A case study by a Western University law professor will look at how the use of blockchain technology could help close the Canadian sales tax gap, reduce compliance costs and improve government tax administration.
Jennifer Farrell, who teaches income taxation and international tax
law, has received a seed grant worth $21,292 for her project called
“Blockchain and taxation: A case study on eliminating the sales tax
gap” from the Western Social Sciences and Humanities Review Board.
The research aims to investigate the causes of sales tax non-compliance and examine how blockchain could tackle current problems with the use of smart contracts, recording real-time transactions and automatic tax submission to the Canada Revenue Agency, as well as look into the pros and cons of using blockchain for stakeholders (such as the CRA and taxpayers). It’ll also look into the topic from a regulatory perspective and discover what problems this could raise for policy makers.
“It’s not only about informing, ‘Can we do something about reducing tax evasion or tax avoidance or increasing tax compliance?’ It’s also [about], ‘How can this help from a tax industry perspective?’” says Farrell, who will be conducting the case study with three part-time research assistants who are law students with computer science backgrounds.
According to Farrell, there currently aren’t any Canadian studies on blockchain’s application to taxation, so this will likely be the first of its kind in the country.
The CRA estimates there was a $4.9-billion tax gap for GST/HST non-compliance and an $8.7-billion gap in personal income tax in 2014, which is the difference of what the government should have collected versus what it was actually paid.
Farrell says that while she is unsure whether her work will make a tangible impact on Canadian tax law in the future, she thinks it’ll contribute to discussions on how to approach this issue from different angles.
“This presents a different approach to very problematic areas in tax laws at the moment where we have these big tax gaps. So I hope this informs the ongoing discussion both domestically and internationally because this doesn’t only impact Canadian tax law,” she says. “The idea with blockchain technology is that you could expand it out internationally.”
Farrell stresses that people need to strive to find the balance between creating and fostering an environment for innovation to thrive, but balancing this by understanding the problems with innovation, such as blockchain. She predicts that while crypto-currencies might not last the test of time, blockchain is only in its infancy.
Once she completes this case study, Farrell says she’d like to further advance her research on the topic and perhaps offer a course on blockchain and the law to students.
The idea of the study, in fact, initially came to her because of students asking her questions about the tax implications of crypto-currency activity. Once she started looking at crypto-currency, she became interested in the technology behind it: blockchain.
“I think it’s important that we’re on the cutting edge of innovation and looking at blockchain,” she says. “As far as I’m aware, I don’t think there is any law course in Canada at the moment [on this topic] . . . That would be a nice way to take it — research as well as teaching."
Editor's note Feb. 27, 2018: Change made to clarify comment made by Jennifer Farrell from "tax cuts" to "tax gaps".