You might expect a tax professional like myself to defend the annual ritual of filing tax returns, but I don’t because it has become a necessary evil that serves almost no one well, especially with the shortage of accountants and increased complexity. Most would rather visit the dentist than complete their tax return.
Adam Smith, the Scottish economist who espoused the four tenets (fairness, certainty, convenience and efficiency) of a good taxation system in his 1776 landmark book, The Wealth of Nations, would recognize that Canada has significant problems with all four maxims. But convenience — that tax should be levied in the manner most convenient to the contributor — is the one our system most spectacularly fails.
There is little policy justification for forcing taxpayers with simple affairs to spend time and money on compliance by purchasing software or paying a tax preparer. Most practitioners I know would say the same.
Yet the cash benefits Canada delivers through the tax system such as child benefits, GST credits and others only flow to those who file, which means non-filing is self-inflicted hardship for the people least able to bear it. Sparing them the maze is a genuine good.
That’s one of the reasons why I’ve long been an advocate for automatic tax filing . Other countries, like the United Kingdom, have spared most taxpayers from filing for decades. Canada has not ever had such a system other than its low-pickup Simple File and its predecessors, all a far cry from automatic tax filing.
So I was pleased when the federal government announced in its November budget that it was finally taking a real step towards automatic tax filing. But, of course, the devil would be in the details, which arrived in Bill C-31 last month. For the first time, the Canada Revenue Agency (CRA) will be permitted to prepare and file a return on a person’s behalf — a “deemed filing,” in the jargon.
To be eligible, an individual must be living (deceased returns do not qualify), be a resident of Canada for the entire year, have no tax payable (thus not attracting any late filing penalties since the return will be filed after the normal filing deadline and penalties are computed as a percentage of tax payable), draw all income from sources already reported to the CRA on information slips and have skipped filing in at least one of the three prior years. They get a notice and 90 days to review or opt out. Silence means the CRA files for them.
But there are flaws with the legislation. For example, the 90-day window to respond is far too short for a population that has historically been disengaged from filing. It should be longer — say, 180 days.
The proposed subsection 150(1.6) deems any error the taxpayer fails to flag within the 90-day window to be “a misrepresentation made by the individual.” A disengaged, low-income non-filer who ignores a CRA letter — precisely the population targeted — can be deemed to have misrepresented a return they never prepared, potentially opening the year to reassessment indefinitely .
The openness runs one way: that same taxpayer, who may have been shortchanged on an automatically filed return, gets no equivalent window to recover, only a discretionary application to the national revenue minister under subsection 152(4.2) of the bill, capped at 10 years and granted at the minister’s discretion. The Crown’s clock never expires; the taxpayer’s does.
Then there is residency. The provision requires Canadian tax residence “throughout the year,” but residency is a fact the CRA cannot read off a slip. Consider someone who emigrates mid-year: the pre-departure slips still arrive, but nothing flags the exit so the CRA automatically files a full-year resident return, triggering benefits the emigrant is no longer entitled to. Recovery of those benefits is likely not feasible.
The above problems are fixable, but the deeper problem is not. The room to expand automatic filing in Canada is structurally tiny. The reason is complexity, which undermines Smith’s certainty maxim.
Only about one-third of returns are simple enough for the CRA to complete from the data it holds, according to research cited in a recent C.D. Howe Institute study . That share shrinks as income rises, because deductions, credits and family circumstances live in the taxpayer’s head, not on a slip. The only solution to this complexity problem is to undergo comprehensive tax reform that has long been advocated for by many parties.
The international comparison only sharpens the point. The countries that file for their citizens — the U.K. and Finland — first built simple tax systems worth automating. The U.K.’s PAYE withholding gets most employees to the right number without a return and delivers means-tested benefits through a separate agency rather than the tax form. We cannot copy the British model because we did not do the British work.
Which brings us to Smith’s other neglected maxim: economy.
The Parliamentary Budget Officer has put the administrative cost of an automatic filing system at roughly $60 million a year . Spread across the returns it might reach, that is in the neighbourhood of what a citizen would pay a preparer to file one — a striking figure for returns that don’t raise revenue and exist only to move benefits and bring non-filing taxpayers back into the system.
The new legislation is a decent start. I’d rate it a C-. To give it an A, the above problems will need to be dealt with and comprehensive tax reform completed with less complexity should be one of its key results. Until then, we are automating the symptom.
Smith would approve of the convenience for the narrow few who qualify. For everyone else, it’s still the dentist’s chair.
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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