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The real problem with all that tax debt Canadians owe

We shouldn’t be surprised that the Canada Revenue Agency just wrote off billions in tax debt, but the government can and should fix the problem


 
The Canada Revenue Agency headquarters in Ottawa is shown on November 4, 2011. A small Vancouver charity that helps the poor in Latin America has survived an audit of its political activities, but now is struggling with fresh demands from the Canada Revenue Agency. (Sean Kilpatrick/The Canadian Press)

(Sean Kilpatrick/The Canadian Press)

The media was all aflutter yesterday reporting that the Canada Revenue Agency wrote off $4 billion in debt in the last two years. I guess this is newsworthy, only because the House is not sitting and the election has not yet ramped up, so there is not much else to talk about. That $4 billion represents less than two per cent of tax revenue collected in any given year. Anyone in the credit business will tell you that that is a pretty low number.

Why should CRA writing off bad debt not be a surprise? Predominantly because it should come as no surprise that people engage in tax evasion. Some of those people get caught and as a result owe money to CRA for taxes owed, fines, and penalties. And some of those people are such tax rebels that they refuse to pay. And much like all other creditors, it is difficult to collect on all of this debt.

Of course there are other reasons for people to owe CRA and not pay it off. First, people die and do not have an estate remaining to pay off their last tax liability. Second, people can experience dire economic situations and CRA does, under very specific circumstances, agree to settle the debt. What is not paid off then must get written off. I don’t think people are all that concerned about debt being written off in these circumstances. Instead, it is the tax evaders “getting away with it” that, I believe, is the cause for the concern.

Of course, CRA is not forthcoming regarding the statistics behind the write-off, which I believe is unfortunate and should change. We do, after all, freely report the income tax statistics because reporting aggregate statistics does not violate privacy and confidentiality and because we should know what our governments are doing. Making things public also takes away that veil of secrecy that suggests an action is nefarious.

Fortunately, the CRA does report various statistics to the OECD which are reported in the OECD Tax Administration report. The 2015 report is not yet available, so the 2013 report will have to do and the relevant information begins on page 219. There you will see that Canada’s tax debts (the undisputed tax debt as a share of net revenue collections) amounts to between 7.5 per cent and 9.2 per cent. The data ends in 2011, which is too bad because the higher figures are likely coming from the fall out of the 2008-09 global recession.

The OECD also reports on the amount of debt written off as a share of debt inventory. This is a trend that has been decreasing despite the amount of tax debt increasing. It was 14.6 per cent in 2005 dropping to 8.9 per cent in 2011.

There has been some suggestion, especially by the NDP revenue critic Murray Rankin, that CRA is not doing enough to collect these owed sums. It is important to remember a few things here. CRA writing off the debt does not mean it won’t collect on this money owed if and when it can. It simply means it is being taken off the books so we are not counting on revenue (to balance the books) that might never come in. Writing off debt is not something taken lightly, especially when a government needs that revenue (to balance the books). In addition, collecting debt is costly and there is certainly nothing gained by continuing to spend to collect uncollectable debt.

There is a much simpler answer to this problem. The best tool CRA has in this area is to increase withholding. Withholding is when the imputed tax liability is deducted from the income source before the income is provided to the recipient. Canada lags behind other countries in terms of the breadth and depth of income sources that are subject to withholding. It is an area that needs to be improved.

A prime example of where withholding is lacking is the Universal Child Care Benefit (UCCB) payment. This payment sent by the government to families with children is taxable income, but the government does not withhold the tax liability. This is an important and timely reminder, given that families with children will shortly receive a windfall amount in their bank accounts shortly as the increased UCCB payment, along with six months of back payment, arrives on July 20. As a result, some people receiving this benefit won’t be able to pay their tax liability from this payment and will end up in the “bad debt” pile. This can easily be avoided by CRA withholding the tax liability at source, a simple and easy thing to do. Of course, the reasons for not doing so are political, so the Conservatives can suggest that they are providing you with more money than they really are, but that is a whole other matter.

Sometimes we need to look forward and not back, and this is a prime example of this philosophy. What can we do moving forward to ensure that we reduce the problem at source and not have to expend the energy tracking down the deadbeats in the first place? I hope all the political parties agree this would make a great pillar in their election platforms.

 


 

The real problem with all that tax debt Canadians owe

  1. Can we get a better example than the Child Tax Credit? I somehow doubt that not withholding tax on the UCCT is the source of much (if any) of these “written off taxes”.

    • There is no discussion of the child tax credit, a non-refundable tax credit that was axed starting 2015. The UCCB was provided as a simple example of where withholding can easily be put in place, and important timely reminder to parents that it is taxable as the back payment arrives in bank accounts. However, as CRA provides no statistics or information related to the write offs, as clearly noted in the article, we don’t know exactly the origin of the write offs, but they will include benefit repayments like the UCCB, EI, etc. As I am sure you know, other examples of income not subject to withholding include but not limited to investment, dividend, and most tip income. Though in some cases withholding rules differ depending on if you are a resident or non-resident for tax purposes.

  2. Two points:

    1. The tax debt write off is of “undisputed” tax. A hefty portion of this should, in fact, have been “disputed”, but for the general aversion of the average taxpayer to take on CRA. More should, as CRA auditors have been known to occasionally err, especially as their annual performance reviews approach.

    2. The inability of CRA to collect every thin dime of tax is in no way attributable to any lack of collection powers, the likes of which would make loan sharks green with envy. If you wish to pursue a vendetta against a rival, try anonymously siccing CRA collections on them.

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