FRASER INSTITUTE Canada has not recently tried to simplify the tax system and has demonstrated little concerted effort at regulatory reduction or simplification
Tax complexity matters to all Canadians,
mostly owing to the considerable resources and time that families and
businesses spend on compliance.
Many of us incur substantial costs: time
invested and money spent on professional legal and accounting services, and on
tax preparers and tax software. Further, the Canadian tax system is recognized
as being complex, hard to understand, and in urgent need of reform.
This study uses three broad categories of
indicators to measure tax complexity: tax expenditures, tax legislation, and
tax guides. Each indicator empirically measures a different aspect of tax
complexity, and all three indicate that Canada’s tax system has become
increasingly complex since 1996.
The number of federal personal income tax
(PIT) tax expenditures increased from 111 to 146 (32 percent) from 1996 to
2016.
The number of federal corporate income tax
(CIT) tax expenditures increased from 66 to 76 (15 percent)
And … the number of federal goods and
services tax (GST) expenditures increased too, but to a lesser degree (9
percent).
The dollar value of federal tax expenditures
has also markedly increased over the same period. PIT tax expenditures have
grown by 55 percent, adjusted for inflation, while corporate income tax
expenditures and GST tax expenditures grew by 51 percent and 48 percent
respectively.
Tax
legislation has steadily grown in size and volume.
Between 1990 and 2018, the text area occupied
by the Income Tax Act and regulations increased 72 percent, from 974,050 cm² to
1,673,802 cm². While the number of pages increased by only 2 percent, page size
increased by 69 percent over the same period.
Our third indicator of tax complexity is the
length of the instructions required to complete a basic personal return. From
2001 to 2016, the length of the federal personal income tax guide for Ontario
increased from 48 to 78 pages, for 63 percent growth over the 15-year time-frame.
Perhaps the biggest impact on perceived
complexity and compliance costs in the past few decades is the popularity of
personal and business tax form completion tools, coupled with the software’s
subsequent internet enablement, now allowing most Canadians to complete all
filing steps electronically. This is a profound change, and paper is now
disappearing as a major tax filing mechanism.
As paper filings have shrunk, the number and
share of tax returns submitted through Efile and Netfile mechanisms have grown
substantially. Efile, the fastest growing mechanism, allows authorized tax
preparers to electronically file returns, while Netfile enables taxpayers to
file their own returns using readily available internet-enabled tax software.
Canadian taxpayers have also had access to an
“Auto-fill” option since 2015.
This enables tax filers to download
information from their income tax slips after obtaining data access through the
Canada Revenue Agency. The use of Auto-fill went up sharply between the 2015
and 2016 tax years (468 percent), and increased again for the 2017 tax year.
Usage is above 18 percent for all age groups over 20, tends to rise with
income, and varies among the provinces.
While the introduction and growth in
Auto-fill, Netfile, and Efile mechanisms may be productive in reducing the time
and cost of compliance, these changes do not address the underlying complexity
of the tax system, nor necessarily help taxpayers understand the tax system.
The risks are that Canadians may not be fully
aware of their tax obligations, or understand how to make better choices to
reduce their liabilities, and they may become complacent.
Unlike countries such as the United Kingdom, Canada has not recently tried to simplify the tax system and
has demonstrated little concerted effort at regulatory reduction or
simplification.
What is clear is that our indicators suggest
an increase in federal tax complexity since the turn of the century: the number
of credits, deductions, exemptions, exclusions, and other preferences, the text
length of tax legislation, and the size of the federal personal income tax
guide all increased by double-digit percentages.
Federal tax complexity is clearly increasing
in Canada over time.
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