Canada’s tax code too complicated even for the CRA

Canada’s income-tax system is complicated and the nuances are often difficult to understand and interpret. This is why, when it becomes more than just a nuisance, Canadians rely on officials from the Canada Revenue Agency to answer questions and help them navigate the system. Turns out, the system is often too complicated for even CRA officials to understand.

Consider a recent report by Canada’s auditor-general that found almost 30 per cent of the answers provided by CRA officials to queries from the public were wrong.

Some questions were more likely to get incorrect answers than others. For example, when asked when interest will begin to be charged on initial assessments, CRA officials gave the wrong date 84 per cent of the time.

The A-G doesn’t delve into why wrong answers are given, but part of the reason is the sheer complexity of the system.

By multiple measures, our incometax system has grown increasingly complex since it was established 100 years ago. In 1917, the Income Tax Act contained 3,999 words. By 2016, it ballooned to 1,029,042 words. That’s a 256-times increase in the number of words.

Put differently, the number of pages — after standardizing the font, margins and page sizes — increased from a mere six pages in 1917 to 1,412 pages a century later. When you realize how big the Income Tax Act has grown over the years, it’s perhaps no wonder CRA officials regularly get the details wrong.

A key source of complexity in the tax system is the long list of tax credits, deductions and other special preferences (collectively known as tax expenditures). These tax expenditures cover a wide range of activities such as donating to a political party, volunteering as a firefighter and buying a home for the first time. From 1996 to 2014, the federal government added 27 personal tax expenditures for a total of 128. That’s a 27-per-cent increase in just 18 years.

Claiming these tax credits typically requires tax-filers to store receipts or fill-out additional forms to demonstrate eligibility. This adds significantly to the time and frustration involved in submitting a tax return.

As tax complexity grows, so do tax-compliance costs. There are direct costs to Canadian households such as hiring professionals to help fill out tax forms (accountants, lawyers, etc.) or buying specialized software for the same purpose.

And indirect costs from the financial value of the time required to understand the tax rules, compile relevant materials and complete the tax form.

Once all of these costs are added up, Canadians spend nearly $7 billion complying with the personal income-tax system each year. That translates to about $501 per Canadian household.

CRA officials are supposed to make the process easier by providing clear and accurate answers to the public’s questions. But clearly they too are often confused by the tax system.

It would certainly be a good thing for the CRA to improve the accuracy of its answers, but there’s a broader problem that should be solved — the complexity of the system itself.

After all, there will be less reason to call the CRA in the first place if the system is easier to navigate.

Charles Lammam is director of fiscal studies and Hugh MacIntyre is a senior policy analyst at the Fraser Institute.