The Canadian tax system is convoluted in part because Ottawa has failed to enact amendments clarifying tax laws dating as far back as 2001, the auditor general's report released Tuesday found.
When legislators present new laws, it is common practice to follow them up with a variety of "technical amendments."
Rather than introducing substantive new policy changes, such amendments often aim to clarify existing policy. Examples of technical amendments include changes to a reporting requirement, a transfer of authority to a different agency, or the closing of loopholes created by ambiguous wording in the original bill.
After being released for public comment, technical-amendment bills are generally then tabled in Parliament before receiving royal assent and becoming law.
Canada's tax system relies on taxpayers to self-assess and pay the income taxes they owe, and according to the Canada Revenue Agency, most taxpayers will meet their tax obligations if given the proper tools and information.
When the intent of tax law is not clearly conveyed, however, taxpayers might find it difficult to assess the income taxes they owe, and this could foster tax avoidance, Tuesday's report by Auditor General Sheila Fraser suggested.
Although the government has said that an annual technical bill of routine housekeeping amendments to the Income Tax Act is desirable, this has not happened, the report found.
As far back as 1991, in response to a prior auditor's report, the Canadian government pledged to release a package of income tax technical amendments on an annual basis.
No technical amendments since 2001
But no income tax technical bill has been passed since 2001, the auditor general said Tuesday.
"As a result, the Department of Finance Canada has a backlog of at least 400 technical amendments that have not been enacted, including 250 'comfort letters' dating back to 1998, recommending changes that have not been legislated," the report reads.
A comfort letter is one in which the Department of Finance promises to recommend that a minor, non-policy legislative change be made law; usually these changes are made to provide relief to the taxpayer when the tax result is clearly not the one intended by the law.
Among the reasons the audit report offered for the inefficiency is that the Department of Finance relies on basic, people-dependant processes and does not use its available electronic tools effectively.
Over the years, only some of the issues identified in comfort letters have been entered into the electronic inventory, for example. And the report also found that the Canada Revenue Agency is not meeting its own time targets for advance income tax rulings for taxpayers.
Part of the problem, the report found, is that the tax agency has no formal database to keep track of the identified legislative issues and their outcomes. Issues are validated, and analysis of some of them is carried out. But there is no systematic review of their impact on compliance or on the tax base.
"The Department of Finance Canada alone cannot correct this situation," the report concludes. "But it can do more to bring the urgency of the problem to the attention of the government and Parliament and make known, by releasing draft amendments for stakeholder comment, how the important technical deficiencies will be remedied."
The Canada Revenue Agency and the Department of Finance have agreed with all of the auditor's recommendations.