From: AlanBaggett@volcanomail.com   
      
   When even the pros don’t understand Canada’s income tax system, you know   
   there’s a problem :CRA SOTW    
      
   By Ian McGugan   
      
    One clue that things are out of whack with our tax system comes from the army   
   of people required to police it. The Canada Revenue Agency has 40,000   
   employees. By contrast, the U.S. Internal Revenue Service makes do with just   
   twice as many staffers in a    
   country with 10 times the population. Do the math, or have your accountant do   
   it for you, and it appears the average IRS employee is five times as   
   productive as the typical CRA worker.   
      
   Now, before I get an audit notice, let me rush to add that I have no reason to   
   think our tax collectors are unusually lazy by international standards. One   
   big reason for CRA's swollen size almost certainly lies in Canada's comically   
   convoluted tax code.    
   It's a labyrinth of rules that appears to have been cobbled together during a   
   midnight rave-up of politicians, Sudoku aficionados and people new to the   
   English language.   
      
   The system taxes a dollar differently depending on whether it comes from a   
   paycheque, a small business, the sale of your principal residence, a capital   
   gain or a dividend. It requires taxpayers to parse the intricacies of RRSPs,   
   TFSAs, spousal deductions,   
    adjusted cost bases and tax credits, while slamming those who trip up.   
      
   Yet the CRA is not particularly effective at enforcing compliance. The gap   
   between what the agency should have raised in theory and how much it actually   
   received stood at $8.7 billion in 2014, according to the CRA's own   
   calculations.   
      
   The sheer complexity of the rules makes even tax professionals want to howl.   
      
   Seven out of 10 accountants in a survey conducted by the Chartered   
   Professional Accountants of Canada indicated that our Jenga-like system of   
   credits, deductions and tax breaks cries out for reform. In a masterpiece of   
   understatement, CPA Canada noted “   
   some tax administration processes are needlessly burdensome, even in   
   relatively straightforward tax situations.”   
      
   The right-leaning Fraser Institute points out that the Income Tax Act swelled   
   from six pages in 1917 to 1,412 pages in 2017.   
      
   Sure, the world has grown more complex over the past century, but has it grown   
   a couple of hundred times more complex?   
      
   Probably not.   
      
   Our current tax code baffles even the people responsible for enforcing it. In   
   a recent study, the Auditor General of Canada found the CRA's call centres   
   gave wrong information to callers nearly a third of the time. Taxpayers   
   required unusual stamina to    
   get even that error-prone advice. Nearly two-thirds of calls to CRA call   
   centres were never answered, either because of high call volumes or because   
   callers hung up when attempting to navigate the CRA's automated-service maze.   
      
   We have to do better, not just for the sake of convenience, but for reasons of   
   fairness. As things now stand, the staggering amount of red tape discourages   
   people from applying for credits they deserve. In 2018, a Senate committee   
   discovered that fewer    
   than 40% of the adults who were entitled to the disability tax credit in 2012   
   succeeded in claiming it, in large part because of the daunting amount of   
   paperwork required.   
      
   The question is how to reform a system that has sprawled in every direction.   
      
   Making matters even more difficult is the growing trend toward income   
   inequality. An increasing proportion of society's earnings now flow to the top   
   tier of earners. This poses a knotty dilemma. On one hand, any attempt to   
   impose hefty levies on society'   
   s wealthiest and most productive members simply prods people of high ability   
   to decamp to other countries. On the other, it's hard to ethically or   
   politically justify a system that goes easy on the well-to-do simply because   
   they're mobile.   
      
   Economists and other theorists who study optimal approaches to taxation   
   generally agree on a few notions. They're for reducing special exemptions and   
   flattening tax rates. They also find merit in distinguishing between income   
   from employment and income    
   from stocks, bonds and other investments.   
      
   For example, Kevin Milligan of the University of British Columbia has argued   
   persuasively for a system that combines strongly progressive tax rates on   
   employment income with a relatively low flat rate on investment income.   
      
   The goal would be to tamp down the inequality in people's paycheques while   
   encouraging individuals to invest in activities that can grow the economic pie   
   for everyone.   
      
   One modest first step would be to follow the lead of the United Kingdom and   
   set up an Office of Tax Simplification. More ambitiously, the time is ripe for   
   a broad rethinking of Canada's tax system. Our last such effort, the Carter   
   Commission in the 1960s,   
    took 10 years to move from initiation to very piecemeal implementation.   
      
   The sooner we get started on a new effort for the 21st century, the better.   
      
   Ian McGugan is an award-winning Globe and Mail writer. Reach him at   
   imcgugan@globeandmail.com or on Twitter @IanMcGugan   
      
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   Alan Baggett - http://www.taxcollectorsbible.com/ - Tax Collector's Bible   
      
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