May 7, 2023
The Context: Budget 2023
In the 2020 Speech from the Throne, the federal government first announced its intent to introduce “automatic tax filing for simple returns to ensure citizens receive the benefits they need.” At that time, we wrote about this idea here. Fast forward to Budget 2023 released in March of this year where it has raised this issue again:
Up to 12 per cent of Canadians currently do not file their tax returns—the majority of whom are low-income, and would pay little to no income tax. In fact, many of these low-income Canadians are missing out on valuable benefits and support to which they are entitled, such as the Canada Child Benefit and the Guaranteed Income Supplement.
Since 2018, the Canada Revenue Agency (CRA) has delivered a free and simple “File My Return” service, which allows eligible Canadians to auto-file their tax return over the phone after answering a series of short questions. Canadians with simple tax situations and lower or fixed income receive an invitation letter from the CRA to use “File My Return”, and in the 2022 tax filing season, approximately 53,000 returns were filed using this service.
- To ensure more low-income Canadians have the ability to quickly and easily auto-file their tax returns, Budget 2023 announces that the federal government will increase the number of eligible Canadians for “File My Return” to two million by 2025—almost triple the current number. The government will report on its progress in 2024.
- Budget 2023 also announces that, starting next year, the CRA will pilot a new automatic filing service that will help vulnerable Canadians who currently do not file their taxes receive the benefits to which they are entitled. Following consultations with stakeholders and community organizations, the CRA will present a plan in 2024 to expand this service even further.
The intention to do something to help more low-income people file their returns so that they can get the benefits to which they are entitled and which are conditional upon filing a return is laudable. But we feel the attention being given to automatic filing is misplaced.
Expansion of the “File My Return” Service
After acknowledging that up to 12 percent of Canadians do not file a return (the source of this much-cited estimate can be found here), the Budget statement above highlights the CRA’s File My Return (FMR) service. But this service is unlikely to help more low-income Canadians in filing their returns. Why? For at least two reasons.
First, despite being introduced in 2018, usage rates for this service have been consistently very low.
Around 700,000 people are currently eligible to use this service but the annual statistics produced by the CRA on filing income tax and benefit returns reveal that usage has remained around 60,000 annually over the past five years. (Usage peaked at 69,634 in the 2020 season due to COVID related public health restrictions which were in place and subsequently declined to 52,714 in the 2022 tax season.) That’s less than 10% of eligible users. (The numbers for current tax year returns and total returns filed are virtually identical, indicating this service is not used to file prior year returns.)
Why is the take-up rate so low? Eligible clients receive a letter inviting them to use this automated phone service, but some recipients are distrustful of government and ignore the letters. For others who wish to use the service, the lengthy (seven to eight pages) and complicated instructions are likely a significant barrier, requiring a high school level of reading skills in the official language of their choice and understanding of tax-related concepts such as “net income.” Even if they understand the instructions, they need a phone to use this service which may be a barrier for some. For those who manage to find a phone to use, confusion over the various automated options they are required to consider can lead to frustration and abandonment. In the face of these challenges, it is not surprising that the take-up rate has consistently remained at less than 10% of those eligible to use this service. These challenges are likely to remain even with the expansion of eligible criteria allowing up to 2 million people to use FMR by 2025. Thus, it is unlikely that the expansion in eligibility requirements will, by itself, lead to a substantial increase in take-up rates.
The second reason why the FMR service is unlikely to help more low-income people file their return is that receipt of the invitation to use the service depends on the CRA having the correct mailing address for the recipient, which it lacks for most current non-filers.
The CRA’s Non-filers Benefits Letter Campaign has been in operational since 2014, targeting people who have not filed in the past year with a letter encouraging them to file. However, the number of letters sent out each year ranges between 200,000 and 300,000, which is a fraction of the number of people who do not file each year, estimated in the Budget to be as much as 12 per cent of Canadians, translating to 3-4 million people. This is because the CRA has no record of many current non-filers in its database and outdated mailing addresses for many others.
