Features | From Pivot Magazine

Online filing is a moot point if taxpayers can’t understand the system

Canadians have the tools they need to file their own taxes. Now they just need a simpler system.

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Couple doing paperworkWhen taxpayers are faced with a mystifying set of rules, they may decide it’s not worth their time to figure out what credits and benefits they qualify for, or how to claim them (Shutterstock/Wayhome Studio)

Over the past five years, the proportion of Canadian tax returns submitted in paper form has plunged by more than a third. No surprises there. Yet, even as tax­payers transition to eFile and NetFile, there’s little evidence that these online filing portals have reduced Canadians’ reliance on tax preparers. In particular, the proportion of returns filed through the eFile system by tax preparers has levelled off at approximately 60 per cent.

That’s not the fault of the software. Electronic filing was supposed to let Canadians file easily and accurately, allow refunds to be issued quickly, reduce administrative overhead and improve compliance. And the technology itself has only gotten better, with additional features like auto-filling fields. The problem, as it turns out, is the increasing complexity of Canada’s tax system.

Case in point: medical expenses. Sure, they are easy to enter into tax software—if you know what to enter. But do taxpayers actually understand what expenses are eligible for the credit? Unlikely. After all, the Income Tax Act has approximately 40 paragraphs setting out which medical outlays qualify. With such a complex overlay of rules, there is a significant risk that many Canadians miss out on tax reductions.

Consider the disability credit. Even for beneficiaries who know they qualify, it’s difficult to successfully claim the credit. A 2018 study by the Standing Senate Committee on Social Affairs, Science and Technology found that fewer than 40 per cent of the 1.8 million adults who report qualifying disabilities actually claimed the credit in 2012.

Other vulnerable Canadians experience similar shortfalls, as many incentives are based on filing a tax return. More than $1.2 billion in federal benefits—including the Guaranteed Income Supplement, the Canada Learning Bond and, for Indigenous families, the Canada Child Benefit—go unclaimed by low-income families each year, according to CPA Canada’s report, “Canada’s tax system: What’s so wrong and why it matters.” Further complicating things is the fact that spousal, age and caregiver credits and benefits are subject to limits and clawbacks depending on household net income.

It can be incredibly difficult to determine who does and does not qualify for some credits and other preferential rules, especially when the CRA itself is having difficulty providing interpretations on eligibility. A growing number of practitioners have told us that they’re struggling to parse the rules.

According to a Nanos poll, three in five Canadians would prefer Ottawa to lower personal income tax rates rather than keep special tax credits.

This situation poses difficult questions: how can we offer tax credits to certain populations while imposing strict rules on others? If we fail to achieve the appropriate balance, the complicated filing rules designed to limit tax expenditures and prevent abuse create a condition of diminishing returns. When taxpayers are faced with a mystifying set of rules, they may decide it’s not worth their time to figure out what credits and benefits they qualify for, or how to claim them. That only undermines the goals that the credits and exemptions are meant to support. 

How do we extricate ourselves from this worsening Catch-22? Streamlining and demystifying the tax system should be job No. 1. For example, if we reduce the number of credits and deductions available, this may allow us to reduce tax rates generally. According to a Nanos poll, three in five Canadians would prefer Ottawa to lower personal income tax rates rather than keep special tax credits.

Another idea: make more use of standard deductions and credits, which reduce the need to wade through complicated eligibility rules and stacks of receipts that are anything but uniform. The medical expense credit would be a good candidate for this kind of reform. If the federal government embarks on a tax review, as CPA Canada has urged, CRA officials should study whether standard deductions in fields like medical expenses would produce a beneficial result.

The government should also consult earlier and more thoroughly when considering tax policy changes or additions. We should encourage Ottawa to consider the consultation process used in the U.K., where the government has specific touch points for consultations. Early in the process, they ask for input on alternatives for dealing with certain tax policy changes as opposed to asking for feedback when draft legislation is released, as is generally done in Canada. Getting feedback earlier may help to identify alternatives and issues that need to be considered before legislation is written. This will also give filers and practitioners a chance to process the changes so they can be ready when the new rule comes into effect, creating a more level playing field for everyone. 

We believe the government can achieve a better balance between improving tax integrity and minimizing complexity and burden for tax filers. New rules would benefit from a specific, practical step that examines the cost of compliance. When we fix the root problems, more of the tax filing process can be automated, making tax compliance easier. And, more importantly, the result will be a tax system that delivers on public policy pledges without frustrating the very people those policies are meant to serve.