Simpler Tax Laws And Administration Would Help All Of Us, Including The Cra

Economist Jack Mintz recently suggested that if the federal government wants to cut public spending, it should put some focus on tax simplification and that tax complexity is an economic growth killer we could reverse if we put our minds to it.

I wholeheartedly agree. In my ideal tax world, with the tax law and related administration simplified, the following would be some of the results:

• Canadians’ knowledge about their tax affairs would greatly improve.
• Canadians could navigate the tax system with ease and without struggling with technology or waiting for days to get through to a tax agent by phone.
• Canadians with simple tax affairs could have their tax returns automatically completed by the government as part of a real effort to streamline administration. And by this, I don’t mean the rudimentary SimpleFile services currently offered by the Canada Revenue Agency (CRA).
• Obvious political tax measures, such as the prohibition of deductions on certain short-term rentals, would be eliminated from our tax statutes.

When I discuss tax simplicity, I often get rebuttals such as, “But Kim, wouldn’t people like you be out of a job?” My usual response is an emphatic “no.” There’s plenty of work to go around, but some of my tasks would certainly be different. And that’s a good thing.

Why? Well, the vast majority of Canadians’ tax affairs are simple. Unfortunately, the navigation of the tax system and its related compliance is not. That group of Canadians should not be required to hire expensive professionals to be compliant with their tax affairs.

Roughly half of Canadian individual tax filers for 2022 prepared their own tax returns (with most of this group using a software product) while more than a third used a paid preparer, according to a recent Fraser Institute study . Considering the time and costs of software, the average Canadian spent $130 to be compliant.

It then extrapolated that average and estimated that the total compliance costs associated with filing of personal taxes was $4.2 billion — equivalent to 0.15 per cent of Canada’s gross domestic product. That’s gross. And it could easily change if a legitimate version of automatic filing was introduced.

To achieve tax simplification would require a big change in how tax policy is developed. Currently, it is the purview of the Department of Finance and is very much a closed system. Some consultation is done with external stakeholders, but it is usually offered once the original proposals are already in the oven and often already baked.

The trust reporting rules are a good example. Introduced in the 2018 federal budget (to become effective in 2021 but later delayed), the first version of the rules was problematic. The finance department asked for comments from stakeholders, but most were ignored. Instead, revised and expanded draft legislation was introduced in 2022 that included reporting for “bare trusts” — where the trustee holds legal title to property but has no discretion and must act solely on the beneficiary’s instructions.

Such an expansion shocked many in the tax community since bare trusts are generally ignored for tax purposes. Significant feedback was provided to the finance department about why this was a bad idea and how the compliance would be problematic. It was ignored.

The rules first became effective for the 2023 filing season, and they were a disaster, leaving the CRA scrambling to provide feedback. Such a debacle led the CRA to announce a last-minute filing reprieve for bare trusts and later a reprieve for 2024.

On Aug. 15, the finance department released its revised rules for trust reporting that are intended to carve out some trusts from the reporting requirement. Unfortunately, the rules are quite complex and require careful analysis by practitioners and/or taxpayers to avoid nasty penalties for not complying.

Carve-outs are good, but the path to such a carve-out should be much simpler. My prediction: the upcoming trust filing season will, again, be challenging.

Another example is the CRA telephone call centres, which are now the subject of a “100-day plan” to try to improve. Many, including the agency’s employee union, have been crying the blues that team members are overworked and overwhelmed with the volume of calls.

But CRA team members are not unlike many hardworking Canadians, so the overworked and overwhelmed assertions need to be taken out of the equation. Secondly, the answer is not simply to add more employees, but the agency was quick to announce — six days into the 100-day plan — that it has hired more employees.

The CRA should be looking at what is causing the huge volume of calls and it’s likely tax complexity. Canadians are overwhelmed and they call when digital tools are not an option. While 100 days won’t be long enough to reduce complexity, it is obvious that the system needs to be simplified to become more approachable to the average Canadian.

What’s a path towards an overall solution? Tax reform with a main objective being to simplify the legislation and related administration.

Tax reform should also tackle how policy is developed. It needs to be much more open and transparent from the start of the policy’s development rather than simply asking external stakeholders for comments after it is almost fully developed.

• Expect the federal budget to deliver more political messaging
• The government can't do math

Tax complexity serves no one well. It’s a dead weight on our economy and destroys confidence in our tax system. Winston Churchill once said, “If you have 10,000 regulations, you destroy all respect for the law.” Canada isn’t there yet, but our tax system sure is giving it a good run.

If we genuinely want a system that Canadians respect — and respects us — then simplification must stop being a talking point and start becoming a political priority.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

_____________________________________________________________

If you like this story, sign up for the FP Investor Newsletter.

_____________________________________________________________