December 24, 2024

Summary: Every fall, the Department of Finance Canada provides an update informing the public about the state of the federal government’s finances and key economic developments.  The Fall Economic Statement (FES) for 2024 was issued on December 16.  Intriguingly, it touched on the issue of filing the income tax and benefit returns of low-income Canadians.

The articles in this two-part series tackle both what the FES said and what it did not say about this subject as the government’s omissions were as relevant to the CVITP as its treatment of the filing of returns for low-income Canadians.

In this first article, I present and comment on what the FES had to say on this subject.  The FES discussion was limited to advancing its agenda for the automatic filing of low-income Canadians’ income tax and benefit returns.

Since it was first announced in 2020, I have been sceptical about the speed with which the Canada Revenue Agency (CRA) would introduce this innovation and how effective it would prove in helping low-income non-filers to get the benefits to which they are entitled, the original rationale for automatic tax filing.

The FES doubles down on the CRA’s efforts to advance this innovation.  But its messages about the 2024 pilot for automatic tax filing prioritize communications optics over coherence and transparency.

The FES indicates the government’s intent to develop legislation that would “allow the CRA to file a tax return on behalf of certain lower income Canadians using the information it has available, beginning as soon as the 2025 tax year” (i.e. in time for the 2026 tax filing season).

As described in the FES: “Eligible Canadians would receive a pre-filled tax return based on CRA data, and be invited to review and modify their information as necessary, or to opt-out of the automated filing process. If eligible Canadians do not opt out, the tax return would be filed on their behalf by the CRA.”

This proposal might make it easier for the CRA to process returns and generate benefits.  But its implementation risks running into serious problems because of its use of automatic tax filing as the default option for filing a return.

Given the current political situation, this may not happen soon as the legislation project proposed in the FES is unlikely to move forward before a federal election is called in 2025.

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Every fall, the Department of Finance Canada provides an update informing the public about the government’s finances and key economic developments.  The 2024 Fall Economic Statement (FES) was issued on December 16.  Intriguingly, it touched on the issue of filing income tax and benefit returns for low-income Canadians.

The articles in this two-part series tackle both what the FES said and what it did not say about this subject as the government’s omissions were as relevant to the CVITP as its treatment of the filing of returns for low-income Canadians.

In this first article, I present and comment on what the FES had to say on this subject.  The FES discussion was limited to advancing its agenda for the automatic filing of low-income Canadian’s income tax and benefit returns.

Communications spin

First, the FES maintains the false narrative that this initiative is ultimately about helping non-filers to gain access to their benefits.  It opens its discussion of the topic of automatic tax filing by reminding Canadians that “[n]early 20 per cent of Canadians with an income below $20,000 do not file a tax return.  They are therefore not receiving many significant federal benefits they are eligible for.”

To participate in the automatic tax filing pilot called SimpleFile launched by the CRA in July of this year, individuals were invited to file their return using one of three “new” methods.  However, the pilot suffered from several serious flaws, of which two are worthy of mention here.

The CRA only invited those individuals with a simple tax situation which does not change from year to year.  But the CRA only had this information on individuals who had filed their previous years’ returns using traditional methods.  Chronic non-filers are, by definition, those for whom the CRA has little or no information on their tax situation.  So, they did not fit the criteria for participation in the pilot.

Furthermore, the CRA needed up-to-date mailing addresses to which it could send these invitations.  This limited the pool of recipients to those who have maintained a current mailing address with the CRA.  This is unlikely to be the case for non-filers, especially chronic non-filers.  So, the CRA would have been unable to send them an invitation in any event.

On the other hand, there are many recent low-income filers who have a simple tax situation which does not change from year to year.  As a result, these individuals are getting the benefits to which they are entitled.  And the CRA is more likely to have current mailing addresses for these recent filers.  These are the individuals the CRA invited to participate in its pilot.  This explains why, earlier this year, so many regular CVITP clients received invitations to participate using one of the “new” methods, SimpleFile by Phone.

