March 7, 2019
Dear Fellow Canadians,
The Prime Minister never responded to my January 15, 2019 letter, which can be found here: http://winokur.ca/an-open-letter-to-prime-minister-trudeau-finance-minister-morneau-and-minister-of-revenue-lebouthillier-from-a-frustrated-accountant/. In light of the ongoing SNC-Lavalin scandal, I can understand why the Prime Minster was preoccupied. However, I did receive a reply from someone from the Ministry of Revenue and someone from the Ministry of Finance, so I thought that was nice.
I am now extremely busy preparing and e-filing hundreds of tax returns for my clients. My clients, along with all Canadians, are anxious to receive their big juicy tax refunds. I hate to be the party pooper here but I would like to inform you all that if you are receiving a tax refund, you are being duped.
The government has been deducting income taxes from every single one of your pay cheques throughout the year. If you receive a tax refund, it means that the government took too much money from you throughout the year and now is being kind enough to return it to you. Are they paying you interest on this loan you gave them throughout the year? No! Is there a way for you to request that your employer deduct less tax from your pay cheque knowing that you have large tax deductions and credits to claim on your tax return? Yes but it is quite a process. You must file a form every year to the CRA and they must approve it and only then can your employer deduct the correct amount of tax enabling you to have better cash flow throughout the year.
Some people are happy to wait until tax filing time to receive their large refund. However, like the vast majority of government schemes, programs, and actions, our current system of self-reporting tax filing and tax refunds is not without its unintended consequences and negative effects.
Allow me to share with you three different stories that are common occurrences.
Story # 1: Bob has a fairly simple tax return. He receives a T4 slip from his employer; he has a large RRSP contribution, some donation receipts and some medical expenses to claim. Every year he receives a fairly large tax refund because of his RRSP contribution, donations and medical expenses. He filed his tax return in April 2018 and two weeks later he received his nice juicy tax refund. In September 2018, the CRA sends Bob a “review letter”. The review letter asks Bob to send in all donation receipts and medical expenses to verify the claim. Bob never received the letter. Then in January 2019, the CRA sends Bob a “re-assessment” with a balance owing. Bob sends me the re-assessment asking me to explain it. I explain to Bob that the CRA re-assessed his 2017 tax return and denied all the medical expenses and donation receipts that were originally claimed because he never responded to the CRA’s review letter from September 2018. They have re-calculated his taxes owing and he has to now repay back some of the refund. Bob said that he never received that letter. I explain to Bob that at this point all we need to do is gather up all the donation receipts and medical receipts and then send them in to CRA as per the instructions on the original review letter. We send in the information and then we wait.
Meanwhile, the balance owing on Bob’s account has now been sent to the Collections department at CRA. They send a “notice of collections”. I call the Collections department, wait on hold for half an hour to speak to a live human being and they grant us 90 days before any collections action will be taken in light of the fact that we submitted the receipts to the “Processing Review” department. We continue waiting for the “Processing Review” department to process the information we sent in. We wait and wait and wait. I call in the “Processing Review” department to try and confirm if they have received the information. I wait on hold for half an hour only to then be informed by an automated message “Our phone lines are too busy right now, please try again later” and I am disconnected. At this point, I am extremely frustrated and decide to write this letter to vent!
Story # 2: Bill filed his tax return on time but left out a few T4A slips which he received late after he already filed. Bill has no idea what a T4A slip is and never knew he would receive these T4A slips. The CRA re-assessed his tax return to include the income from these slips which is correct on their part. However, they also charged several thousand dollars of penalties and interest. Bill is unable to afford these penalties and interest because he is a very low income individual. The CRA re-assessed his tax return with a large balance owing. Bill has no extra money on hand to pay this large balance owing but he does in fact owe the tax on the income. What is he to do? The collections department requires Bill to go through a full financial disclosure and then go on a payment plan to pay off the balance of tax owing. The CRA will confiscate Bill’s family’s GST credits, Ontario Trillium Benefits and Canada Child Benefits to pay off the balance of tax owing. This is a great example of how low income people get caught up in a brutally onerous, overly complicated and unfair income tax system. I informed the Collections agent that we would be filing for relief of the penalties and interest. She said that they still have to include that amount in the Collections payment plan because the amount is still outstanding on the account.
Story # 3: Boris filed his tax return and claimed “employment expenses”. These are expenses that Boris incurred as a part of his job that he was not reimbursed for and was entitled to claim. His previous tax advisor claimed car expenses as part of his employment expenses because he was required to drive to different client locations. However, it turned out he was not in fact entitled to claim these car expenses because of the nature of the car allowance he received from his employer. The rules have become so complicated that even some accountants give incorrect advice. The CRA re-assessed two years of tax returns from several years ago denying the car expenses, resulting in a balance owing on this person’s tax account of over $8,000! How was Boris supposed to pay back $8,000? Boris already received these tax refunds several years ago. The money is gone and Boris never budgeted for unexpected tax bills due to re-assessments of tax returns from several years prior. Boris had to be put on a payment plan and had to use his next year’s tax refund to pay off the balance owing.
These situations happen more frequently than people think. The tax system is extremely complicated and leads to tax returns being filed incorrectly, and then re-assessed with balances owing on people’s tax accounts that cannot be paid off because people simply don’t budget for unexpected tax bills.