Presently, the CRA sends letters of invitation to use the FMR service to Canadians for whom it has a current mailing address. This is because these Canadians filed a recent return and the CRA knows that they would be eligible to use the FMR service in the following year based on the information contained in that return, provided their situation does not change. Therefore, people who presently file their returns using other methods, such as the CVITP, are being invited to use this service.
It is conceivable that the expansion of eligibility criteria may lead to an increase in the number of low-income people using the FMR service, but most of these people will simply be switching from one filing method to another.
Piloting Automatic Filing for Non-filers
The Budget statement notes that, in the upcoming year, the federal government will also pilot a new service for automatic filing service, targeting vulnerable people who currently do not file their returns.
According to some recent media reports, this initiative is intended to be the first step toward simplifying the return filing process for everyone. This is misleading. The federal government is concerned that many low-income residents are not filing their returns and consequently missing out on benefits to which they are entitled. Eligibility for and the amounts of income-tested benefits provided by the federal and provincial or territorial governments are primarily based on the income information disclosed in a person’s income tax and benefit return. As a result, low-income residents can only access these benefits if they first file a return. The objective of this initiative is to make it easier for previous non-filers to file their returns and obtain these benefits.
As we noted previously in our discussion of automatic tax filing, “there is no such thing as fully automatic filing” and therefore, the term “automatic” is a misnomer. While the return can be automatically prepared by populating the various boxes in the return:
…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.
Following the automatic preparation of the return, 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.
The CRA will face a significant challenge in providing pre-populated returns to non-filers who are not included in the CRA’s database or whose mailing address is outdated. As mentioned earlier, the CRA’s Non-filers Benefits Letter Campaign has shown that the CRA has not been successful in reaching out to the majority of previous non-filers.
Even if the CRA does manage to locate and send pre-populated returns to many non-filers, the Non-filers Benefits Letter Campaign, which has been in operation since 2014, demonstrates the CRA has a poor track record in getting non-filers to respond. On average, less than 10% of non-filers who receive a letter actually go onto file a return. (In other words, we estimate that 1-2% of the people who have not filed in the previous year file a return following receipt of a letter from the CRA.)
Therefore, it is unlikely that the response rate will be any better for non-filers who receive a pre-populated income tax and benefit return. There are several reasons why some non-filers may not respond, such as a lack of trust in any government initiatives, language barriers, financial illiteracy, or confusion about making changes to the return.
Additionally, many optional deductions require information that the CRA does not have, which means that only a small number of low-income people’s returns can be fully prepared automatically by the CRA.
The result may be the same as with the expansion in the eligibility criteria for the FMR service. The pilot may be successful in getting some low-income people to file “automatically”. However, there is a risk that it will be mostly current filers switching from one filing method to another rather than drawing in non-filers.
This means that even once automatic tax filing is fully operational, at the earliest in 2025, its impact on low-income people’s access to benefits could remain very limited.
Overreliance on Technology, Underuse of Human Contact
The efficient use of technology is crucial for services like FMR and automatic tax filing to help low-income non-filers access benefits. However, it’s important to question whether these services, which rely heavily on technology and reduce direct client interaction with people, can truly be effective in reaching previous non-filers.
As discussed above, the CRA’s FMR service and Non-filer Benefits Letter Campaign have produced marginal results despite their reliance on technology. Therefore, it’s doubtful that automatic tax filing, which also relies on technology, will be significantly more successful.
The CRA already has a successful program called the Community Volunteer Income Tax Program (CVITP), which helps low income people file their returns. In a recent article, we suggested how the CRA could strengthen the CVITP to help more low-income people who haven’t filed a return in recent years.
However, there is evidence to suggest that the CRA has been scaling back its ambitions for this program in recent years as its performance has fallen short of expectations. To reach more low-income non-filers, the CRA should focus on strengthening the CVITP, which has relied on direct person-to-person contact and has earned the trust of the communities it serves for over 50 years. As highlighted in the federal government’s 2018 Poverty Reduction Strategy, the CVITP remains the best option for increasing vulnerable people’s access to the benefits to which they are entitled.