I am a fairly young Chartered Professional Accountant working in the Greater Toronto Area. I look young but have started to notice some grey hair due to the practicing of my profession. I file tax returns for individual Canadians. My clients are regular people, low and middle income Canadians, self-employed individuals and very hard working small business owners.
The bureaucracy we have to deal with at the Canada Revenue Agency has been absolutely horrendous. I can no longer stay silent. I must speak up and try to effect some positive change in regards to our unnecessarily complicated, unfair and punitive tax system. The income tax system, as it stands right now, is making peoples’ lives miserable. There is no other way to describe it. Anyone who has had any interaction with the CRA knows what I am talking about. It is an absolute nightmare, whether for individual taxpayers, the self-employed or small business owners.
In 1917, when the income tax was first established in Canada, the “Income War Tax Act” was only 11 pages long and it could be read in 20 minutes. Today, the “Income Tax Act” is 3,000 pages long and contains over 1,000,000 words. In 1917, only the top 2% of income earners had to file a tax return. Today, everyone does. As of 2012, Canadians were spending upwards of $7 billion every year to comply with the income tax system. The budget for the CRA is now over $4 billion every single year.
On the individual side, our tax system is riddled with countless tax credits and tax deductions. People are afraid to file their own tax returns, which allow people like me to earn a nice living. I lose sleep every night thinking about how my job would be wholly unnecessary if we simplified the tax system. All that needs to be done is abolish every single tax deduction and tax credit and then very simply, lower the tax rates, to make up for it. This would be fair for every single Canadian.
Currently, every time someone claims a tax credit or deduction, there is a risk that the CRA will request to see backup documentation to prove the claim was made correctly. This, in and of itself, makes sense. However, this process of verifying the claims often results in many errors, both on the part of taxpayers as well on the part of the CRA. All these errors leads to “objections”, “appeals”, “tax court”, “adjustments”, “re-assessments” and so forth. This all costs a lot of money, both for the CRA and for taxpayers. A bloated budget at the CRA is required to fund tax offices all across the country full of diligent CRA employees reviewing peoples’ tax returns, sending out letters to taxpayers, and processing information received from taxpayers. Furthermore, taxpayers must pay their accountants, lawyers, and other advisors, to interact with the CRA on their behalf, because they are obviously too afraid to. Taxpayers receive unexpected tax bills from the CRA because their tax returns were re-assessed as a result of all these insane tax credits and deductions, sometimes going back in time for more than several years. This is very unfair because people simply do not budget for unexpected tax bills and can’t afford to pay these bills. The CRA forces people to go through very intrusive personal financial disclosures in order to approve a payment plan that is acceptable to them.
Every single tax credit and tax deduction adds complexity, uncertainty and costs to our tax system. Every one of these credits and deductions increases the necessity for taxpayers and their advisors to have to interact with the CRA whether by mail, fax, online mail, or phone. Every single one of these interactions is inefficient, wasteful and costs money. The goal of a tax system should be to collect tax in the simplest most efficient way possible. It seems, from my personal experience of running my own tax filing practice for the past six years that Canada’s current tax system is designed exactly in the opposite way. My heart rate increases every time I have to call the CRA. The agents are usually very nice on the phone but I am frequently on hold for five minutes, or ten minutes, or twenty minutes or even more. Sometimes, certain departments don’t even answer the phone. I had to file a “service complaint” about the “non-resident tax department” because they simply do not answer their phones.
The tax system is riddled with unfairness and irrationality. Perhaps, in my opinion, one of the most insane aspects of the tax system is that the amount of tax that a person must pay is calculated based on their individual income but the amount of benefits a family receives, such as Canada Child Benefits, or GST credits, is based on combined family income. This is very clearly double dipping. The government wins on both ends. How can you have it both ways? Either you use family income or individual income. Most Canadian families budget together as a family. The two spouses calculate their combined income, then look at all their combined expenses and then see how much they have left over at the end of the month, if anything. However, income taxes are calculated based on individual income, such that a family where one spouse earns $100,000 and the other spouse earns nothing pays thousands of dollars more in income tax than the family that has two spouses earning $50,000 each. In both families, the income is $100,000 so why should there be a difference?
A vast simplification and reform of the Canadian tax system for individual taxpayers is required immediately. Every single tax deduction and tax credit should be abolished and the tax rates should be lowered across the board to make up for it. This idea can potentially be revenue neutral so no one should disagree with it. Your government and future governments should stop using the income tax system to try and engineer society to your liking and stop using the tax system to attempt to change people’s behaviour. It is simply not worth the high cost, both in the $4 billion plus budget for the CRA and the $7 billion that Canadians spend annually hiring people like me to file their tax returns, to use the income tax system, as a tool to fix all of society’s problems. If every credit and deduct were abolished, people would be able to file their own tax returns without the need for accountants and tax lawyers and the CRA would have no need for all the billions of dollars of different departments that deal with individual tax. Many other countries have such a simple system in place such as the UK, Denmark, Estonisa, Israel, Sweden, Spain, Finland, Norway and Iceland. If those countries can do it, why can’t we?
For those Canadians who are adventurous and take a risk by becoming self-employed and starting their own business, the tax system is literally a nightmare.
