Canada’s tax regime is too complex to make automatic tax filing a practical option, a new study suggests.
Instead, the federal government should consider “decoupling” the requirement to file a return from eligibility for benefit programs, say the authors of Automatic Tax Filing: A Challenging Idea for Canada, in a report from the C.D. Howe Institute.
Currently, Canadians must file a tax return in order to access benefits such as the Canada Child Benefit and the guaranteed income supplement, for example.
“Establishing a new body specifically tasked with delivering income-tested benefits to Canadians could make this possible, better serving the poverty-reduction objectives of government support programs that are now tied to tax filing,” the study said, while acknowledging that such a body could be difficult to create and that concerns about fraud would need to be managed.
As part of the 2020 speech from the throne, the Liberal government announced it “would work to introduce free, automatic tax filing for simple returns to ensure citizens receive the benefits they need.” However, the promise was not mentioned in the 2021 federal budget, and nor was it included in the mandate letter issued in December to Minister of National Revenue Diane Lebouthillier. Instead, the minister was asked in the letter to develop and implement “a strategy to support people filing their first income tax and benefit return, with a focus on youth and newcomers to Canada.”
Many countries have adopted at least some form of automatic tax filing, which typically involves a tax authority prefilling a tax return and determining tax liability, if any, using information about a taxpayer that it has received from third parties. The tax authority then sends the prefilled return to the individual, who can correct or amend the information on the return. If no change is made by a deadline, the government files the prefilled return on the individual’s behalf.
The authors estimated about 1.29 million potential Canadian tax filers did not file a tax return for the 2019 tax year, at least half of whom would have would have been benefit recipients.
However, only about a third of total potential tax filers are in a situation that enables the CRA to correctly prefill their tax returns, the authors estimated, limiting the potential benefit of automatic tax filling.
“The [Canadian] tax system is complex and requires more than simply income information,” the authors added. For example, the CRA does not have information related to a variety of deductions, such as child care or moving expenses, and “there are a multitude of tax credits recognizing personal circumstances, for which the CRA needs inputs from claimants.” These include credits related to charitable donations, medical expenses, disability, purchasing a home, or the purchase of school teaching supplies, to name a few.
“The tax system is widely used to achieve social and economic goals, and a number of provisions would be difficult to automate. Governments’ appetites to use new tax concessions for their redistributive goals are on the rise, making fundamental tax reform aimed at tax simplification unlikely,” the report said.
The authors argue that, on balance, the CRA’s current self-assessment system, which offers electronic filers an auto-fill function, “is well adapted to Canada’s complex tax system.”
In recent years, the Canadian government has introduced initiatives to help Canadians file returns, including funding tax-filing clinics and developing services such as the auto-fill function and File My Return, a telephone-based service for low-income tax filers.