It is important to remember that when a person receives their phone bill, or internet bill, or insurance premium renewal, or utility bill, or property tax bill, or grocery bill etc the bill is usually 1-2 pages, easy to understand and has the balance owing already calculated for you. There are no deductions or credits, simply the balance owing for the service provided. It’s easy and simple. However when it comes to our income tax bill, we have to hire an income tax professional or pay to use a special software to calculate the bill ourselves, pay the balance owing, or receive a refund and then cross our fingers we did it correctly and hope that for the next six years we don’t have one of those bills adjusted and re-assessed.
Why is the income tax bill different from all other bills? Why not have a simple system in which we have a flat rate of tax (with three different rates for three different tax brackets to maintain a progressive tax system in which higher income people pay more) without any deductions or credits? Why have we allowed our tax system to become riddled with literally a hundred different tax credits and deductions, each of which has complicated rules and procedures, and each of which costs taxpayers and the CRA time, money, effort and stress to deal with.
The reason why our tax system has become such a mess is because governments and politicians feel the tax system can be used to re-engineer society to their liking and/or to pander to and target specific groups of voters. For example, the Harper Conservatives implemented the child fitness tax credit, the child arts tax credit and the public transit tax credit. The Trudeau Liberals eliminated these credits but then implemented a new school supply tax credit for teachers and have announced a possible new digital media subscription tax credit for 2019 should they get re-elected! The insanity of all these tax credits is too much to bear. I cannot imagine the CRA sending letters to teachers who received an extra refund of $150 (15% of $1,000 tax credit) due to claiming the school supplies tax credit to produce the receipts for these school supplies. Tens of thousands of employees at the CRA to verify all these tax credits and deductions and tens of thousands of accountants trying to help millions of Canadians navigate this crazy system is just a waste of resources and a waste of talented minds that could be producing more value for society elsewhere.
Another reason why there are so many credits and deductions is because we as a society feel that people who have legitimate expenses should be able to pay a lower amount of income tax. For example, people with significant medical expenses should be given a break on their taxes (medical expense tax credit), people with certain disabilities also should be given a break (disability tax credit), people caring for a dependent should be given a break (caregiver credit), people who put their kids in daycare or hire childcare help should be given a break (childcare tax deduction), and it goes on and on. The problem with this is that it’s clearly impossible to create a completely individualized tax system for 35 million different Canadians! And yet we are trying to take into account every single individual’s situation when calculating what their taxes payable should be. It’s time for us as a country to come together to have a serious rational adult conversation about this and ask if it’s really worth it. Is it worth forcing low income people to go through the hassle and cost of filing a tax return every year? Is it worth spending more than $4 billion a year of taxpayer dollars on the budget of the CRA? Is it worth Canadians spending over $7 billion a year to pay people like me to file their tax returns? Is all of this necessary and worth it? I strongly believe it’s not worth it and that it’s time to massively simplify and clean up our income tax system. If the tax rates were massively lowered across the board and income tax eliminated for the bottom 75% of income earners, then we wouldn’t need tax credits and deduction to lower peoples’ tax bills because they would be affordable at the actual existing tax rates.
I, therefore, hereby propose the following and urge the government to implement these changes to our individual income tax filing system as soon as possible:
- Abolish every single tax credit and tax deduction
- Lower the tax rates to make up for the abolishing of credits and deductions
- Implement three tax brackets to keep the progressive nature of the tax system:
- $0 – $60,000 (zero percent tax-free) (75% of Canadians earn less than $60,000 a year so this would abolish income tax for the first 75% of Canadians)
- $60,001 – $500,000 – (one rate)
- $500,001+ (a higher rate)
- A tax return filing for every single individual should be one page (unlike the current 30-50 page PDF documents that I print for my clients)
- If the above four recommendations are not followed through with, then at the very least the CRA should NEVER issue a tax refund UNTIL it has verified correctly that all income is being reported based on all T-slips it has on file AND all deductions and credits have been verified. In the old days, before e-filing existed, people would send in all their receipts and backup documentation for their deductions and credits, so that the CRA could assess the tax return with the backup documentation and be confident that the refund is being issued correctly. However, now the CRA is doing it backwards: issue the refund, ask questions later! I therefore propose a return to the old system whereby the CRA does not issue any refund until all deductions and credits have been verified! This will ensure Canadians do not receive any unexpected re-assessments or tax bills.
- The CRA should never ever apply penalties and interest on a tax return if a taxpayer left out income that was already on a T-slip. Remember every T-slip is filed to the CRA. So if a taxpayer leaves out a T-slip when he or she files their tax return, the CRA should simply re-assess the tax return to include that T-slip but refrain from applying penalties or interest. The reason for this is that clearly the taxpayer is not deliberately leaving out income maliciously if the income is reported on a T-slip, because the T-slip is reported to CRA automatically! So the CRA can simply re-assess the tax return and forget about the unfair penalties and interest.
My dream is that no individual Canadian should ever have to worry about an audit from the CRA. No Canadian should have to keep receipts for six years for claims made in their tax return. No Canadian should have to worry about an unexpected re-assessment of a tax return filed years ago. No Canadian should have to worry about receiving an unexpected tax bill from the CRA. No Canadian should have to pay a tax filing professional to file their tax return for them.
My dream is that one day I will be out of a job because our tax system is so simple that no one will require my services. Help make my dream come true by sharing this letter with everyone you know including your Member of Parliament!
Thank you for reading and may this be the last year of filing complicated tax returns!
Neal Winokur, CPA, CA