Self-employed people and business owners have to worry about the filing of GST/HST returns, collecting GST/HST from their clients and customers, remitting the GST/HST on time to the CRA, calculating payroll source deductions from their employees pay, paying the source deductions on time to the CRA, filing the T4 slips and summary on time every year, filing their corporate tax return and paying their corporate taxes on time, and they still have their individual tax return to worry about. The tax system is an absolute mess for business owners.
Business owners must become tax collectors for the government. The obligation of every single small business owner to collect GST/HST as soon as they hit $30,000 of revenue is just pure evil. Why force these very hard working people to collect additional tax on top of their income when they are already paying tax from their income itself? This is just an added level of bureaucracy for the business owner and self-employed individual to deal with. I have had clients who opened up HST accounts in error, never collected HST, sought to close the accounts but first had the CRA arbitrarily re-assess them to have collected thousands of dollars in HST which they never did collect! I have had clients had their HST returns audited to prove the HST credits that they were claiming on their purchases. These audits are a nightmare to deal with for taxpayers and their advisors. The $30,000 exemption limit for small suppliers has not changed with the level of inflation since it was first implemented! The current exemption limit is way too low. Someone who only earns $30,001 must register for and collect HST. But this person, most likely, does not have the money to hire an accountant or bookkeeper to help them with their HST returns.
I really don’t think that the people who work at CRA and our politicians in government realize how hard it is for self-employed people and small business owners. These people have serious cash flow issues. I see it every day in my practice. Money comes in their bank account from their revenue and it’s like a miracle and a blessing for them. They need every penny. I beg and urge all my clients to set aside the HST they have collected so they can pay it out to the CRA as required. But they tell me they can’t because they need every penny that comes into their bank to pay their employees and pay their own suppliers and bills. The CRA, the politicians, and the academics who make these rules simply do not understand what it’s like to be self-employed or run a small business where there is no bi-weekly pay cheque coming in. They expect self-employed and small business owners to collect money and set it aside but that in and of itself is very onerous, punitive and leads to way too many unintended consequences. We must figure out a way to have a tax system where we stop forcing every single self-employed individual and small business owner to become a tax collector on behalf of the government. There are very onerous and unfair penalties for late filing of HST returns and penalties and interest for not paying HST on time. It is completely unfair that this requirement exists in the first place and even more unfair that penalties and interest are charged for late payments and late filings. If the government wants to collect sales taxes, they should find an easier more efficient way! Don’t force every small business owner to become your tax collector!
The current system of payroll tax deductions has made it impossible for small businesses to hire employees. Small business owners and self-employed people avoid hiring employees at all costs for two main reasons. The first reason is the actual cost itself in terms of the employer having to match the employee’s CPP contribution and pay 1.4 times the amount of their EI contribution. The second reason is that calculating the correct amounts of deductions, paying the deductions on time to the CRA each month or quarter and filing T4 slips is a daunting complicated process that small business owners and self-employed people are terrified of. I can tell you, from first-hand and experience, that the obligations the CRA places on employers, especially small business employers, is discouraging people from hiring more workers and discouraging people from growing their businesses. There are penalties and interest charged on late payments and late filings which can really add up.
Perhaps the craziest aspect of our tax system for self-employed and small business owners is the requirement to report their net income at the end of the year based on “accrual accounting” as opposed to “cash accounting”. The most logical way to calculate taxes payable would be based on the money you actually made during the year, meaning the physical money that came into your pocket. How else would someone be able to pay tax if not on money actually received? Well, currently, our system works such that if someone “earned revenue” during the calendar year but did not collect that revenue yet from their customer because the customer is paying 30 days, 60 days or 90 days or more later, well that still counts as revenue and that taxpayer still has to pay income tax and HST collected, even though nothing was collected! This obviously makes no sense at all. From an accounting perspective it does make sense, because the revenue was in fact earned, so from an accounting financial statement perspective it is logical. However, taxes should be calculated on a definition of income that was actually earned physically so that the taxes are based on ability to pay. There are many other examples of how business income is calculated on a non-cash basis that it makes it very unfair for taxpayers.
To fix all these problems, I propose and urge the government immediately to abolish the requirement for self-employed individuals and small business owners to register for and collect GST/HST as well as abolish the employer portion of CPP and EI and the requirement to make deductions at source or file T4 slips and also allow calculating tax on cash-based accounting as opposed to accrual based accounting. Meaning, the government should immediately raise the $30,000 exemption for GST/HST to perhaps $250,000. So every self-employed person or small business owner who earns less than $250,000 of revenue would be completely exempt from registering for and collecting the GST/HST. Also, every self-employed person or small business owner with less than $250,000 of revenue should be completely exempt from making deductions from an employees’ pay or paying an additional employer portion of CPP and EI. The way this would work is that the employee working for a small business owner would be responsible to pay their own CPP, EI and income tax at the end of the year, similar to how the small business owner is responsible to pay their own taxes. Adopting the above proposals would be a huge boon to self-employed people and small business owners and encourage more people to start their own businesses and hire more people. It would save countless headaches, stresses and frustrations, not to mention a nice lowering of their accounting fees, for the small business owner.
In conclusion, Prime Minister Trudeau, Finance Minister Monreau, and Minister of Revenue Lebouthillier, I hope you will read this letter, take it to heart, and enact the changes and proposals noted herein in order to help every single Canadian and relieve them of the insane costly horrible burden that is our tax system. I look forward to hearing your reply.