For Canadians living on low incomes, the Canada Revenue Agency (CRA) is more of a social assistance agency than the national tax-collector. Child benefits, sales tax refunds, the refundable tax credit for low-income workers, the carbon tax rebate and now the temporary Canada Emergency Response Benefit, all flow through the CRA.
Many Canadians, however, do not file a tax return and therefore lose out on benefits. We estimate that about 12% of working-age Canadians do not file a return and that many of the non-filers would have been eligible for cash benefits had they filed. In a study forthcoming in Canadian Public Policy, we estimate that $1.1 billion in child benefits was not collected by eligible working-age parents.
In Canada, filing a tax return has always been the responsibility of the taxpayer. Canadians who do not have any taxable income or taxes owing are not required to file except in special circumstances. While the CRA is clear that a return must be filed if taxpayers are to receive the child benefits for which they are eligible or to receive any other benefits administered by the CRA, there is no requirement that they do so.
As Canada rebuilds its economy, post-pandemic, the CRA should redouble its efforts to ensure that Canadians file tax returns — and get the benefits for which they are eligible.
Why Not Have the Tax Agency Do More of the Work?
Advances in information and communications technology have shifted the balance between what individual taxpayers can do and what the central tax agencies can do. Pre-filled tax returns or statements are prepared by tax agencies in some countries, reducing the burden on individual taxpayers. According to a 2017 study by Deloitte, examples include Spain, Denmark and Sweden. Systems that use pre-filled returns are known as “tax agency reconciliation” (TAR) systems. TAR systems cannot keep track of all of the tax liabilities for all taxpayers. When there are changes in status (such as the onset of a disability or loss of a spouse) or in behaviour (such as starting daycare payments, relocating for work, or becoming a volunteer firefighter), taxpayers must still play an active role in correctly establishing their tax liability.
Moving to a TAR system for all Canadians is a complex and long-term reform that would require significant changes in the tax code and in the information provided to the CRA. In addition, federal and provincial personal income tax systems would likely have to be simplified. But the CRA can, and should, immediately roll out a TAR system for Canadians with straightforward tax returns, starting with social assistance recipients who have no other income.
Why should the CRA create such a system for social assistance recipients? Looking at national data, we estimate that one in five working-age adults with social assistance income did not file a tax return in 2016. According to a 2018 report by John Stapleton, the Ontario government found that “only 64% of single male and 70% of single female Ontario Works recipients filed an income tax return for the tax year 2010.” Those in Ontario who did not file would not have received the GST/HST tax refund, the Canada Workers’ Benefit (then called the Working Income Tax Benefit) or the Ontario-specific Trillium credits for which they were eligible. Stapleton estimates that the lost benefits totalled about $128 million.
Do we know that CRA can fill out the tax returns of social assistance recipients? Provincial social assistance agencies have detailed contact information for those to whom they provide benefits. Banking information is already on file for many, if not most, social assistance recipients as governments have moved away from paper cheques in favour of direct deposit or reloadable payment cards. Social assistance recipients already get a T5007 tax slip showing the benefits they have received and this information is shared with the CRA. Social assistance recipients must sign a consent form allowing a wide variety of government actions. It is possible this consent, with amendments, might be used to authorize the CRA to file a return on behalf of social assistance recipients.
Finally, the CRA already operates a TAR-like system called File My Return (FMR). FMR is only available to a subset of taxpayers with “low or fixed income whose tax situations remain unchanged from year-to-year” and who have received an invitation letter from CRA. FMR is a telephone-based interactive voice system; the taxpayer calls CRA and the automated service asks a short series of yes or no questions to which taxpayers respond by pressing 1 or 2 on their phones. Minister of National Revenue Diane Lebouthillier announced in January 2018 that 950,000 Canadian would receive letters inviting them to use FMR to file their 2017 taxes. For 2017 tax returns, however, only 47,195 returns were filed with FMR; only 66,542 were filed for 2018. These are low response rates; 47,195 returns for 2017 out of more than 950,000 invitations sent is less than 5 percent. File My Return clearly falls short of the goal of completing tax returns for low-income Canadians with uncomplicated taxes.
Pros and cons of a tax agency reconciliation system
For us, the major benefit of a TAR system is that it would increase the likelihood that low-income Canadians receive more of the income benefits for which they are eligible. In the short-term, the CRA could prepare a return for people whose only income comes from social benefits and send the result to the taxpayers for their final approval. The CRA would have enrolled the taxpayers into the programs for which they were eligible. Each taxpayer could then either review the return and send it back to the CRA or file a correction using the usual filing method. What if the taxpayer does not receive the return completed by CRA or simply neglects to send it back? Starting with this subgroup only, and subject to relevant legal restrictions, we think the return should be deemed to have been filed. Of course, the return could later be amended if either the taxpayer or the CRA came upon new information.
The other major benefit of a TAR system is that it can significantly reduce the costs to taxpayers of preparing a return. A significant non-monetary cost is the time and effort needed to collect the required information and complete the tax return. For those who pay a third party to complete and file the return on their behalf, there is also a monetary cost; we estimate that the mean payment is just over $120 per return.
Those who oppose TAR systems do so for a variety of reasons. Privacy is an important concern, as some fear that the government is collecting an inappropriate amount or type of information and cannot be trusted to handle it correctly. Of course, some of the information needed to pre-fill returns for taxpayers is already available to the government through third-party reporting. There is also the possibility that the returns sent to taxpayers could go to the wrong address, either postal or electronic, thus revealing private information about personal income or social assistance receipt.
A major challenge of implementing a TAR system would be adapting it to the many ways that tax policy is used to advance social and economic goals. We use tax policy to recognize childcare expenses associated with paid employment, encourage charitable giving, and recognize medical expenses (including the financial costs of coping with a disability). Either the TAR system would have to collect far more third-party information than is currently collected or, alternatively, support for these policy goals would have to be handled outside of the personal income tax system.
A first step: CRA files a tax return on behalf of many social assistance recipients
The Canada Revenue Agency should explore a broader TAR system for personal income taxes. But this transition should start by taking on the burden of completing tax returns for the subset of Canadians — social assistance recipients in particular — who receive income only from government benefits during the full tax year. A further extension would be to pre-fill the returns of those whose only income is from working for a single employer. Such a system, already operational in a number of countries, would increase the proportion of Canadians who receive the social benefits to which they are entitled, and would greatly reduce the cost of preparing tax returns. The pre-filled returns would be sent, either electronically or through the mail, to taxpayers, who would then be responsible for reviewing the return, signing it and returning it the CRA. If the taxpayers preferred, they could file their own returns.
For social assistance recipients, we hope the move to “deemed filing” — sending a completed return to the taxpayer for review and signature but treating the return as if it had been reviewed if the taxpayer does not send it back — could be completed before the 2021 tax filing deadline.
One lesson policymakers should take from recent experience in the pandemic is that administration of income supports can be made much faster and simpler, so long as the CRA has good information. CRA has done an admirable job in setting up a system for distributing Canada’s newly designed temporary and emergency income supports. New federal support for non-profit services to help people get information and access benefits is likewise welcome. During the economic recovery, income supports like child benefits will be crucial stabilizers for families, and CRA’s current speed and efficiency may well make citizens less tolerant of administrative delays in getting money they need. As part of the work to prepare now for the rebuilding to come, policymakers should be looking at a tax filing system that does much more of the work for Canadians. That initial planning should start now and aim, as an easily achievable first step, to do deemed tax returns in 2021 for social assistance recipients without other income.
