Ottawa’s attempts at tax filing fixes don’t address the problem

Article content

While Monday’s 2024 Fall Economic Statement contained very little in the way of tax changes, the government did provide further details on its progress toward automatic tax filing, at least for some Canadians.

Article content

Article content

After all, for most Canadians (myself excluded), preparing a personal tax return isn’t much fun. Nor does it add much value. In the end, much of the information we enter on our tax returns the government already has. Earned employment income in 2024? The feds already have the details of how much you earned, the taxes that were withheld, and your Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions and Employment Insurance (EI) premiums from your T4 slip. Maybe you received some dividends on your non-registered bank stock? The government has that information, too, as your brokerage firm issued a T5 slip reporting the amount both to you and directly to the Canada Revenue Agency (CRA). Made a Registered Retirement Savings Plan (RRSP) contribution? Yes, they have that information, too.

Article content

Yet each year we spend either time or money (if we hire someone) to essentially re-input information into our returns that the government already has. Sure, the government has introduced Auto-fill my return, which makes inputting tax information easier, but we still need to complete the rest of the tax return on our own each year, which can be complex and costly for some to do.

In its economic statement, the government noted that nearly 20 per cent of Canadians with an income below $20,000 do not file a tax return. As a result, they are not receiving many significant federal benefits they are eligible for, such as the Canada child benefit and the GST credit.

The CRA is therefore working to make tax filing easier for many Canadians by introducing programs such as the SimpleFile by Phone program (formerly known as File my Return), which invites selected Canadians to call in to answer a few brief questions, and provide consent to automatically file a tax return on their behalf.

Back in 2023, the government committed to reach two million Canadians in SimpleFile by 2025. Earlier this year, the CRA increased the number of previously planned SimpleFile initial invitations to more than 1.5 million Canadians, up from 700,000. As of November 3, 93 per cent of invitees had filed a tax return, and are collectively receiving $3 billion in benefits and credit payments. The CRA has also piloted a new national automatic tax filing service for lower-income individuals who have never filed a tax return or who have a gap in their filing history

Article content

Article content

Notwithstanding the success of these initial programs, the government says it needs to do more “to accelerate modernization of how Canadians file their taxes and make needlessly complicated and costly tax filing services a thing of the past.”

Many other countries have already pursued full-scale automatic tax filing. In nearly 30 countries, the tax authorities provide residents with a prefilled tax return, which includes a preliminary tax liability assessment. Taxpayers can then review and modify the information on their tax return, if needed, before submitting it. Sweden and New Zealand will deem the preliminary tax liability assessment accepted if the taxpayer doesn’t submit any modifications, while Denmark and the United Kingdom require taxpayers to confirm their prepopulated returns to complete the filing process. Even the Internal Revenue Service (IRS) in the United States introduced the Direct File service this year, allowing eligible individuals in 12 states to file their tax returns electronically using a free platform provided by the IRS.

Article content

On Monday, Ottawa announced that it is launching the second phase of its work to move Canada toward “broad-based automatic tax filing.” To this end, it plans to introduce legislation to allow the CRA to file a tax return automatically on behalf of certain lower-income Canadians using the information it has available, beginning as soon as the 2025 tax year. Eligible Canadians would receive a prefilled tax return based on CRA data and be invited to review and modify their information as necessary, or to opt out of the automated filing process if they so choose. If eligible Canadians choose not to opt out, the tax return would be filed on their behalf by the CRA, helping more Canadians automatically receive their government benefits.

The CRA will also be exploring expanding automatic tax filing to middle-class Canadians with “simple tax situations.” This could include Canadians who aren’t currently filing returns, or those with a gap in their annual filings, and who don’t claim most deductions and credits. It may also include modest-income families who don’t have the resources to pay for tax return preparation.

Article content

The government is also considering options for improving the availability of free online tax software for Canadians, as those with simple or straightforward tax situations who can least afford it should not have to pay a tax preparer or an online service to file their tax return. Note that many commercially-available tax software packages, such as TurboTax, do offer free tax return preparation and filing for “simple tax returns.”

Of course, all of this automatic filing doesn’t actually address the larger problem which can only be solved by broad-based tax reform. As I’ve lamented many times in this space, our personal tax system, with its myriad deductions and obscure and seldom-claimed boutique tax credits, such as the volunteer firefighter’s amount, digital news subscription amount, or eligible educator school supply tax credit, needlessly complicate the tax filing process, and require taxpayers to assemble and maintain detailed receipts to claim a credit, which is hardly worth the time administering.

For example, only 82,000 teachers took advantage of the school supply credit in 2021. It was worth a maximum of $250, there is a prescribed list in the Income Tax Regulations (Part XCVI, Regulation 9600, if you must know) of durable goods that qualify for this credit, and you’ve got to hang on to your receipts in case the CRA decides to audit your claim.

Article content

As I’ve said before, my solution is to start the tax simplification process by scrapping most of our boutique credits and replacing them with a combination of a higher basic personal amount (BPA), and lowering the tax rate for the first federal income bracket (for income under $55,867 in 2024). This could be done by calculating the average tax benefit each Canadian gets from the various boutique tax credits being eliminated, and then tweaking the BPA and lower bracket rate to achieve a revenue-neutral result.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

If you liked this story, sign up for more in the FP Investor newsletter.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content