Our tax system is too costly for the poorest Canadians

Tax season is in full swing, and millions of Canadians are currently collecting all the paper they need to fill out their income tax returns. Many of them will devote time and money to this tedious task, but at least they have the means to do so. Unfortunately, due to a lack of resources or knowledge, many others will not fill out their returns, or will fail to claim the benefits to which they are entitled.

Prosper Canada, a charity dedicated to expanding economic opportunity for Canadians living in poverty, estimates that over $1.4-billion in benefits of all kinds are not claimed by citizens, often the most vulnerable.

The totals for many individual programs are very discouraging. More than 60 per cent of Canadians eligible for the Disability Tax Credit don’t claim it, which amounts to more than 1-million people.

Some 240,000 low-income Canadians eligible for the Canada Workers Benefit do not receive it, since they do not claim it, according to the federal Finance Department’s own evaluation. This program alone accounted for more than $175-million of unclaimed benefits in 2014.

Another program underused by thousands of families who need it is the Canada Learning Bond. For low-income families ($47,630 or less in 2019), the federal government provides $500 upon the opening of a Registered Education Savings Plan (RESP), without the household having to make a contribution.

Over the next fifteen years, Ottawa can add up to $2,000 per child. Yet in 2016, two-thirds of eligible children—some 1.8-million Canadians—were still not benefiting from this program.

Several factors can explain this. Obviously, a lack of financial literacy — or even general literacy — has an impact. Insufficient computer skills and lack of access to accounting resources also play a role. Yet the predominant cause remains the mind-boggling and growing complexity of our tax system.

The Income Tax Act was 4,000 words long when it was enacted in 1917. Today, it comprises over 1.1-million words, or 275 times as many. The upward trend is striking: Just since 2005, the act has gotten more than a third longer.

Over the 25 years from 1991 to 2015, the number of personal income tax breaks and refunds increased by almost 40 per cent, and their total value reached a little over $84-billion.

In other words, the Income Tax Act is a monster that the government keeps feeding, and it keeps growing, year after year. Even chartered professional accountants think that the current system of tax deductions and credits is too complex — more than two-thirds of respondents said so in an opinion poll two years ago.

True, Ottawa provides tools to help taxpayers fill out their tax returns, and to identify programs and subsidies for which they are eligible. Non-profit organizations and professional orders of accountants also offer help. All of these actions are valuable, but their effectiveness clearly has its limits.

The best way to ensure that everyone receives all the sums they are due is to simplify our tax system. Instead of favouring the current system of credits and exemptions targeting large swaths of the Canadian population, the credits should be simplified for low-income Canadians.

Meanwhile, tax credits and exemptions targeting middle and higher-income Canadians should be abolished and replaced by broad-based tax cuts.

The complexity of the Canadian tax system not only imposes substantial costs on all taxpayers, but also has a disproportionate effect on the most vulnerable among us. Instead of maintaining a costly, unfair system that gets more complex by the year, and then spending large amounts to help taxpayers navigate it, the government would be wiser to simplify the Income Tax Act for the benefit of all Canadians.

Luc Vallée est chef des opérations et économiste en chef à l’IEDM et l’auteur de « Impôt : quand les contribuables ne reçoivent pas leur dû ». Il signe ce texte à titre personnel.