Second, the FES conveys the misleading impression that one of the three “new” methods, SimpleFile by Phone, has been a success.[i]

The FES states that over 1.5 million Canadians have been invited in 2024 to use this method.  It then adds that, as of the beginning of November, 93% of invitees had filed an income tax and benefit return.  What it fails to mention is the percentage of invitees who used SimpleFile by Phone to file their return.

However, the CRA’s update on its website would seem to suggest that as of mid December, at best only 3.4% of invitees had used SimpleFile by Phone as the method to file their returns.[ii]  Such a low adoption rate is hardly an indication of success.

Third, the FES claims, without any supporting evidence, that this pilot has seen “some initial success”.  Nor does the CRA provide any evidence anywhere on its website to support this assertion.  As indicated immediately above, the low adoption rate for the most publicized of the three methods suggests otherwise.

Fourth, despite opening its treatment of automatic tax filing with a false narrative, the FES changes direction mid discussion, stating “it is time for Canada to accelerate modernization of how Canadians file their taxes and make needlessly complicated and costly tax filing services a thing of the past”.  While this may be a laudatory objective for advancing automatic tax filing, it has little to do with helping non-filers obtain the benefits to which they are entitled.

What the FES proposes

The FES indicates the government’s intent to develop legislation that would “allow the CRA to file a tax return on behalf of certain lower income Canadians using the information it has available, beginning as soon as the 2025 tax year” (i.e. in time for the 2026 tax filing season).  This is different from the SimpleFile pilot the CRA ran this year, wherein recipients first had to answer a series of questions before they could file their return.[iii]

The FES describes how this would work:

Eligible Canadians would receive a pre-filled tax return based on CRA data, and be invited to review and modify their information as necessary, or to opt-out of the automated filing process. If eligible Canadians do not opt out, the tax return would be filed on their behalf by the CRA.[iv]

Presently the CRA requires clients to confirm the amount of income declared in their return before the return is filed.  The FES states that this change would require an amendment to the Canada Revenue Agency Act.  

Is this a good idea?

I empathize with the government’s original concern over the difficulties non-filers face in getting the benefits to which they are entitled.  And this proposal might make it easier for the CRA to process returns and generate benefits for some low-income Canadian residents.  But its implementation risks running into serious problems along the way which could undermine its purported advantages.

The government proposes to make use of opting out rather than opting in.  In other words, unless the recipient of the pre-filled tax return specifically requests not to participate, the assumption is that the recipient has chosen to participate.

Every year, roughly 60% of Canadians consistently ask someone else to prepare their income tax and benefit return for them[v].  For some, their financial situation may be complicated enough to warrant the use of a more informed agent to help them file their return.

But for many, they simply don’t understand the income tax and benefit return preparation process.[vi]  This is because, in its written form the current income tax and benefit return is a complicated document.

Most individuals, CVITP volunteers and professionals who prepare income tax and benefit returns use software to help them navigate its various complexities and manage the various calculations required to complete the return.  Few bother to look “under the hood” to understand how the software generates the resulting numbers.

The pre-filled tax return would have to be substantially simplified to ensure it could be readily understood by most individuals receiving the document.

The income tax and benefit rules which form the basis of the income tax and benefit return are, admittedly, complex and subject to frequent changes.  But the CRA has traditionally not done a good job of communicating with Canadians.  Its written messages are often difficult for clients, let alone their CVITP volunteer return preparers, to understand.  Thus, I am sceptical that the CRA would be able to produce a pre-filled return that most recipients could easily understand.

What would happen when an individual received a pre-filled return from the CRA?  Some recipients, fully understanding the document they have been sent, would either accept their pre-filled tax return as is (in which case they need do nothing more) or be able to successfully communicate changes that need to be made to the CRA.

But other recipients might not be able to understand their pre-filled return.  In that case, what would be their options?

They could simply accept the CRA’s results, running the risk that these contain errors either in the government’s favour (more income tax is owing) or the individual’s favour (they are entitled to more benefits).

