Time to clean up the Income Tax Act

The length of Canada's tax code is only one of numerous factors behind considerable costs of compliance

Time to clean up the Income Tax Act

With the April deadline for filing taxes looming large over Canadians’ heads, many are finding themselves devoting considerable hours to completing income tax returns. And as taxpayers attempt to decode and untangle the eligibilities, exceptions, and requirements included in the Income Tax Act, two policy experts argue that it’s well past time to review the system.

“Whereas the Income Tax Act was 4,000 words long when it was enacted in 1917, today it comprises over 1.1 million words,” wrote Kevin Brookes and Mathieu Bédard of the Montreal Economic Institute in a column for the Financial Post.

Aside from its length, Brookes and Bédard noted the inherent difficulty in understanding the act, citing government audit findings that nearly one-third of responses provided by Canada Revenue Agency (CRA) call-centre agents to taxpayers are wrong. Adding to the challenge is the number of personal tax credits, which represent exceptions that must be considered when completing a tax return. According to the duo, such credits have increased in number by 26% from 1991 to 2015.

“The Federal Income Tax and Benefit Guide, a sort of instruction manual for tax filers, could also stand to be simplified,” they continued. While there have already been efforts to do so recently, the guide still consisted of 52 pages as of 2018.

Because of the Income Tax Act’s length, language, and numerous exceptions, taxpayers have had to pay increasing costs of compliance; Brookes and Bédard estimated that cost to average $501 per household, with low-income tax payers being harder hit as they devote a larger share of income to compliance with the law.

They also noted that taxpayers actually pay a higher price for government services when it has to allocate considerable resources to manage its tax system. Administratively speaking, they said, Canada’s tax system is among the costliest among OECD countries. Part of that cost comes from the manpower needed: the Canada Revenue Agency (CRA) reportedly employs around 40,000 people — half of the number employed by the US Internal Revenue Service (IRS), which serves a country that’s nine times the size of Canada.

“While Canada has made no major revisions of its Income Tax Act since the 1960s, other countries have implemented measures to reduce the size and complexity of their tax codes over the past 25 years,” they said.

From 1996 to 2010, the UK embarked on a campaign to rewrite and simplify 6,000 pages of income-tax laws; an “Office of Tax Simplification” was established in 2010. Imposing a mandatory push for experts to rewrite and reorganize tax laws in 1994 gave New Zealand an easier-to-read tax law, for which the government received an award from a plain-language organization. And the Australian government’s establishment of a team to reorganize and rewrite its tax code in 1993 led to the eventual elimination of 30% of the tax law’s content.

“A detailed examination of Canada’s tax system is long overdue,” they said. “Its goal should be to simplify the language of the law, reduce its size, use a tax-complexity index, improve communication with taxpayers, and eliminate tax credits.”


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