The month of April is a perennial headache for taxpayers. They have to devote precious hours of their time to completing their income tax returns, or pay someone else to do it for them. Is it possible to make life easier for Canadians by simplifying the tax system?
The Canadian tax system is very complex, and has become more so over the years. Whereas the Income Tax Act was 4,000 words long when it was enacted in 1917, today it comprises over 1.1 million words. That’s the equivalent of all seven volumes of the Harry Potter series — although it’s a considerably less gripping read.
Indeed, in addition to being massive, the Income Tax Act is not easy to understand, even for civil servants: Government audits have found that nearly one-third of responses given to taxpayers by Canada Revenue Agency (CRA) call-centre agents are wrong.
Another aspect of the complexity of the Canadian system is the high number of personal tax credits, which represent exceptions that must be taken into account when completing a tax return. The number of these credits increased by 26 per cent between 1991 and 2015.
The Federal Income Tax and Benefit Guide, a sort of instruction manual for tax filers, could also stand to be simplified. Despite recent efforts to do so, it still had 52 pages in 2018. The very existence of such a voluminous guide is itself evidence of the complexity of the task of completing one’s tax return.
The length of the Income Tax Act, its inaccessible language, and its numerous exceptions increase the cost of compliance for taxpayers, which amounted to an average of $501 per household in 2012. This complexity hits low-income taxpayers even harder, as they devote a larger share of their income to complying with the law.
Tax complexity is also expensive for taxpayers due to the resources the government has to devote to managing its tax system. From an administrative viewpoint, the Canadian system is one of the costliest among OECD countries. Canada also requires a large number of civil servants to apply its tax laws: There are around 40,000 CRA employees, fully half the number of people employed by the Internal Revenue Service in the U.S., a country nine times our size.
While Canada has made no major revisions of its Income Tax Act since the 1960s, other countries have implemented measures to reduce the size and complexity of their tax codes over the past 25 years.
In the United Kingdom, between 1996 and 2010, some 6,000 pages of income tax laws were rewritten in order to simplify them. An “Office of Tax Simplification” was then created in 2010 to provide independent advice to the Chancellor of the Exchequer, or finance minister, and a tax-complexity index was established.
In New Zealand, in 1994, experts were mandated to rewrite and reorganize tax laws, as well as the documents used to communicate with citizens. This rewriting process made the law easier to read. In fact, the New Zealand government was given an award by a plain-language organization for the clarity of the English used to communicate with taxpayers.
In 1993, the Australian government established a team to reorganize the tax code and rewrite it in modern English. Eventually, 30 per cent of the content of the law was eliminated.
A detailed examination of Canada’s tax system is long overdue. Its goal should be to simplify the language of the law, reduce its size, use a tax-complexity index, improve communication with taxpayers, and eliminate tax credits.
Of course, it would be against the interest of taxpayers — and frankly absurd — for the elimination of tax credits to lead to a net increase in effective income tax rates. The trade-off should thus be, at minimum, an equivalent lowering of income tax rates. This would lower the cost of tax collection without affecting government tax revenues, all while making the system easier to understand.
Kevin Brookes est chercheur associé à l’IEDM, Mathieu Bédard est économiste à l’IEDM. Ils sont les auteurs de « Ottawa doit simplifier la Loi de l’impôt sur le revenu » et signent ce texte à titre personnel.