Why are we filling out these crummy tax forms in 2017?
Results from a new study commissioned by tax preparation behemoth H&R Block show that as of earlier this week, two out of five Canadians still need to file their 2016 tax returns.
The poll also indicates that while one in four Canadians actually gets excited about filing and the prospect of receiving a hefty refund, most people associate negative feelings with the filing process, citing reasons ranging from finding tax preparation a complicated process (21 per cent) to the inconvenience factor (19 per cent) of filing a tax return or just the feeling of overall anxiety it evokes (11 per cent).
But have you ever wondered why we even need to file a tax return in the first place? I pondered this question more closely last week as I sat with my brother in a Tel Aviv restaurant, where he explained to me, nonchalantly, that in Israel, most residents don't bother to file personal tax returns. That's because most Israelis are actually exempt from filing, based on the type(s) and/or amount(s) of income they earn. Similar systems exist in other major countries, including Japan, the U.K. and the Netherlands.
Each tax season, Canadian taxpayers or their tax preparers, spend millions of hours filling out forms, albeit mostly electronically, to file their tax returns. And it's not easy stuff for the untrained filer. For example, let's say you want to claim the $2,000 pension income amount, which translates into a non-refundable federal credit worth 15 per cent or $300. You just need to follow the Canada Revenue Agency's federal worksheet, which says, "Enter on line 314 of Schedule 1 $2,000 or the amount on line A, whichever is less. However, if you and your spouse or commonlaw partner are electing to split your eligible pension income, enter the amount from line A on line A of Form T1032, Joint Election to Split Pension Income. Follow the instructions at Step 4 of Form T1032 to calculate the pension income amount to enter on line 314 of your and your spouse's or common-law partner's Schedule 1." All that work for three hundred bucks? Which begs the question: Can't the CRA do all this math for you? In other words, if you have qualifying pension income, couldn't the CRA automatically calculate both your eligibility for, as well as the correct amount of, the pension income credit? Indeed, the CRA already has electronic records of nearly all your income, including pension income which is reported on a T4A slip, a copy of which is electronically transmitted to the CRA. Similarly, employment income is reported on T4 slips, which your employer files electronically.
RRSP and RRIF withdrawals are reported on T4RSP and T4RIF slips and investment income is reported on T3 and T5 slips.
A step in the direction of what's become known in global tax parlance as "pre-populated returns" came in 2016 when the CRA introduced the "Auto-fill" feature. This allows taxpayers who have fully registered for the CRA's My Account feature and who use a NETFILE-certified software product to use the "Autofill my return" service, which will download all your information on the most popular tax slips, avoiding transcription errors. One of the hurdles to automatic, pre-populated returns and tax calculations in Canada is the proliferation of the dozens of boutique tax credits inherent in our personal tax system which must be independently claimed on your return, assuming you meet various qualifying conditions. There are credits for volunteer firefighters, search and rescue volunteers as well as first-time home buyers. Last year's budget saw the elimination of four of them (the children's fitness and arts credits as well as the education and textbook credits for students) and in this year's Budget, the popular transit credit was killed as of July 1, 2017. Yet even if the government did away with many of these credits, individuals who make charitable donations would still have to report them on their return to claim the donation credit as charities do not currently submit electronic copies of their issued donation receipts to the CRA. The same holds true for medical expenses, for which you must keep your receipts if you want to claim the medical expense tax credit.
And some individuals, such as those who report rental or selfemployment income, would always have to complete a return to take into account various associated deductible expenses. But for the average Canadian who just has employment or investment income, a prepopulated return, with calculations done for you, could be a big help.
In 2008, Revenu Quebec experimented with the use of prefilled tax returns, but abandoned plans to expand the program after only 33 per cent of the test group used the prefilled returns.
In reviewing the Quebec experiment, a 2011 Fraser Institute study concluded that the use of prefilled personal income tax forms "does little to reduce the costs of personal income tax compliance."
"The idea behind the prefilled personal income tax form is that the government sends the forms to taxpayers with much of their personal tax information already filled in. Individual taxpayers check the information, add whatever is missing, and return the forms to the government," said Francois Vaillancourt, the study's editor and an economics professor at the Université de Montréal.
"But since taxpayers with more complex tax returns bear the brunt of compliance costs and governments find it difficult to prepare pre-completed forms for these taxpayers, the opportunities for such programs to reduce total compliance costs are limited."