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January 25, 2022 – The September 2020 Speech from the Throne saw the federal government commit to working to introduce free, automatic tax filing for simple returns to ensure citizens receive the benefits they need. In “Automatic Tax Filing: A Challenging Idea for Canada,” authors Alexandre Laurin and Nicholas Dahir review international tax-filing practices, examining what automatic tax filing might look like if enacted federally. They find that implementing automatic tax filing for all Canadians would face major tax-complexity challenges, and a more targeted solution to the narrower issue of getting cash benefits to vulnerable Canadians would be preferable.

Although Canada’s federal and provincial governments increasingly use cash benefits as a means to achieve their redistribution goals, including poverty reduction, recipients are required to file a tax return to claim the benefits. Many individuals in vulnerable situations do not. “A more promising solution would decouple the requirement to file taxes from the eligibility to claim cash benefits,” says Laurin.

It is not clear what automatic filing actually would mean in practice, write Laurin and Dahir, but a review of international filing practices suggest that taxpayers would have their tax return prefilled and tax liability assessed by the Canada Revenue Agency (CRA), which would automatically file in the event that no requests for modifications to the prefilled return are sent back within a deadline.

Using Statistics Canada’s data, the authors estimate that only about 32 percent of potential tax filers would be in a tax situation enabling the CRA to prefill their tax returns and correctly assess their tax liability using the financial information it already receives from third parties. They argue that too many preliminary assessments of tax liabilities on prefilled returns would be erroneous to make a widely available, fully automatic filing system practical.

Further, the CRA’s current Auto-Fill system – wherein it fills in key numbers on tax returns –greatly accommodates the current complexity of the tax code and without fundamental tax policy reforms aimed at tax simplification.

The authors also estimate the number of potential tax filers who did not or will not file a tax return for the 2019 tax year at about 4.2 percent (about 1.29 million). Not all of them are potential benefit recipients, but it is reasonable to assume that many are.

Laurin and Dahir recommend a targeted approach to the problem of unclaimed benefits, overseen by a new federal body. “Despite practical challenges, decoupling the requirement to file taxes from eligibility to claim benefits, facilitated by establishing a new body specifically tasked with delivering income-tested benefits to Canadians, would better serve the poverty-reduction objectives of government support programs that are now tied to tax filing,” Laurin and Dahir conclude.

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For more information contact: Alexandre Laurin, Director of Research, C.D. Howe Institute; Nicholas Dahir, Research Assistant; Lauren Malyk, Communications Officer, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.