Ottawa now collects more than $150 billion from the tax, approximately half its total revenue, from just three percent a century ago.
But beyond the dollars extracted by government, Canadians pay a significant cost to comply with the tax code. Some Canadians directly pay tax preparers, accountants and lawyers to assist with preparation and planning. Others purchase software to help them wade through the tax code. Canadians also incur indirect costs: the value of the time it takes to understand the tax rules, compile the relevant materials and complete the forms.
All told, the latest available estimates suggest Canadians spent nearly $7 billion complying with the personal income tax system in 2012. This represents about $500 per household.
These compliance costs don’t improve our lives by increasing our incomes. In fact, the cost of complying with the tax code means Canadians have less money and time to spend on leisure, and with family and friends.
And the relative burden of compliance falls disproportionately on lower-income Canadians, since the costs represent a larger share of their income.
It’s the complexity of the system that partly drives compliance costs. Consider the evolution of the Income Tax Act, which governs personal and corporate income taxes. Since it was introduced 100 years ago, the act has grown longer and more dense.
When established in 1917, the act contained 3,999 words, compared to 1,029,042 words today. It has grown from just six pages in 1917 to 1,412 pages today. And the number of lines in the federal income tax form, a key administrative document, has increased from 23 in 1917 to 328 in 2015, a 14-fold increase.
A key source of complexity is the number of tax credits, deductions and other special preferences (whose importance is measured as “tax expenditures”). For instance, the number of federal tax expenditures in only the personal income tax system (excluding corporate and sales taxes) is now well over 100, and covers a wide range of activities such as donating to a political party and volunteering as a firefighter. And this is an increasing source of complexity; from 1996 to 2014, the federal government added 27 personal tax expenditures for a total of 128.
Claiming a tax credit or deduction typically requires a tax filer to acquire and keep receipts, fill out additional forms and carry out various calculations. Sometimes it leads people to hire tax professionals so they don’t miss any possible benefits. All of this can drive compliance costs higher.
And other factors add to the system’s complexity, including the number of tax rates and differing treatment for different types of income. But regardless of the indicator, Canada’s system is much more complicated than it was 100 years ago.
So what can be done?
To lower compliance costs, Canadian governments could reform complex tax policies. Getting rid of ineffective credits, deductions and other special provisions would not only simplify the system, it would create room to broadly lower personal income tax rates. That could be part of the ongoing federal review of tax expenditures.
In the absence of reform, Canadians will continue to bear high costs to comply with our personal income tax system.
Charles Lammam (along with François Vaillancourt are) co-authors of the essay Compliance Costs and Complexity in Canada’s Personal Income Tax, published by the Fraser Institute.