Why the Income Tax Act is failing us

Do you ever wonder why there are so many tax problems for small business to deal with? The tax problems needing solutions are exponentially related to the number of complications in the Income Tax Act.

We cannot expect that CRA is ever going to allow simplicity, and we know that we need to ask ourselves, “What is it that I can do for a solution to tax problems?”  The answer is simply that we have to keep audit ready books and records. And we need an audit trail whick is exactly what it sounds like…. An audit trail is a paper trail demonstrating that the money was used for legitimate business expenses.

To avoid tax problems and learn more about audit ready bookkeeping, go to www.danwhite.ca  and www.tax-audit-solutions.com

Dan White

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Here is the article from the Montreal Gazette
By Kim Brooks November 11, 2009

Canada’s Auditor-General Sheila Fraser.
The Income Tax Act and related regulations run over 2,800 pages long. The legislation is so complex that even highly trained accountants and lawyers get things wrong, miss relevant provisions, and confess that they don’t understand aspects of the rules.
Last week, Auditor General Sheila Fraser included in her report to the House of Commons a chapter on the efforts of the Department of Finance and the Canada Revenue Agency to clarify and clean up at least some of the technical aspects of the Act. Her conclusion: they are failing Canadian taxpayers.

She’s right. But Parliament shares responsibility. The Income Tax Act is Canada’s single most important instrument of domestic economic and social policy. A bill to address technical inadequacies in the enacted legislation has been under discussion since 2002, yet Parliament has failed to act.

There can be no debate about the harm caused by overly complex, outdated tax legislation and unresponsive administrative practices. Businesses incur needless expenses for tax advice to carry out relatively straightforward transactions; low- and middle-income folks fail to access desperately needed programs delivered though the tax system; and taxpayers cannot be confident that they are filing their returns on the basis of the law that applies to them.

The Department of Finance has been working on technical amendments in addition to those reflected in the outstanding bill. As a result, there are over 400 such amendments awaiting enactment. While these measures languish, the Revenue Agency assesses taxpayers as though at least some of the provisions have already been enacted.

The delays and confusion trickle down. The Revenue Agency provides guidance to taxpayers in a variety of written forms. Some of the advice given by the Revenue Agency is out of date and other advice is not in accord with the law. For example, generally speaking, since 2006 student scholarships have been tax free. Yet the Revenue Agency’s interpretation bulletin on the issue still informs readers that only the first $3,000 of scholarship income is exempt.

Another example: Two cases earlier this decade determined that when someone who sells their business receives a payment not to compete with the new owner, that payment should be tax exempt. In an effort to plug this loophole, the Department of Finance proposed legislation that would tax non-competition payments. But those rules remain in draft form. Given that often the Department intends for proposed rules to be effective the date of their announcement, how should the Revenue Agency assess people who receive non-competition payments?
Compounding the problems caused by the complexity of the income tax, when taxpayers and tax advisors ask the Revenue Agency for advice related to their specific circumstances, they often confront long waiting times for responses.

In addition to the time wasted trying to comply with the rules and high fees for legal and accounting advice, tax complexity gives rise to more fundamental problems. Taxpayers may decide that the system is simply too complicated to comply with and fail to file returns, or pay less than they should. These decisions exacerbate the problem of the tax gap - the difference between what the Revenue Agency actually collects and what it would collect if everyone filed their return honestly according to the rules.

Canada is not alone in confronting a pressing need for the simplification of its tax legislation. In her most recent report, the U.S.’s national taxpayer advocate, Nina Olson, identified the complexity of the Internal Revenue Code as the most serious problem facing American taxpayers. In response to the enormous social costs of tax complexity, Australia, New Zealand and the United Kingdom have all launched major tax simplification exercises over the past decade.

The Auditor General is right to chastise the Department of Finance and the Revenue Agency for their failings in keeping Canada’s tax system current. However, the blame does not fall only on those agencies. In fact, they do a lot with surprisingly little. The government should view the Auditor General’s report as a wake up call. The Department of Finance and the Revenue Agency need an infusion of resources. They need to be able to hire and retain the best people to keep Canada’s tax legislation and administrative practices up to date.

But more fundamentally, it is time for Canada to undertake comprehensive income tax reform. Our last major reform effort, a tour de force driven by the work of the internationally regarded Carter Commission, was in 1972. The benefits of simplification are well documented. The integrity of our tax law and the viability of the self-assessment system is at stake.

Kim Brooks is the H. Heward Stikeman Chair in the Law of Taxation at McGill University, Faculty of Law
© Copyright (c) The Montreal Gazette