The size of the problem
Each year, Statistics Canada reports on the number of tax filers for the previous year and what it calls the coverage rate (which is a percentage based on a comparison of the number of tax filers and the latest population estimates). Therefore, it is a simple matter to estimate the number of non-filers.
According to Statistics Canada, 95.4% of all those eligible filed a return for the 2018 tax year; this means that almost 5% of Canadians who could have filed a return did not. Given that 28.336 million Canadians filed that year, this would imply that some 1.366 million Canadians did not file.
However, some researchers feel that this is an underestimate of the percentage of non-filers. For example, Robson and Schwartz believe the figure is somewhere closer to 10-12%.
Intriguingly, the Canada Revenue Agency (CRA) does not publicly report on the number of non-filers. Therefore, we are left to work with Statistics Canada’s estimates.
Why it’s a problem
Some of these non-filers, perhaps the majority, have low incomes. Some low-income non-filers may be liable to pay tax but again others may not. Individuals will not be liable for any taxes if their annual incomes fall below the federal basic personal amount ($13,229 for the 2020 tax year). But surviving on such a low income means these individuals are living well below the official poverty line, regardless of where they reside in Canada.
Whether or not an individual on a low income owes some taxes, the fact that they are not filing means they are losing out on benefits and credits to which they are entitled. As Robson and Schwartz note, “For eligible non-participants [non-filers], filing an income tax return can lead to a substantial increase in household income from credits and benefits administered through the tax system.”
Why people don’t file
The real mystery then is why someone living on such a low income would not file their return. Hard evidence on the reasons for this is difficult to come by. In 2019, Prosper Canada published two survey-based reports that sought to answer this question.
The first, which was based on input from community service providers (mostly based in Ontario), included the following reasons for non-filing, ranked in order of importance:
- Not knowing what to do
- Not knowing where to get help
- High cost of private tax help
- Challenges accessing existing supports
- Problems assembling documents
The second, which was based on input from a small number of low-income filers, included the following reasons:
- Sometimes it wasn’t worth the effort given the amount of money received
- They had to bear the consequences for past mistakes made by others who had filed for them
- Some were fearful of finding out they owed money to the government
- Some did not want to be “on the government’s radar” for a number of different reasons
What is being done to address the problem?
In its Departmental Results Report for fiscal year 16/17, the CRA first referred to an initiative it had undertaken in 2016:
“…the CRA sent 260,000 letters to taxpayers who had not filed for the 2014 tax year, prompting them to file a tax return to get benefits they may have been entitled to. As of mid-February 2017, 21,532 potential benefit recipients [8.28%] had filed a total of 33,937 returns, with some filing returns for both 2014 and 2015. These taxpayers received over $12.4 million in tax refunds for 2014 and 2015 combined. In addition, following the assessment of returns for those two years, the CRA issued over $27.2 million in benefit and credit payments, helping 6,542 children.”
In the next fiscal year (17/18), the CRA sent out 300,000 letters through what it was now calling the non-filer benefit letter initiative. Although it had established a target response rate of 25% and even included this as a performance indicator within the Benefits portion of its results framework, only 8.1% of the identified population filed returns.
Recognizing that it had been overly ambitious, the CRA revised its performance target for this initiative downward to 10% in future years. In the following fiscal year (18/19), the CRA issued 205,425 letters to “Canadians with low or no tax recovery potential, promoting filing so that they can receive the benefits and credits for which they are eligible.” Its Departmental Results Report indicates that 7.9% of those contacted responded by filing a return.
There are a number of things to keep in mind in this process. The CRA identifies non-filers from the previous tax year, writes to them and reports on its success in getting them to file in the next tax year. This is what is shown in the above table.
The number of low-income non-filers who file following the receipt of a CRA letter is too small, by itself, to account for the decrease in the estimated number of non-filers from one year to the next. (For example, the estimated number of non-filers declined by 102,000 between the 2016 and 2017 tax years whereas only 24,300 previous non-filers who were contacted through the CRA’s letter initiative chose to file in the 2017 tax year. Some 77,700 other previous non-filers also chose to file in the 2017 tax year.) There are obviously other reasons why previous non-filers may also decide to file.
Furthermore, we do not know how the decline is distributed amongst the different income profiles of non-filers. It is possible that some low-income non-filers who had not been contacted by the CRA nevertheless chose to file.
A weak response to a large problem
It is difficult to conclude much from an initiative for which there is only three years of reporting. Nevertheless, there are a few noteworthy points:
First, the number of letters issued appears to be very small by comparison with the total number of non-filers. (For example, in fiscal year 18/19, the number of letters issued represented only 14.7% of non-filers.) It could be either that the number of individuals “with low or no tax recovery potential” represents a very small portion of all non-filers, or that the letters issued represent the number of individuals in this category for which the CRA had a mailing address on file. The CRA provides no explanation for the low number of letters issued.
Second, the response rate is very low. As noted above, the CRA had originally expected a 25% response rate but revised its target down to 10% after seeing the initial response rate. It could be either that a large number of the mailing addresses the CRA had on file and used were incorrect (letters returned undelivered would have indicated this), or that the majority of letters were delivered but ignored or misunderstood by the recipients. The CRA gives no explanation for the low response rate.
