It’s time to end annual tax filing

Why does everyone in Canada have to file a tax return each year? Why is the calculation of federal tax nine pages long? Why does the Canada Revenue Agency (CRA) need to send letters in pulse-quickening brown envelopes demanding documentation for amounts claimed in our tax returns?

The answer is simple: the countless tax deductions and credits that politicians, in their wisdom and generosity, have introduced into our tax system. The defenders of the status quo believe targeted tax deductions and credits are beneficial because they encourage desirable behaviour or provide a fairer tax outcome for each individual. The RRSP deduction encourages people to save money, for example; the child-care deduction helps new parents return to work; and the medical expense tax credit gives families a break on required medical costs not covered by the government or insurance.

As an accountant on the frontlines of this madness, I experience the unintended negative consequences our politicians seem to miss. All these deductions and credits are why Canadians need to buy tax software, blow their budgets hiring accountants, and keep boxes of receipts for six years. They’re why CRA’s annual budget is nearly $5 billion. This overly complicated system does provide a good living for thousands of accountants and lawyers (thank you very much!), not to mention 40,000 CRA employees, but all the needless bureaucracy causes too much stress and frustration.

Is it all really necessary? No, it isn’t.

Much simpler tax systems are currently used all over the world. For example, “prefilled” tax returns are used in Germany, Japan, Denmark, Sweden, Spain, Estonia, Finland, Norway, Iceland, the Netherlands and Belgium. The tax authority fills out the tax return and sends it to the taxpayer for approval and completion.

Would this be possible in Canada? CRA already has our T4, T3, T5, T4A, T4AOAS, T4AP, T4RSP, and T4RIF slips on file. So why do we need to enter all these slips into a “tax return” and file it ourselves? In fact, “auto-fill” already exists in Canada. You can download certified tax software, enter your social insurance number, and “auto-fill” your tax return with the required information directly from CRA. Why not have CRA send us “auto-filled” tax returns and then have us claim any other deductions or credits as required?

The advantage of “prefilled” returns is that CRA would gather our income slips and so would no longer need to charge penalties when people forget to include T-slips in their returns. At first glance, this sounds great. But do we really trust the CRA not to make errors? Would people review their “pre-filled” tax returns carefully enough? Another shortcoming of this approach is that, if we still need to manually claim deductions and credits, then pre-filled tax returns leave us only slightly better off than we are now.

Another option would give taxpayers a choice to use a simpler version of the tax form. For example, American tax-filers can choose between “standard” deductions or “itemized” deductions. Those with simpler situations can claim the standard deductions and don’t need to keep receipts or do further complex calculations. The advantage of this system is that it gives taxpayers a choice yet still allows the government to use targeted deductions and credits to accomplish its policy objectives. The problem with this system is that it still forces too many taxpayers to keep receipts, go through Internal Revenue Service audits and do complex calculations to determine whether they are better off using standard or itemized deductions.

A “standard deductions” option would be good. But even more simplification would be better. For example, the United Kingdom uses a “pay as you earn” (PAYE) system for employees. The employer deducts the correct amount of tax from each paycheque and files the information directly to the government. Employees have no further filing obligation but can still apply for a refund if they think too much tax was deducted. There are still a few basic deductions and credits that people can claim but they don’t apply to most employees.

Could Canada transition to this type of “no-filing” system? We are already halfway there, with the employer deduction and T4 filing system already set up. The next step would be to eliminate all tax deductions and credits and lower tax rates to compensate for the difference. The basic exemption would increase from $13,229 to approximately $50,000 and the federal tax rate on the next bracket, up to income of $97,069, would be cut to 10 per cent from the current 20.5 per cent.

This would be a revenue-neutral way to simplify the tax system for the majority of Canadian tax-filers. Your T4 becomes your tax return. You no longer have to file anything else. Say goodbye to keeping receipts for six years, waiting for weeks for your tax refund, and worrying about audits, re-assessments, objections and court cases. Of course, this would mean politicians could no longer use boutique tax deductions and credits to target favoured subsets of voters. In exchange, Canadians would finally be freed from the burden and stresses of an antiquated, expensive, inefficient and unforgiving bureaucratic nightmare. Most of us would consider it a good bargain.

Neal Winokur is a CPA. His new book, The Grumpy Accountant, is now available for sale on Amazon.ca.