How to gain financial empowerment through tax filing

This post is written by Lisa Paterson, a community development worker at British Columbia Public Service, Canada.

• The problem: Filing taxes is complicated and its process is opaque.
• Why it matters: It causes stress and worry to everyday citizens.
• The solution: A simplified process, such as the British one, enables financial empowerment.

On September 23, 2020, the Speech from the Throne indicated that the Canadian government would work to introduce free, automatic tax filing for simple returns to ensure citizens receive the benefits they need. Thirty-six countries, including Germany, Japan and the United Kingdom, already permit auto-filing for some taxpayers. Canada’s tax structure was set up in 1918 and needs modernisation.

With few exceptions, those living and working in Canada must file a tax return if they want to receive credits and benefits. It is estimated that low-income individuals who don’t file taxes may be missing out on up to 50% of their income. This is because they are not claiming and receiving all the government benefits they’re entitled to. This can include the goods and services tax or harmonised sales tax (GST/HST) credit, the working income tax benefit, and the Canada child benefit.

Filing a tax return in Canada can be overwhelming and inhibiting for many. Paperwork and proof of income must be located. Many on a low income believe there is no point in filing. Fear, lack of confidence, and bad experiences with government services contribute to hesitancy in filing taxes.

A simplified filing process like [the UK's tax system] would make tax filing easier.

Digital access isn’t always the answer

Many people resort to paying expensive fees to private firms to file a simple return. Often those on a low income don’t owe the Canadian Revenue Agency any funds but are hesitant about filing as they believe they could owe money. They, therefore, remain stuck outside of the system unable to claim money that could make all the difference. Take Julie for instance, a single mum, working part-time. She missed the deadline to file taxes and therefore was unable to maintain her housing rental supplement, recreation discount passes, and other programs requiring income level proof. This caused unnecessary stress which could have been alleviated by an auto-taxing filing system.

Online systems can prove to be another barrier to filing. More and more, filing taxes in Canada requires digital access. This is part of a wider problem surrounding outdated systems that contribute to a digital divide. As in many societies, the digital divide in Canada exists between Canadians who have access to information and communication technologies (ICT) and their benefits and those who don't. The digital divide stems from income inequality among Canadians and is impacted by age, gender, geography, first language, and cultural background.

For example, a 2021 report commissioned by the Royal Bank of Canada showed growth in entrepreneurship in Indigenous communities. Nevertheless, the potential for this is being hindered by the digital divide. Currently three-quarters of households in First Nations communities don't have high-speed internet. If digital infrastructure in a community is poor, this affects economic development. Remote and rural communities are especially in danger because of infrastructure gaps.

Finding inspiration from elsewhere

Looking to the UK tax system could provide inspiration about how to simplify the Canadian tax system. A simplified filing process like theirs would make tax filing easier. Most people who earn income from an employer in the UK have income taxes and National Insurance contributions (social security) withdrawn automatically from their paychecks. The employer uses the PAYE (Pay-as-You-Earn) system to deduct all necessary contributions from wages prior to payment. For the 2021/22 tax year, all individuals are permitted a personal allowance of £12,570, making income below this level tax-exempt. UK income tax rates depend on income. In Canada, the personal tax-free allowance increased from $13,229 to $13,808 in 2021. This means that individuals can earn up to that amount without paying federal tax on income. However, it is still necessary for them to file a tax return.

Automatic tax filing for simple returns could result in several benefits including enabling individuals to quickly increase their income without the need to navigate a maze of provincial and federal benefits. This in turn could reduce the amount of bureaucracy needed by moving systems towards auto payments for credits and benefits. This would start to eliminate the need for many processes that require individual applications. For low-income earners, a prefilled tax return may be a more attractive option than tax-filing assistance software that requires users to fill in their information.

There is a need for objective re-examination of tax filing processes to modernise and make the tax system in Canada work in favour of the citizens served. The success of this change will be judged not only on whether it can efficiently collect revenue but whether the system can bring benefits to its users. Plus, those who often have no need to pay taxes will receive the greatest household income in terms of benefits from the Canada Revenue Agency (CRA).

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(Picture credit: Unsplash)