As tax complexity grows, so do tax compliance costs. Canadians spend nearly $7 billion complying with the personal income tax system each year
By Charles Lammam
and Hugh MacIntyre
The Fraser Institute
Canada’s personal income tax system is complicated and the nuances are often cryptic. So citizens routinely rely on Canada Revenue Agency staff to help them navigate the system. Turns out, the system is often too complicated even for CRA officials to understand.
A recent report by Canada’s auditor general found that almost 30 per cent of the answers CRA officials gave to public queries were wrong. Some questions were more likely to get incorrect answers than others. For example, when asked when interest begins to be charged on initial assessments, CRA officials gave the wrong date 84 per cent of the time.
The auditor general 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 personal income tax 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. The number of pages – after standardizing – increased from a mere six in 1917 to 1,412 a century later.
So it’s no wonder CRA officials regularly get details wrong.
A key source of complexity is the long list of tax credits, deductions and other special preferences (collectively known as tax expenditures). These 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. Direct costs to Canadian households include hiring professionals to help fill out tax forms (accountants, lawyers, etc.) and purchasing specialized software for the same purpose. Indirect costs include the 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 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 would be less reason to call the CRA if the system was easier to navigate.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is a senior policy analyst at the Fraser Institute (www.fraserinstitute.org)