Time to Simplify the Tax Code

Over the past several weeks, Canadians have been grappling with the stress and anxiety of completing their income tax returns. Once the paperwork is complete and the numbers neatly added up, many will be shocked by just how much of their income they paid in taxes last year. Even more eye-opening, that total does not take into account the myriad other taxes we pay.

Not only are governments taking a significant portion of our incomes in taxes, we're forced to sweat, stress, and spend hours complying with the tax system. It's time the government addressed the complexity of Canada's income tax system.

A recent study, The Costs to Canadians of Complying with Personal Income Taxes, by François Vaillancourt, professor of economics at the University of Montreal, used the results of a survey carried out by Leger Marketing on behalf of the Fraser Institute of 2,000 Canadian tax filers to calculate the enormous costs imposed on Canadians to comply with income tax regulations.

Despite the widespread use of computers over the past 20 years and continuously simpler software programs such as QuickTax, the number of Canadians using paid help to complete and file their income tax returns continues to increase. The survey found 51% of Canadian tax filers paid for professional assistance (e.g., accountant, lawyer or firms such as H&R Block) to prepare and submit their tax returns. In 1986, only 39% of tax filers used paid help.

Meanwhile, only 31% of Canadian tax filers prepare their returns themselves, while 18% rely on friends, family, or a non-profit organization.

The survey also found Canadians spend an average of five hours gathering receipts and forms, preparing, meeting with tax professionals, and/or completing their tax returns. When time spent on tax planning and appealing Canada Revenue Agency or Revenue Québec decisions is included, Canadians spend an average of seven hours complying with personal income taxes. In addition, the Canadians spend an average of $61 on payments to tax professionals and purchasing tax software.

All told, it costs Canadians on average of $215 to comply with personal income tax regulations when all the costs, time, and effort associated with preparing tax returns are included.

Unfortunately, the tax system seems to be getting more complicated and more costly, as shown by the litany of tax credits introduced over the past few years, including the Canada Employment Credit, Child Tax Credit, Textbook Tax Credit, Children's Fitness Tax Credit, Public Transit Tax credit, temporary Home Renovation Tax Credit and First Time Home Buyers' Tax Credit.  While Canadians might like the idea of receiving a tax break for different types of activities they undertake, such as putting their kids in sports, it substantially increases the costs of compliance.

When total costs associated with preparing tax returns are added up, it costs Canadians between $4-billion and $5.8-billion annually to comply with personal income tax regulations.

It doesn't need to be this way. If Canada adopted a flat tax, Canadian taxpayers could complete and file their taxes in about five minutes on a simple, postcard-size tax form. In 2007, Alvin Rabushka, internationally renowned tax expert and University of Stanford professor, developed just that: a 15% flat tax and postcard-size tax return for Canada.

A flat tax would simplify Canada's tax code by eliminating nearly all deductions, exemptions, and credits that complicate the current tax system. For individuals, only a few basic calculations would be needed to determine the amount of tax owing or refund due.

At this time of year, as Canadians grapple with our unwieldy and complicated tax code, littered with exemptions for special interests, it's time to give thought to simplifying our tax system. Replacing Canada's personal and business income tax system with a flat tax will save money, make everyone's taxes easier to calculate, and strengthen the Canadian economy.