Third, the response rate appears to be declining over time. This may be an inherent characteristic of the initiative: as progress is made in contacting and getting some non-filers to file, the remaining pool of non-filers is composed of those who are more difficult to contact or to convince to file. However, the CRA gives no explanation for the declining response rate.
Fourth, the low response rate means that the number actually filing represents a very low proportion of the estimated pool of non-filers. (For example, the number of non-filers who filed in fiscal year 18/19 through this initiative represented 1.2% of the estimated pool of non-filers from the 2017 tax year.) As the CRA does not report on the number of non-filers, it comes as no surprise that it gives no explanation about the remaining pool of non-filers.
Why doesn’t the CRA attempt to give an estimate of the number of non-filers in any given year? As indicated above, we are instead reliant on coming up with our own estimates based on what Statistics Canada calls the coverage rate. Yet, if any agency in Canada is best placed to provide such estimates, it is surely the CRA.
Providing such an estimate each year and indicating the percentage of this estimate that falls into the category of low-income individuals would give us a better sense of the scale of the problem. The absence of any attempt to estimate the scale of the problem is surprising, especially as the CRA plays such an important role in delivering so many federal and provincial/territorial benefits which help to reduce income-based poverty.
According to the CRA’s own Departmental Plan for the 18/19 fiscal year, the CRA has two core responsibilities: taxes and benefits. The CRA’s stated outcome for its benefits program is that “Canadians receive their rightful benefits in a timely manner.”
Yet the CRA’s report does not indicate any concern that over 1 million individuals failed to file their returns and to receive their rightful benefits in a timely manner. For individuals who are on low incomes, the failure to obtain their benefits implies unnecessary personal deprivation and less effective government policy aimed at poverty reduction. When the CRA reports that it sent letters to non-filers “with low or no tax recovery potential”, this suggests it attributes a lower priority to the management of its benefits related responsibilities than to its tax related responsibilities.
Imagine if over 1 million individuals had failed to file their return and were evading their obligation to pay income tax? Would the CRA be content with issuing letters to only 15-20% of these non-filers reminding them to file? In such a case, we do not believe the CRA would be concerned with these individuals’ failure to receive the benefits and credits for which they were eligible. The CRA’s focus would be on ensuring these people file to fulfill their tax obligations.
We agree that the two scenarios are not identical: paying taxes is an obligation whereas getting credits and benefits is a choice. However, it should be left to the individual to make this choice. The CRA needs to make much greater efforts to contact all individuals who have not filed to ensure they are making an informed choice.
What’s the relevance to the CVITP?
As we indicate in our series on the Evolution of the CVITP, the CRA has an inventory of some 3,500 community-based organizations which offer free CVITP services to low-income individuals across Canada. Embedded within their communities, many of these organizations offer other services targeted to low-income individuals. These organizations know their communities and their clients well. They may have strong connections with other social services and organizations in their communities which also target low-income individuals. Thus, these organizations are potentially well placed to communicate with non-filers within the local community.
Through its non-filer benefit letter initiative, the CRA uses letters sent by post to addresses it has on file for recipients. Yet many non-filers fall within the population of the poorest individuals, with no permanent address or who move frequently enough that Canada Post has no forwarding address. So, it is not surprising that there is such a low response to the CRA’s non-filer benefit letter initiative – we believe that many of the letters the CRA sends may not even be seen by their intended recipients.
The CRA needs to develop a more effective strategy to connect with non-filers to encourage them to file. This strategy should include working closely with the host organizations in its CVITP network to build on the extensive network of contacts these organizations have within their local communities. At present, the CRA has not explicitly made any link between its non-filer benefits letter initiative and the CVITP. Yet it is likely that many of those receiving the letter who decide to file are using the existing free return preparation services offered by CVITP host organizations.
We are not suggesting that the CRA should abandon the protection of client confidentiality by providing host organizations with the names of non-filers suspected of residing within their communities. However, the CRA has insight into the extent of the non-filer problem in different communities. Based on this knowledge, the CRA could, in conjunction with local CVITP host organizations, tailor campaigns specific to those communities where non-filing is a greater problem.
These campaigns would seek to raise awareness about the importance of filing a return while, at the same time, addressing some of the barriers to filing identified above. Notably, the three most important barriers – not knowing what to do, not knowing where to get help, and the high cost of private tax help – could all be addressed by CVITP host organizations: embedded within their communities, they are well placed to provide free return preparation services to non-filers when they need them.
However, these host organizations will require significantly greater support from the CRA if they are to run effective local campaigns. In another article, we suggest how this support could be provided. Such campaigns, if well conceived, could substantially reduce the number of non-filers.
In any event, when a low-income individual who has been a long-standing non-filer finally chooses to file, they will often need ancillary services such as assistance with applications for the Guaranteed Income Supplement or with basic financial planning. Community-based host organizations are usually best placed to offer or connect former non-filers to these services.