Automatic tax filing is coming to Canada, but according to tax expert Kim Moody, the government's plan still misses the mark. In a recent article, Moody argues that while the new legislation is a step forward, it fails to address the underlying issues of the country's complex tax system. 'Until we have comprehensive tax reform, it's just automating the symptom,' he writes.
The Problem with Canada's Tax System
Moody, a tax professional, acknowledges that the annual ritual of filing tax returns is a necessary evil that serves almost no one well. With a shortage of accountants and increasing complexity, most Canadians dread the process. He cites Adam Smith's four tenets of a good taxation system—fairness, certainty, convenience, and efficiency—and notes that Canada fails spectacularly on convenience.
'There is little policy justification for forcing taxpayers with simple affairs to spend time and money on compliance by purchasing software or paying a tax preparer,' Moody says. Most practitioners agree.
The Need for Automatic Filing
Canada's tax system delivers cash benefits like child benefits and GST credits only to those who file. Non-filing is a self-inflicted hardship for the least able to bear it. Moody has long advocated for automatic tax filing, similar to systems in the United Kingdom, which have spared most taxpayers from filing for decades.
He was pleased when the federal government announced a step towards automatic filing in its November budget. However, the details in Bill C-31, introduced last month, reveal significant flaws.
Key Provisions of Bill C-31
For the first time, the Canada Revenue Agency (CRA) will be permitted to prepare and file a return on a person's behalf—a 'deemed filing.' Eligibility requires the individual to be living, a Canadian resident for the entire year, have no tax payable, draw all income from sources already reported to the CRA, and have skipped filing in at least one of the prior three years. They receive a notice and 90 days to review or opt out. Silence means the CRA files for them.
Flaws in the Legislation
Moody points out several flaws. The 90-day window to respond is too short for a historically disengaged population. It should be 180 days. Additionally, the proposed subsection 150(1.6) deems any error not flagged within 90 days as a misrepresentation made by the individual. A disengaged, low-income non-filer who ignores a CRA letter could be deemed to have misrepresented a return they never prepared, potentially opening the year to indefinite reassessment.
'Due to the complexity of Canada's taxation system, the room to expand automatic filing is structurally tiny,' Moody concludes. He calls for comprehensive tax reform to truly address the issue.
