Ottawa’s attempt to resolve tax filings does not solve the problem

Content of the article

While it’s Monday Financial statement for autumn 2024 contained very little in the way of tax changes, the government provided further details about its progress toward automatic tax filing, at least for some Canadians.

Content of the article

Content of the article

After all, for most Canadians (myself excluded), preparing a personal tax return is no fun. It also doesn’t add much value. At the end of the day, much of the information we enter on our tax returns is already held by the government. Earned income in 2024? The feds already have the details of how much you earned, the taxes withheld, and your Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions and Employment Insurance (EI) premiums from your T4 slip. Perhaps you have received some dividends on your non-registered bank share? The government also has this information since your brokerage firm issued a T5 slip reporting the amount both to you and directly to the Canada Revenue Agency (CRA). Have you made a Registered Retirement Savings (RRSP) contribution? Yes, they have that information too.

Content of the article

But every year we spend either time or money (if we hire anyone) essentially re-entering information into our returns that the government already has. Of course the government has introduced Auto-fill my returnwhich makes it easier to enter tax information, but we still have to fill out the rest of the tax return on our own each year, which can be complex and expensive for some to do.

In its economic statement, the government noted that nearly 20 percent of Canadians with incomes below $20,000 do not file a tax return. As a result, they do not receive many essential federal benefits to which they are entitled, such as the Canada Child Benefit and the GST credit.

The CRA is therefore working to make tax filing easier for many Canadians by introducing programs such as SimpleFile by phone program (formerly known as File my Return), which invites selected Canadians to call in to answer a few short questions and consent to automatically file a tax return on their behalf.

Back in 2023, the government committed to reach two million Canadians in SimpleFile by 2025. Earlier this year, the CRA increased the number of previously planned SimpleFile initial invitations to more than 1.5 million Canadians, up from 700,000. As of Nov. 3, 93 percent of invitees had filed a tax return and are receiving a combined $3 billion in benefits and credit payments. The CRA has also been piloting a new national automatic tax filing service for lower-income individuals who have never filed a tax return or who have a gap in their filing history

Content of the article

Content of the article

Despite the success of these initial programs, the government says it needs to do more “to accelerate the modernization of how Canadians file their taxes and make unnecessarily complicated and expensive tax filing services a thing of the past.”

Many other countries have already pursued full-scale automatic tax filing. In almost 30 countries, the tax authorities provide residents with a pre-filled tax return, which includes a provisional statement of tax liability. Taxpayers can then review and amend the information on their tax return, if necessary, before submitting it. Sweden and New Zealand will consider the provisional tax liability assessment accepted if the taxpayer does not submit any changes, while Denmark and the United Kingdom require taxpayers to confirm their pre-filled returns to complete the filing process. Even the Internal Revenue Service (IRS) in the United States introduced the Direct File service this year, allowing eligible individuals in 12 states to file their tax returns electronically using a free platform provided by the IRS.

Content of the article

On Monday, Ottawa announced it is launching the second phase of its work to move Canada toward “broad-based automatic tax filing.” To that end, it plans to introduce legislation that would allow the CRA to file a tax return automatically on behalf of certain lower-income Canadians, using the information they have available, starting as soon as tax year 2025. Eligible Canadians will receive a pre-filled tax return based on CRA data and be encouraged to review and amend their information as needed or to opt out of the automatic reporting process if they wish. If eligible Canadians choose not to opt out, the tax return will be filed on their behalf by the CRA, helping more Canadians automatically receive their public benefits.

The CRA will also explore expanding automatic tax filing to middle-class Canadians with “simple tax situations.” This may include Canadians who do not currently file returns or those with a gap in their annual filings who do not claim most deductions and credits. It may also include families with modest incomes who do not have the resources to pay for tax return preparation.

Content of the article

The government is also considering ways to improve the availability of free online tax software for Canadians, so that those with simple or straightforward tax situations who can least afford it do not have to pay a tax preparer or an online service to file their tax return. Note that many commercially available tax software packages, such as TurboTax, offer free tax return preparation and filing of “simple tax returns.”

Of course, all this automatic reporting doesn’t actually solve the bigger problem, which can only be solved by broad tax reform. As I have lamented many times in this space, our personal tax system, with its myriad deductions and obscure and rarely claimed boutique tax credits, such as the volunteer firefighter’s amount, digital news subscription amounts, or eligible preschool tax credits, unnecessarily complicates the tax filing process and requires taxpayers to collect and maintains detailed receipts to claim a credit, which is hardly worth the time to manage.

For example, only 82,000 teachers took advantage of the school supply credit in 2021. It was worth a maximum of $250, which is a prescribed list in the income tax rules (Part XCVI, Regulation 9600if you must know) of durable goods that qualify for this credit, and you have to hang on to your receipts if the CRA decides to audit your claim.

Content of the article

As I’ve said before, my solution is to start the tax simplification process by scrapping most of our boutique credits and replacing them with a combination of a higher basic personal amount (BPA) and lowering the tax rate for the first federal income bracket (for income below $55,867 in 2024). This could be done by calculating the average tax benefit each Canadian receives from the various retail tax credits being eliminated, and then adjusting the BPA and lower brackets to achieve a revenue neutral result.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is Managing Director, Tax & Estate Planning at CIBC Private Wealth in Toronto. [email protected].

If you liked this story, sign up more in FP Investor’s newsletter.

Bookmark our website and support our journalism: Don’t miss the business news you need to know – bookmark financialpost.com and sign up for our newsletters here.

Content of the article