Building a good tax system is not easy.
The Scottish economist Adam Smith, in his 1776 book The Wealth of Nations, said a good tax system should have the following tenets:
- Equity: taxation on people should be proportional to what they can pay;
- Certainty: the system should be clear and transparent;
- Convenience: the timing and system of payment should be convenient;
- Economy: the costs to administer and collect taxes should be minimized.
Canada has significant work to do in all of the above areas and that’s the reason many have loudly been calling for comprehensive tax reform for decades.
One of the most common responses I get is that our tax system is too complex so let’s just simplify it. That deals with the second tenet above — certainty. I wish reducing complexity was easy.
Unfortunately, many of our governments look at the tax system as a nail that needs a good hammer to solve issues. And anytime a nail is pounded by the hammer — the addition of new tax measures — it adds complexity.
For example, there are many who believe there are billions and billions of dollars in unreported income sitting offshore. These beliefs are often fuelled by ideology rather than facts. There’s no shortage of research papers published by think tanks, academics and governments that try to estimate the amount of hidden wealth and, therefore, lost taxation revenues.
International Tax Gap and Compliance Results For the Federal Personal Income Tax System, a
by the Government of Canada, said “the stock of hidden offshore wealth held by Canadians could be between $75.9 billion and $240.5 billion … in 2013.”
The report also said that “for the 2014 tax year, the estimated range of federal tax revenue loss due to hidden offshore investment income earned by Canadians on their foreign assets was between $0.8 billion and $3 billion.”
My first reaction when I read that publication was that’s a pretty big range for the amount of hidden wealth. That’s like a cookbook saying to use one cup of sugar in a recipe for cookies, but, hey, you can also use four cups.
My second reaction was that the amount of estimated lost tax revenue was low compared to the overall compliance burden placed on Canadians to ensure they properly report their foreign income. My overall reaction — despite the report’s disclosed research methodologies — was that these estimates are a bit of a crapshoot.
Recent
also add to the belief that the rich are hiding their assets. For example, the 2016 Panama Papers — the theft of client information from a Panamanian law firm — had the media in a frenzy about this.
The CRA in March 2024 disclosed that it had completed more than 310 taxpayer audits linked to the Panama Papers, resulting in approximately $83 million in federal taxes and penalties. The Paradise Papers resulted in $6.8 million in disclosed tax recoveries, while the Pandora Papers had nothing.
While $83 million is a lot of money, it is a pittance compared to the amount the CRA has received in budget allocations from the government to strengthen enforcement in the offshore area. The CRA was allocated $444 million over five years in the 2016 budget, and it was allocated another $1.2 billion in the 2022 budget.
The underreported offshore income myth has been in existence for decades. For example, the
foreign reporting form came out of the
(in response to a 1994 auditor general recommendation) and became applicable law for the 1998 taxation year and onward. The stated
for the form were:
- to enhance compliance with tax laws that require the reporting of foreign-source income;
- to increase taxpayers’ awareness of these laws;
- to provide information to the Canada Revenue Agency (CRA) for the purpose of verifying taxpayers’ compliance;
- to better target international tax evasion and aggressive tax avoidance.
That sounds good, but practitioner complaints about the form were almost immediate. Foreign assets that required disclosure included publicly traded foreign stocks such as Apple Inc. and Microsoft Corp. Investment houses are required to disclose all forms of investment income to the government, so this extra reporting is burdensome and duplicative.
The T1135 has changed and expanded throughout its almost three decades in existence, but the foreign publicly traded stock requirement remains in the legislation, and the CRA has had no problem issuing penalties to taxpayers for various filing foot faults.
Over the years, various statistics have been published about the data collected by the CRA. But what it actually does with the information is a mystery, and it continues to say the T1135 form is an important tool to help it identify offshore noncompliance and target audit activities.
This is highly unlikely for two reasons. The first is that much of the submitted information is already available to the CRA. The second is that people who are purposely hiding their wealth and not paying tax on the income generated from that wealth will not voluntarily file a form to help the CRA find that income. That is akin to requiring a drug dealer or murderer to record their criminal activities in advance before committing their crimes. It simply doesn’t happen.
Instead, compliant and diligent Canadians are burdened with more reporting requirements that add to the overall complexity of the tax system.
The T1135 is just one example. There are dozens of others. It’s often said that complexity is itself a tax. I agree. Every redundant or unnecessary reporting obligation eats away at the certainty Adam Smith saw as a pillar of a good tax system.
He knew in 1776 what we keep forgetting in 2025: complexity erodes certainty. Canadians don’t need more ideological nails; they need a tax system that actually works.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.
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