Making income tax returns simpler is no simple task
Hard to eliminate targeted credits, provisions aimed at ensuring compliance, experts say
By Jon Hembrey, CBC News
Posted: Apr 14, 2012 9:32 AM ET
Last Updated: Apr 15, 2012 2:00 AM ET
Although many people say Canada's income tax system is overly complex — a realization often reached as they struggle to compile T4s and calculate federal and provincial credits — coming up with ways to reform it isn't exactly a cakewalk either.
The system has grown over the decades to include a host of provisions, tax avoidance language and credits that provide tax relief for particular groups of Canadians, ranging from parents to volunteer firefighters. Helping people navigate that system has become big business.
According to a study from the Fraser Institute in 2010, Canadians spend between $4 billion and $5.8 billion a year preparing and filing personal income tax returns, the average cost per person being $215.
And only one-third of Canadians actually prepare returns themselves — most either hire a professional or ask a more financially savvy friend or relative.
The cost of doing annual tax returns increases dramatically for businesses. According to figures released by the Canadian Federation of Independent Business, companies spend a total of about $12.6 billion a year meeting their tax obligations.
The cost per employee, moreover, is higher for small- and medium-size businesses. Very small firms, those with fewer than five workers, pay an average of $3,928 per employee to manage their tax obligations, compared to a per-person average of $212 for large firms that can take advantage of economies of scale.
Hard to eliminate specific tax credits
Calls for tax reform often focus on simplifying the Income Tax Act by reducing the number of income rates and eliminating specific credits for particular individuals or groups. Some would like to see the complete elimination of the current system of graduated rates and the institution of a flat tax system, for example.
According to Gregory Thomas, federal director with the Canadian Taxpayers Federation, the income tax system needs to be simpler and the tax rates themselves need to be both flatter and lower.
He says much of the complexity is a result of targeted tax credits, including the new children's art tax credit and the voluntary firefighter credit introduced by the Conservative government for the 2011 tax year.
'You're rewarding people who are good at collecting receipts and who have good accountants'—Gregory Thomas, Canadian Taxpayers Federation
However, it is not enough to simply eliminate individual provisions, he says — the whole system needs an overhaul.
“You can’t denounce the tax credit for volunteer firefighters unless it’s part of a plan to eliminate 50 other boutique tax credits and loopholes,” he says, “and in the course of doing that drop the actual rate that firefighters, and everyone else, pays.”
Not only does the complex nature of the system cost tax filers, Thomas says, it also undercuts government revenue because some are able to game the system by exploiting loopholes. Others end up paying more than they should because they misplace documents or are unaware of certain credits.
“You’re rewarding people who are good at collecting receipts and who have good accountants,” he says.
Tax avoidance language creates complexity
While it may be complex, not everyone agrees that the tax system should be flattened.
The complexity of the system is based in part on differences among individuals and businesses — distinctions society as a whole has deemed worthy of exemptions, says Lisa Philipps, associate vice-president of research at York University and a tax law professor at Osgoode Hall.
The tax system is one tool the government uses to redistribute resources. Removing tax credits aimed at helping less fortunate groups in society would require something in its place. But proponents of reform generally say lower rates for all would compensate for any increases in the tax burden shifted onto lower-income earners.
“It's not easy to fix,” she says. “There are costs to simplification.”
Much of the complexity of the 2,950-page Income Tax Act deals with tax avoidance, Philipps says.
This is because courts have generally protected the right of taxpayers to minimize the amount they owe, so the onus is on the government to spell out the specific conditions under which a person or business must pay, she says.
“A simple tax would have a loophole you could drive a truck through, and that people will drive trucks through,” Philipps says.
The Certified General Accountants Association of Canada published a report in August of last year calling for an across-the-board simplification of the tax system, noting the high cost of compliance.
It's a move that might sound counter-intuitive, given that such a reform could result in less work for its members, says Carole Pressault, vice-president of regulatory affairs at CGA-Canada. However, she says tax reform is an important issue for her members, most of whom say the system is just too complex. They would rather be involved in growing businesses, not filing taxes, she says.
Pressault says the government should appoint a task force made of independent advisers who can examine the tax system and make recommendations for a tax overhaul.
On the other hand, the House of Commons finance committee called for a review of personal and corporate income taxes in a report published last December, citing the need to "review, modernize and simplify the personal tax system."
“The debate around tax simplification or tax reform is a politically charged debate, of course,” she says.
Reasoned public debate on reform needed
It is indeed a charged debate for some. But in Canada, it seems that tax simplification isn't on the agenda of most people outside tax time, says Thomas.
Indeed, much of the debate around taxes in Canada largely centres on raising or lowering taxes, not eliminating specific provisions and how they're determined.
Although simplification is not an easy process, there is room for a discussion on tax reform, according to Philipps. “There is scope for a more informed and reasonable public debate about that,” she says, adding that much of the conversation needs to look at “our sensibilities about what fairness constitutes in the realm of taxation.”
Top News Headlines
- Most groups don't want return of Trudeau speaking fees
- Most of the 17 charitable and other organizations that have paid speaking fees to Liberal Leader Justin Trudeau during his time as an MP say they aren't interested in having their fees returned, despite Trudeau's offer on the weekend to reimburse any organization unhappy with his services. more »
- Are e-cigarettes safe to puff?
- As electronic or e-cigarettes grow in popularity, some health advocates want them to be regulated. more »
- Canada to send peacekeeping troops to Haiti
- A handful of Canadian troops are about to take part in peacekeeping operation in Haiti, under the command of Brazilian forces, in a long-delayed mission that has been kept inexplicably low on the political radar. more »
- Google asks secret court to lift gag on surveillance
- Google is asking the secretive Foreign Intelligence Surveillance Court to lift its long-standing gag order on how often the company is asked to turn over data about its customers to the U.S. government. more »
Latest Business Headlines
- Tim Hortons being circled by Wall Street hedge funds
- At least two groups of American hedge funds have bought large chunks of Tim Hortons shares recently, a sign the activist investors want to push the company to make major changes to its business, or possibly give up some control over the company. more »
- Chrysler agrees to recall 2.9 million Jeep SUVs in U.S., Canada
- Chrysler avoided a showdown with U.S. government safety regulators Tuesday, agreeing to recall 2.7 million older Jeep Grand Cherokee and Liberty SUVs in the U.S. and 256,000 in Canada that could be at risk of a fuel tank fire. more »
- Leaders downplay reports of stalled Canada-EU trade talks
- Both Prime Minister Stephen Harper and his British counterpart, David Cameron, downplayed signs of trouble in the Canada-EU trade negotiations Tuesday, even as the European Union's spokesman suggested Canada hasn't shown enough "pragmatism and flexibility" at the table. more »
- Business jets dominate Bombardier's $2B in sales at air show
- Business jets dominated the aircraft orders announced by Bombardier on Tuesday, the second day of the Paris Air Show, accounting for most of the nearly $2 billion US worth of business that the Montreal-based company has done at the show — if all options are exercised. more »
- Crowdfunding websites trying to cash in on crowded field
- Success stories make it seem like crowdfunding websites drop cash from the heavens on to any deserving idea. But regulators and big banks are now taking a closer look at the controversial new field, Dianne Buckner writes. more »
The data on this site is informational only and may be delayed; it is not intended as trading or investment advice and you should not rely on it as such.