What You Should Know About Canada Taxation System: Return Free-Filling
Policy Brief by Kevin Hua
On September 23rd, 2020, then Governor General Julie Payette read the Speech from the Throne, re-opening Parliament after its adjournment in August and outlining the minority Liberal government’s policy direction in the new session of Parliament. Nestled in the 6,783-word speech [1], there included one overshadowed line about one specific policy: “The Government will also work to introduce free, automatic tax filing for simple returns to ensure citizens receive the benefits they need.” [2] This singular line, perhaps, reveals the best-kept secret about our system of taxation and, that is, that the government could, quite literally, do your taxes. A policy known as return free-filing would simplify and consolidate the process of tax returns to the revenue agency and promote a fairer tax system for Canadians.
Currently, taxpayers bear the burden in the arduous navigation of their tax returns, filling in the myriad of details, making numerous determinations regarding tax benefits, and conducting intricate calculations to ascertain the amount of taxes owed by or refunded to the taxpayer [3] while the Canada Revenue Agency plays the role of reviewing and auditing the validity of the tax returns. Return free-filing, at its most basic level, reverses this relationship by placing the burden on the revenue agency to calculate the amount owed while taxpayers check and scrutinize for errors or discrepancies. It has been adopted by 36 countries including the United Kingdom, Sweden, Germany, Japan, and New Zealand, providing relief to as low as 46% to as high as 90% of their citizens [4]. What makes this possible is that the Canada Revenue Agency already receives financial records submitted by employers, banks, and other financial institutions that contain some of the needed information to complete a tax return. It also has at its disposal the administrative capacity and accounting prowess of the largest public institution in the nation, which enables more efficient processing due to economies of scale. In essence, this would be no different than the relationship between a restaurant and its customers where the burden of calculating the bill is not on the customer but on the restaurant.
The simplification and streamlining of the tax return process under return free-filing is conducive to the further option of rapid, convenient, and accessible digital and mobile tax returns for Canadians. In 2016, only around 13% of Canadians filed their taxes through physical paper while the vast majority used electronic mediums through tax software like H&R Block, UFile, and TurboTax [5]. With the condensation of obligations for the taxpayer to simple review and approval, it becomes practical to conduct tax returns through digital means which would be otherwise infeasible under the current volume of tax workloads. Furthermore, tax software and preparers, which Canadians on average spend $61 on to help do their tax returns, are rendered redundant as the burden of labour and complexity is shifted away from the taxpayer [6]. This industry’s business model is sustained by the complexity of the tax process, without which their purpose and the necessity of their services would dissipate. As such they lobby against return free-filing to maintain the current complex and difficulty tax process, particularly in the United States where every attempt at return free-filing has continuously been obstructed in Congress through the exertion of the industry’s political influence [7]. Return free-filing would represent a modernization step of our tax system by making it a free public service and saving Canadians time and money.
Tax returns in Canada rely on voluntary compliance, that is, Canadians are expected to voluntarily assess their tax liabilities and report them in their tax returns without much proactive government urging [8]. Those that make an insufficient income to be taxed are, therefore, not legally required to submit a tax return which, paired with its complicated nature and the confusion it produces, discourages tax return submissions, leaving many eligible benefits, tax credits, and deductions unclaimed. 10%-12% of Canadians do not file a tax return with these numbers being disproportionately higher among low-income Canadians at (19.6%), Indigenous populations at (24.2%), and those in homeless shelters (57.9%) [9]. This hampers poverty reduction efforts designed within these tax benefits as those who need them the most face the most barriers to accessing and obtaining them. By making the submission of a tax return a prerequisite to these tax benefits, it instead engenders undesirable social outcomes and existing disadvantages for the most vulnerable of our society. Numerous beneficial tax provisions including the Canada Child Benefit, the carbon tax rebate, and the Canada workers benefit all culminate to an estimated $1.7 billion in unclaimed tax benefits [10]. However, by simplifying the process and making it a government service, return free-filing eliminates obstacles to submitting a tax return and overcomes the challenges that inhibit the poverty reduction goals of these tax benefits.
Doing your taxes has been considered by many as a laborious chore that voraciously consumes much of one’s energy, time, and even sanity. But return free-filing offers Canadians relief by simplifying the tax return process and making it convenient for all as a government service, reducing the time, labour, and money they spend on it. Rather than toiling away at the labyrinth of bureaucracy, expending money on predatory tax software and tax preparers, and weakening the vital poverty reduction effort, what once took many weeks, cost much, and inhibited poverty assistance only takes mere minutes, is free, and expands access to poverty assistance. Return free-filing can facilitate a fairer system of taxation in Canada, one that is better oriented for Canadians in convenience, accessibility, and simplicity.
“Simplicity is about subtracting the obvious and adding the meaningful.” - John Maeda [11]
[1] Tasker, Jean Paul. “Feds promise free, automatic tax returns — a change that could send benefits to thousands.” CBC, September 27, 2020. https://www.cbc.ca/news/politics/free-automatic-tax-returns-benefits-1.5739678.
[2] A stronger and more resilient Canada: Speech from the Throne to Open the Second Session of the Forty-third Parliament of Canada. Ottawa: Government of Canada, 2020. https://www.canada.ca/content/dam/pco-bcp/documents/pm/SFT_2020_EN_WEB.pdf.
[3] Government of Canada. “Steps to file a tax return.” Doing your Taxes. Last modified March 17, 2021. https://www.canada.ca/en/services/taxes/income-tax/personal-income-tax/doing-your-taxes.html.
[4] How Could We Improve the Federal Tax System? Urban-Brookings Tax Policy Center, 2020. https://www.taxpolicycenter.org/sites/default/files/briefing-book/tpc_briefing_book_2020.pdf.
[5] Golombek, Jamie. “Pretty soon, the CRA could be doing your tax return for you — but for now try 'Auto-fill’.” Financial Post, April 24, 2016. https://financialpost.com/personal-finance/taxes/pretty-soon-the-cra-could-be-doing-your-tax-return-for-you-but-for-now-try-auto-fill.
[6] Vaillancourt, François. The Cost to Canadians of Complying with Personal Income Taxes. Fraser Institute, 2010. https://www.fraserinstitute.org/sites/default/files/cost-of-complying-with-personal-income-taxes.pdf.
[7] Day, Liz. “How the Maker of TurboTax Fought Free, Simple Tax Filing.” ProPublica, March 26, 2013. https://www.propublica.org/article/how-the-maker-of-turbotax-fought-free-simple-tax-filing.
[8] Robson, Jennifer and Saul Schwartz. “Who Doesn’t File a Tax Return? A Portrait of Non-Filers.” Canadian Public Policy 46, no. 3 (September 2020).
[9] Robson, Jennifer and Saul Schwartz. “Who Doesn’t File a Tax Return? A Portrait of Non-Filers.” Canadian Public Policy 46, no. 3 (September 2020).
[10] Robson, Jennifer and Saul Schwartz. “Who Doesn’t File a Tax Return? A Portrait of Non-Filers.” Canadian Public Policy 46, no. 3 (September 2020).
[11] Maeda, John. The Laws of Simplicity: Design, Technology, Business, Life. Cambridge: MIT Press, 2006. 89.