November 17, 2020
Introduction
For those of you who may have missed it, in the September 23rd, 2020 Speech from the Throne outlining the government’s priorities up until the next federal election, the Governor General of Canada stated that “The Government will also work to introduce free, automatic tax filing for simple returns to ensure citizens receive the benefits they need.”
This statement has received some coverage in anglophone media (for example, look here, here and here). This is because the Speech from the Throne sets out the government’s priorities for the remainder of its electoral mandate. This means the reference to automatic filing should be taken seriously as a government priority in the coming years. (Many of the initiatives that make it into the Speech from the Throne originate in the federal bureaucracy; so, the Canada Revenue Agency (CRA) may have proposed the initiative to the government. In any event, the reference to automatic filing in the Speech will have come as no surprise to the CRA.)
So, does this mean that CVITP volunteers and host organizations will soon be out of the work of preparing income tax and benefit returns? We think not. In this article, we explain why. First, we make some observations regarding any CRA move to the automatic filing of simple returns. Then we draw out the implications of these observations specifically for the CVITP.
Observation #1: The Canadian income tax and benefits return is so complex that, at this stage, there are very few “simple” returns
Among the older CVITP volunteers, some will remember the pre-internet days when one could fill out a paper return fairly easily, using only basic arithmetic, and in short order. However, given the complexity of the current returns, using software to help prepare the return is a necessity, whether filing over the internet or by regular mail.
According to a Deloitte comparative study of the personal income tax return process in 34 countries, including Canada, last updated in 2017, two thirds of these countries provide returns with some pre-populated fields. (A pre-populated field is a box that has already been filled in with information specific to the taxpayer.) In fact, Spain’s return is completely pre-populated by the authorities; in such a case, automatic filing is entirely possible. However, Canada is among the third of the countries in the study which provides no pre-population of the boxes in taxpayers’ returns. One can see that, with greater use of Autofill My Return (AFMR), the CRA is moving toward pre-population of some parts of the return.
But there remain many boxes to be filled in that do not depend on T slip information the CRA has on hand. Many of these boxes relate to possible deductions that are based on the taxpayer’s unique situation. Canada was among the 59% of countries covered by the study which allowed for many personal deductions. These deductions reduce taxes owed but increase the complexity of the return.
At least half of the countries in the study had fewer boxes in the return to be filled out by the taxpayer than the return used by the CRA. The additional information sought from the taxpayer by Canadian authorities cannot be attributed solely to the myriad of personal deductions. We believe there is another reason so many boxes in the return cannot be pre-populated.
The federal government has increasingly turned to using the income tax and benefit return as a tool to promote its social policy objectives. To gain and maintain access to various social benefits, users are required to provide the federal government with additional information. The return is also increasingly being used by provincial and territorial governments in a similar way. This further adds to the information authorities seek with regard to eligibility for various benefits. (This explains why the CRA now refers to it as the income tax and benefit return, not just an income tax return.)
Understanding which of the many boxes are relevant to a person’s unique situation and what the information requirements are for each of these boxes, even after using AFMR, are tasks beyond many people’s capacity. This may explain why, even with tax preparation software to facilitate the job, almost 3 out of every 5 people in Canada filing a return still turn to someone else to prepare and submit their taxes for them (the process is called efiling – see the statistics here).
What would the simplest of returns look like? We assume that it would be entirely pre-populated by the CRA. This means that the CRA would already have access to all the information it needs to complete the return. We believe there are very few such returns at present.
Among our CVITP clients, many claim deductions or credits which require them to provide information not currently in the hands of the CRA. As volunteers, we see almost no returns that are based solely on information readily available through the CRA’s T slips. For automatic filing to become a reality for a significant number of people including some CVITP clients, something in the return preparation process will have to change. Either some personal deductions will have to be removed (something we think highly unlikely) or the CRA is going to have to get a lot more creative about collecting the information it will need to pre-populate all the relevant boxes in a person’s return. We believe this process will take time.
Observation #2: The use of the CRA return by provincial and territorial authorities makes the process of developing automatic filing a more complex one
With the exception of Quebec, the return preparation process led by the CRA is also used by provincial and territorial authorities to collect information they need to assess their residents’ income tax obligations and benefit entitlements, as we have already indicated above. The current collaboration between federal, provincial and territorial authorities in the use of the return means that before the CRA can move to automatic filing, even of the simplest returns, it will still need to get the agreement of these provincial and territorial authorities.
The challenge CRA faces here should not be underestimated. Because automatic filing impacts core elements – revenue collection and social expenditures – of their mandates, provincial and territorial authorities will need to be fully assured that automatic filing will not entail any loss of tax revenues or significant increase in expenditures on benefits and credits. We believe that these negotiations will also take some time.
