Canadians spend billions complying with personal income tax system
By Contributor
The Fraser Institute
As tax deadline day approaches, a new study released by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank, finds that Canadians spend billions complying with the personal income tax system.
The study, based on survey responses from tax-filing Canadians, measures the overall costs (time and money) of tax compliance (paying accountants, completing tax forms, buying software, etc.).
“Each year, Canadians spend more in tax compliance costs than what the average household spends on groceries in a month,” said Sean Speer, associate director of the Fraser Institute’s Centre for Fiscal Studies and author of The Cost to Canadians of Complying with Personal Income Taxes.
According to the study, Canadians spent up to $6.96 billion complying with the personal income tax system in 2012, which equals an average of $501 for each Canadian household.
“When analyzing Canada’s tax system, politicians, pundits and policy makers may talk about the economic cost of taxation but rarely address the costs to Canadians of simply complying with the tax system,” Speer said.
Moreover, tax compliance costs fall disproportionately on lower-income Canadians who spend a greater share of their income complying. The study finds that the lowest-income Canadians spend 3.3 per cent of their income on tax compliance compared to 0.3 per cent for the highest-income Canadians.
And what about compliance costs associated with tax credits, deductions and other special breaks (technically known as tax expenditures) which are meant to save Canadians money?
Virtually every federal budget since 2006 has contained new special tax breaks related to specific activities (i.e. public transit use) or specific groups (i.e. parents with children in youth sports). The 2014 federal budget, for example, introduced a new tax credit for Canadians who volunteer for search and rescue operations.
Although welcomed by many Canadians, these special tax breaks can increase the cost of compliance. According to the study, Canadians who claimed at least one of 10 tax expenditures listed in the survey spent an average of $49.80 more in compliance costs (or in other words, 20.3 per cent more) than Canadians who didn’t claim these expenditures.
“In some cases, compliance costs associated with tax expenditures can significantly impair their financial benefit, which may cause many Canadians to think twice before claiming a tax expenditure,” Speer said.
So what can be done to lighten tax compliance costs to Canadians and their families?
Because the tax system’s growing complexity (the federal Income Tax Act grew from 11 pages in 1917 to more than 3,200 pages in 2014) imposes compliance costs on Canadians at ever-increasing rates, the most obvious fix, notes the study, would be to eliminate tax provisions and reduce the number of tax expenditures.
“A simplified personal income tax system would be easier to understand and less expensive in time and money for Canadians to navigate. Given the tax burden faced by Canadians, it makes sense to find ways to reduce the cost of tax compliance,” Speer said.
