The future of Canadian tax practice: Are you on track?

Advancing technology is transforming the business of tax. Tax advisors of the future will spend less time on compliance and more time providing tax advice and adding value for their clients and employers.

Based on our research and information shared by colleagues on the Global Accounting Alliance Tax Directors Group, here are three of the biggest trends that are transforming how we practise tax in Canada.

1.  Automating bookkeeping and corporate tax compliance

With bookkeeping becoming more automated, tax practitioners can now import transactional data directly from clients’ banks to accounting records. Machine learning and artificial intelligence also allow for the automated entry of source documents. When you combine these two elements, a great deal of basic data entry and categorization can be automated so accountants and bookkeepers can focus more on data review and uncommon transactions.

And, when bookkeeping systems are set up with tax in mind, accounting data can then be imported directly into corporate tax return financial statements coded using the General Index of Financial Information (GIFI), as the Canada Revenue Agency (CRA) requires. Depending on how accounting records are set up, it may also be possible to automate other calculations such as Schedule 1 adjustments and Schedule 8 additions and disposals. 

Accounting firms and their clients who embrace automation will likely see ongoing reductions in the time they spend on bookkeeping and basic corporate tax compliance work. If done well, automation should also significantly improve accuracy.

2. Automating personal tax compliance

Canada has made significant advances in introducing technology to the area of personal tax compliance. A wide variety of information can be downloaded through the CRA’s Auto-fill my return service. However, income that hasn’t been reported on an information return (e.g., rental income) and many deductions and credits (e.g., childcare expenses) must be entered into the tax return manually. The personal income tax return is then submitted to the CRA for assessment.

Last fall, we spoke to tax authority delegations from China and Japan who marvelled at how we can download a wide variety of data from the CRA into personal tax return software. But they both asked the same question: If the CRA has all of this information, why do you have to download it and send it back to them through the electronic filing system?

When you compare Canada to other countries, the answer becomes clear – it’s because of the number and variety of tax expenditures we have. Most Canadian taxpayers have some sort of deduction or credit to claim, and some of these claims are complicated. Less commonly, some taxpayers also have other sources of income to report.

The question from the Chinese and Japanese delegations arose because many other countries do not require the filing of personal tax returns at all, at least for some individuals. Some countries have or are looking at automated personal taxes where tax data or filings reside on the government’s website. Other countries use an older system, commonly called PAYE (pay as you earn), under which the tax withheld from earnings is a final tax.

Both types of systems reduce the need to file a formal personal tax return. However, a PAYE system can create other issues, such as higher compliance costs for employers who need to calculate the correct final tax amounts to withhold. 

New Zealand’s current system is interesting because it uses a flexible approach that can be matched to the taxpayer’s circumstances. When individuals have straightforward tax situations and their income sources have been reported to the tax authority, their tax information resides on a government website and they are sent an assessment of tax. The individual can still review the assessment and notify the tax authority if changes are required. In some cases, the tax authority sends a request for information when they believe the taxpayer may have other sources of income or potential deductions.

Individuals with income such as rent or self-employment income still have to calculate this income and file a tax return. But the number of these people is relatively small.

These systems are possible in countries that have fairly simple rules for personal taxpayers. The key is that they allow relatively few deductions and credits. In New Zealand, the goal is to have broad tax bases and low rates.

In addition to Canada’s relatively large number of credits and deductions, our governments also deliver many social programs through the tax system. This complicates the tax system further, and most Canadians either must or should file a tax return as a result. CPA Canada is hopeful that the federal government will soon launch its promised tax expenditure review, which should be transparent and public process that looks at key issues such as effectiveness and complexity.

We believe the use of technology via tax software and by the CRA has significantly streamlined the tax compliance process for individuals. But the complexity of our tax system limits Canada’s ability to introduce major enhancements in the future. If the government could simplify the system, other tax filing options may become possible. These solutions may also make it easier for lower-income and vulnerable Canadians to access the tax benefits that they are eligible for.

3. Tax authorities accessing taxpayer transactional information

Currently, most data reported to the CRA is provided through information returns. Globally, however, many tax authorities are looking into gaining more access into transactional data in real time.

For example, many of the world’s tax authorities now use electronic invoicing for value-added tax purposes. While details vary by country, this usually involves the tax authority approving the e-invoice before the transaction occurs. While this trend is still evolving, such access offers tax authorities many benefits, including the ability to assess tax and detect errors almost instantaneously. In addition to compliance and enforcement, governments are using the data they collect through e-invoicing and other real-time data requirements to conduct more sophisticated data analytics.

While some businesses may find all this data collection troubling, we should also consider its potential to vastly reduce or eliminate other tax compliance burdens. For example, our recent Tax Blog  highlighted our concerns about the rules for filing T4A reporting forms when a business pays for services. In an environment where the tax authority has virtual access to data, we assume that this could reduce the need to file some information returns. 

Although Canada has not mandated e-invoicing or other real-time reporting at this point, Canadian businesses and tax practitioners should keep an eye on this global trend. 

WHAT DOES ALL THIS MEAN FOR CANADIAN TAX PRACTITIONERS?

Canadian tax practitioners need to keep these trends in mind to ensure their practices continue to thrive in the coming years. As the amount of traditional compliance and administrative work will decline, this will free up time for tax advisors to provide more value-added services. These include:

• Advisors can focus more on reviewing and less on data entry. As more functions are automated, advisors can focus on more uncommon transactions and data quality more generally. This should help reduce the risk of errors and the time needed for tax compliance.
• Tax and business advisory services.  Many businesses have a limited budget for advice and professional fees. To the extent that compliance costs are reduced, clients will have more resources available for value-added services such as tax planning and services related to technology enhancement.
• Information technology. With ever more automation and demands for seamless data processing, clients will look to their tax advisors to help them implement bookkeeping systems that help satisfy both GST/HST and income tax requirements. Spending time on bookkeeping systems up front could produce significant savings for clients that will accumulate over time. Tax advisors also need to look at ways to leverage technology to streamline their internal business processes so they can spend more time servicing their clients.
• Tax audits and disputes. A tax authority’s ability to access more data for risk assessment and audit will significantly change the nature of tax audits and enquiries. Those who put a lot of thought and planning into how their data is organized should benefit, as there should be fewer issues that are raised. By contrast, when electronic records are not well organized, the ability of the tax administrator to detect errors will increase. Effective process planning should also yield benefits in terms of fewer audit issues and associated costs.

Today’s Canadian tax advisors would do well to get familiar with these trends, streamline their practice and processes, and leverage technology as much as possible. This will help them broaden their skills, keep their competitive edge and deliver the highest quality service to their clients.

Keep the conversation going

What other changes will automation and technology in general have on the Canadian tax advisor? What can CPA Canada do to help tax advisors stay current with tax technology trends? Add your comments below.

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practice tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.