Observation #3: There is no such thing as fully automatic filing
Above, we referred to the pre-population of boxes in a return as an essential step in the automatic filing process. Strictly speaking, it is crucial for the automatic preparation of returns. However, that is not the same as the automatic filing of returns. The reference to “automatic filing” is a misnomer.
In the income tax and benefit return process, no one wants to discover they have absolutely no say over how much tax they owe or benefits they are entitled to. In even the most automated tax filing systems, there is always one step which is not automatic: an individual receives their pre-populated return and they are required to indicate if they agree with the results and if not, why not, before it is filed. Tax authorities insist on this, at the very least, to ensure the individual confirms there are no sources of taxable income that have been left out of the pre-populated return.
In the automatic filing process, the CRA will need to share the pre-populated return with the individual before it can be filed. The CRA presently has two means of communicating with individuals. One method, electronically through email associated with the CRA My Account, assumes that the filer has access to a computer and an internet connection. The second method, by regular mail, assumes the filer has a permanent address (and, when they move, has registered with the post office for mail to be forwarded to their new address).
Both these methods of communication are well designed to connect with many middle and high-income people. But less so for many low-income people. While many low-income individuals may have a smartphone, far fewer have access to an internet-linked computer and are familiar enough with computers to set up a CRA My Account. Some low-income people move around a lot without informing the post office of their address change or, in some cases, have no fixed address. This means that the CRA will have trouble sharing pre-populated returns with these individuals. For this reason, we believe that some low-income people will not be able to file automatically, even when the CRA can produce their prepopulated return.
Implications for volunteers and host organizations
As we observed above, the CRA’s move to a pre-populated return, even for “simple” cases where there are just a few boxes that need to be filled, will take time. And getting agreement from provincial and territorial governments with this new process will also take time.
This suggests that, for some time to come, it will be business as usual for the CVITP.
When automatic filing is eventually introduced, many CVITP clients’ situations will still be too complex to allow for their returns to be pre-populated by the CRA. For some CVITP clients whose situation is simple, the CRA may be able to pre-populate their returns. But, as we have stressed above, the CRA will still need to share the pre-populated returns with these clients before the returns can be filed. The CRA will be able to communicate this information to those CVITP clients who have set up an online CRA Account or who have an up-to-date postal address on file with the CRA. But for other CVITP clients who do not have My Account or the correct postal address on file, the CRA will not be able to share the pre-populated return and get them to file it.
This suggests that, even when automatic filing is introduced for simple returns, it may not make a significant difference in the demand for CVITP clinics. Many CVITP clients will still need help in preparing and filing their returns as their situations are too complex for the automatic preparation of pre-populated returns. Some CVITP clients whose situations are simple enough for a pre-populated return will still need help communicating with the CRA as they do not use My Account or have a mailing address on file with the CRA. Furthermore, there will always be CVITP clients who will need help understanding CRA correspondence.
In both the short term and the longer term, CVITP clinics will also be needed to help low-income people to file a return who have never previously filed or have not filed in a very long time.
Bottom line: Keep calm and carry on filing client returns.
Postscript: some cautionary thoughts
While automatic filing has the appeal of simplifying people’s lives, its introduction could further erode citizens’ roles in understanding and holding governments accountable for their policies.
As we indicate above, most people find their income tax and benefit return so complicated that they get someone else to prepare it. This is because the current return preparation process is built on income tax and social policies which are themselves complex and often difficult to understand. Automatic filing means a simplification of the process of preparing the return. It does not mean any simplification of the policies that underlie the return.
One risk is that the majority of people who eventually receive an automatically prepared return will not be in any better position to effectively question the CRA’s pre-populated results. To decipher the results in their returns, they will still have to turn to experts for help. Or they will be left passively giving their “uninformed consent” to the CRA’s results.
Another risk is potentially more worrisome. For Canadian citizens, paying income tax is a fundamental obligation and receiving benefits a right. There is an important connection between the two. Income tax is progressive: the higher a person’s income the greater the share of income they pay to the state. This progressivity is linked to redistribution through benefits: the lower a person’s income, the greater the share of benefits they receive from the state. As a society, we accept the principles of progressivity and redistribution to promote greater equality. Successive governments have implemented policies that give specific meaning to the principles of progressivity and redistribution.
Yet different policy choices to promote progressivity and redistribution can yield significantly different results. In our democracy, it is important to understand these policies if citizens are to hold the government accountable for its choices. The income tax and benefit return is the chief tool used by the Canadian government to engage with citizens in the implementation of the progressivity and redistribution policies it has chosen. If citizens do not understand their returns, they are unlikely to understand the policy choices which lie behind their returns. In face of this lack of understanding, automatic filing may help to reinforce citizen passivity, rendering the government less accountable for its policy choices.