such as the expiry of the collections limitation period and accounts that have an insolvency event under the Bankruptcy and Insolvency Act.