The Role Of Artificial Intelligence In Canadian Tax Compliance

The Government of Canada freely admits that it is already using artificial intelligence (AI) for Canadian tax compliance purposes, and representatives from the Canada Revenue Agency (CRA) have been exploring this opportunity since at least 2018. On the other side of the bookkeeping world, companies and accountants in Canada are also employing AI-based strategies for tax planning and compliance  purposes. Canadian companies today should consider both sides of this coin. While AI offers companies numerous tax planning opportunities, the CRA may use this same technology to monitor for potential compliance issues and perform audits in new ways. To discuss your concerns and opportunities associated with AI, consider contacting an experienced Canadian tax lawyer at Jeremy Scott Law by calling (902) 403-7201 today.

How Does the CRA Use AI?

The CRA has been openly using artificial intelligence for tax compliance purposes for years. Although it began as a joint experiment with the Justice Department in 2018, the use of machine learning now seems embedded within not only the CRA, but in many other government agencies. Therefore, companies, employees, and contractors alike could benefit from at least a cursory understanding of how the CRA employs this type of software.

Predicting the Outcomes of Tax Litigation

In 2018, 26 tax practitioners at Justice Canada began using a commercial AI software program called Tax Foresight. The Canadian startup that developed this software claims that it can predict the outcome of tax litigation with an accuracy rate of 90 percent. However, the CRA provided few additional insights.

Using Data Mining Software

In a move that has never been widely publicized, the CRA has adopted predictive data mining software to “enhance Collections and Compliance Programs.” The Government of Canada provided a few details of this process in a summary of the Privacy Impact Assessment (PIA) . In this document, the CRA highlights a clear mandate to use data mining techniques to improve collection strategies and risk-scoring systems for tax debts.

The CRA admits that it analyzes web-based information without obtaining consent. This information may include social media posts, online shopping habits, and online banking data. The implications here are quite far-reaching. One possibility is the use of AI software to scrape or “crawl” all public data related to a tax entity, potentially finding a forum post describing unreported cryptocurrency earnings or a social media update highlighting an expensive purchase that is completely at odds with reported income.

Directive on Automated Decision-Making

The experimental use of AI by the CRA in 2018 was seen by many as controversial, as the Government of Canada had not yet implemented a clear code of ethics regarding machine learning. However, the Government eventually introduced a Directive on Automated Decision-Making, which was modified in April 2023. In the document as released and modified, the Government of Canada expresses a commitment to transparency, accountability, legality, and procedural fairness in its use of AI.

While these expressed principles are laudable, individual Canadians may still harbor legitimate privacy concerns. Canadian business owners who conduct much of their commerce online may wish to consult with a tax lawyer at Jeremy Scott Law to discuss the implications of Canadian tax compliance audits driven by artificial intelligence.

AI-Powered Worker Classification for Canadian Tax ComplianceHow To Use Artificial Intelligence for Canadian Tax Compliance: Automated Worker Classification

One use case of artificial intelligence in Canadian tax compliance involves worker classification, and AI software has the potential to identify optimal decisions based on numerous, complex factors. Employers must consider many important factors to determine whether they should hire a particular worker as an independent contractor or an employee. Artificial intelligence can assess these factors quickly and effectively to help employers make these important decisions. Canadian startups have already developed AI-powered software that can accomplish this goal, although it supplements human decision-makers rather than replacing them entirely.

Benefits of Working With Independent Contractors

As many business owners are undoubtedly aware, classifying workers as independent contractors offers substantial tax planning and related benefits. In a broad sense, this offers employers more flexibility, potential cost savings, and the mitigation of potential wrongful dismissal lawsuits. Employment insurance (EI) is also unnecessary when hiring contractors, and these workers are not entitled to vacation or overtime pay. In short, contractors have fewer rights, which translates to fewer financial and legal obligations for the employer.

There are additional tax implications associated with hiring independent contractors. An employer does not need to cover payroll taxes for contracting services, and there is no need to withhold any income tax or Canada Pension Plan (CPP) contributions. Contractors handle their own taxes, reducing a company’s accounting burdens, paperwork, and other costs.

Benefits of Hiring Employees

There are various potential benefits associated with hiring employees instead of contracting workers. Employers may consider non-monetary advantages of hiring employees, such as increased stability, teamwork, and commitment. Canada also provides employers with various incentives to hire employees, including tax credits. These incentives may be particularly attractive in certain target industries. Examples include the following:

• The Scientific Research and Experimental Development tax credit
• The E-Business tax credit in Quebec
• The Multimedia tax credit

Benefits of Using AI To Avoid Misclassifying Workers

Canadian companies must assess the legal risk of misclassifying employees or contractors. A time-consuming, expensive misclassification lawsuit can completely overshadow any benefits associated with hiring contractors. Therefore, employers must consider various factors to determine the legally correct classification of a particular worker. These factors include levels of oversight, independence, and profit-sharing opportunities provided by the company. Software programs that leverage artificial intelligence can help business owners to weigh these factors quickly, saving time and, if the programming is developed to apply CRA employee classification guidance, potentially assisting with business tax compliance.

How To Use Artificial Intelligence for Canadian Tax Compliance: Analyzing Notices From the CRA

Canadian companies can also use AI to analyze notices from the CRA, which may prove especially useful for larger operations. The sheer volume of these notices can be overwhelming, and AI can augment human tax planners. A very simple AI solution in this area involves separating informational notices from those that require immediate action. AI can also sort and prioritize CRA notices that require attention, allowing companies to address their most pressing tax issues first. The standardized nature of CRA notices makes this a somewhat easy task for effective AI platforms.

Contact a Canadian Tax Lawyer Today

The world of artificial intelligence (AI) offers many possibilities for Canadian tax compliance, and its implications depend entirely on the unique aspects of each Canadian tax entity. To discuss these implications with greater accuracy, consider a consultation with a Canadian tax lawyer. Choose Jeremy Scott Law. Call (902) 403-7201 today to get started.