The 2013 tax-filing season was a historic one. For the first time, the Canada Revenue Agency (CRA) did not mail out T1 packages. While the T1 documents were still available upon request, the CRA was clearly trying to encourage more Canadians to switch to electronic filing. This push to reduce the cost of government is laudable, but it doesn’t go far enough in delivering benefits to tax filers, especially in the case of small-business owners.
One problem is that there remains a bewildering array of tax-filing packages, and finding the right one can be time consuming. For example, for beginners it’s a hit-and-miss affair to find a product that includes tax forms beyond the set in the basic T1 package—an example being the Statement of Business or Professional Activities (T2125) form required by small-business owners and self-employed professionals.
Another problem: glitches. One would think CRA-certified offerings would be bug-free but that is not the case. For example, in one product for the 2013 filing season, Schedule 3, Capital Gains (or Losses), the form would not allow: i) the name of a stock to be entered, ii) more than one stock to be included, and iii) commissions to be included in column 4 for the calculation of capital gains or losses in column 5.
Perhaps the biggest bone of contention is that most of the tax-filing packages come with a fee. While it’s worth applauding CRA’s attempts to trim administrative costs, their savings appear to be a result of simply shifting the cost burden to tax filers. The overall societal benefit may actually be rather small or possibly nil.
A better solution
Implemented differently, electronic tax filing can provide a greater net benefit to filers. Specifically, the government can set up its own website for free electronic tax filing. They do this already for businesses that file the HST. It should also be doable in the case of income taxes for individuals and businesses.
Free electronic filing, such as has been proposed in the U.S., would bring benefits on top of the greater savings in tax filers’ time, energy and money. Notably, the government has the resources to invest in, and maintain, state-of-the-art security systems to protect data (unlike many of the smaller operators selling tax software).
Another benefit is a further reduction in filing burdens through the “pre-population” of tax returns with data the government receives from employers’ payrolls, financial institutions, and other sources. This information is sufficient to fully fill out a large number of returns. All tax filers have to do is click on their account, review their pre-filled forms, then make some changes or accept as is—a process that takes less than 10 minutes.
Unfortunately, free and pre-filled electronic filing would not be popular with firms charging for tax-filing software in Canada. Indeed, they likely will lobby against the concept, as their U.S. counterparts have done. But about 20 U.S. states do offer free tax filing, and California includes pre-filled forms. Perhaps there is yet hope for Canadians.
Larry MacDonald is a former economist who manages his own portfolio and writes on investment topics. He is the author of several business books and tweets at @Larry_MacDonald