Or they could seek out advice from knowledgeable parties.  Commercial service providers cost money, something to be avoided if one’s target recipients of pre-filled returns are low-income Canadians.  Trusted CVITP host organizations and their volunteers are another potential source of advice.  This itself could be problematic; I will explain why in the second article in this two-part series.  That leaves the confused recipient with the option of communicating directly with the CRA to get advice.

As any CVITP volunteer who has helped a client communicate by phone with the CRA knows, getting client-specific advice from the CRA can be a Kafkaesque-like nightmare.  CRA agents will only talk with a client about their specific case once the client has passed a security test.

In this test, the client must correctly answer specific knowledge questions put to them by the CRA agent.  Answering these questions correctly, which it is assumed only the right person can do, enhances the CRA agent’s confidence that they are not going to share private information with a fraudster.

Because the CRA’s security questions rely on the client’s good memory and record keeping of past CRA correspondence, many CVITP clients fail to get beyond this first step.  In these cases, the client is unable to resolve their issues except by using regular postal mail, an option not adapted to getting timely information.

Thus, for many recipients of the pre-filled return, getting advice from the CRA would not be a realistic option.

In these circumstances, with so many risks around recipients understanding and accepting their pre-filled returns, perhaps it would be wiser to allow recipients the choice of opting into automatic tax filing.

However, the federal government is proposing to use opting out rather than opting into automatic tax filing.  It is doing this because social science research shows most people tend to choose the default option.  If the default option were to opt in, very few people would likely choose to participate.  But if recipients have problems understanding their pre-filled returns and cannot get timely advice, many may – if they understand how to – opt out of the automatic filing option.[vii]

When will this happen?

The federal government will continue to pursue automatic tax filing, egged on in part by social policy advocates who believe this is the best way to get non-filers the benefits they are entitled to.  Yet many are ignorant of the legal and operational constraints the CRA faces in making this anything but a distant reality, the many shortcomings of its 2024 SimpleFile pilot, and the increasingly tenuous situation in which the CVITP – the chief mechanism at present for meeting this policy objective – presently finds itself.

Given the current political situation, this may not happen soon as the legislation project proposed in the FES is unlikely to move forward before a federal election is called in 2025.  And it is anybody’s guess as to what the next government might do with this idea.

The least that can be said is that none of this is likely to be ready in time for the 2026 tax filing season.  In the meantime, the CRA may very well be stuck in a halfway house, continuing to experiment with the three methods it developed for its 2024 pilot but unable to move to forward with anything like what the government has proposed in the FES.

In the next article in this two-part series, I comment on two surprising omissions from the FES that are also relevant to the CVITP.

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[i] The CRA originally implied this when it first announced the formal launch of the automatic tax filing pilot project in July.

[ii] In July, the CRA indicated that, in addition to the 1.5 million individuals who had received an invitation to use SimpleFile by Phone earlier in the year, up to a further 500,000 would be sent these invitations in 2024.  This would seem to suggest that as many as 2 million Canadian residents received these invitations.  The FES only states that a total of 1.5 million invitations were sent out.  The CRA reported that by December 15, a total of 51,335 people had used SimpleFile by Phone to file their returns.  The 3.4% response rate is calculated based on 1.5 million invitations.  If as many as 2 million invitations were sent out, the actual response rate would be even lower.  As many CVITP clients received these invitations but chose to get a CVITP volunteer to file their return, these CVITP clients are also counted within the 93% figure (as are recipients who chose other traditional methods to file).

[iii] This also seems to contradict the third claim, that the pilot has been a success.

[iv] In previous articles on automatic tax filing, I have used the expression “pre-populated” to mean the same thing as what the government calls here a “pre-filled” return.

[v] CRA statistics on individual filers regularly show annual rates for EFILE usage around 60%.  EFILE is the chief means for electronically filing the return of another person.  NETFILE is the name given to the electronic method for filing one’s own return.

[vi] Volunteers all know clients who avoid dealing with the CRA whenever possible because they fear what they don’t understand.

[vii] What low or not cost alternatives might then be open to them for filing their return?  The CVITP would be an obvious option.