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Study Highlights Huge Cost Of Maintaining Canada's Tax System

by Mike Godfrey, Tax-News.com, Washington

01 May 2007


Preparing, filing and submitting our tax returns plus maintaining a government bureaucracy to manage and regulate our tax system cost Canadians between C$19 billion and C$31 billion in 2005, says a new study from The Fraser Institute, an independent research organization.

"When you add up all the costs - the time and effort spent obtaining or providing receipts and other documents, preparing and submitting the actual tax return, plus the cost of a government bureaucracy to manage the system - they worked out to between C$19 and C$31 billion in 2005. That translates to a cost of C$585 to C$955 for every man, woman and child in the country," said Jason Clemens, Director of Fiscal Studies at The Fraser Institute and co-author of the study.

The new study, Compliance and Administrative Costs of Taxation in Canada, uses existing data to estimate the total cost to the Canadian public in 2005 of complying with tax laws and regulations and the costs to governments in managing and maintaining the tax system. The study examines two types of costs associated with taxation - compliance costs and administrative costs.

Compliance costs are expenses incurred by individuals, families, and businesses to comply with tax regulations. These include the time and expenses to maintain proper records, undertake tax planning, file necessary reports, and calculate required remittances. They include both the costs incurred by individuals and businesses as well as fees paid to tax professionals such as accountants and lawyers. Costs incurred by businesses include collecting, managing, and remitting taxes paid by employees to the government, the costs of paying the businesses own taxes, and in providing tax-related information to governments.

Administrative costs are incurred by governments to collect taxes and enforce tax regulations. These costs include collecting, administering, and managing the tax collection system. They include the direct costs of the Canada Revenue Agency, which is responsible for administering and managing the Canadian tax system, and related overhead. They also include indirect costs incurred by judicial bodies responsible for settling disputes between taxpayers and the government.

"The myriad complexities and regulations of Canada's tax system are increasing the costs of paying our taxes. We're essentially being forced to pay more money in order to give our money to governments," Clemens said.

Clemens pointed to the recently created fitness tax credit as an example of a regulation adding unforeseen additional costs to the tax system.

"People may like the idea of receiving a tax break for putting their kids in sports," he said. "But to get that tax break, parents have to make sure they obtain receipts for all their kids' sports. Volunteers from athletic associations have to be sure they issue the receipts. Organizations have to make sure they are eligible under CRA guidelines to provide receipts. When you add up all the time and costs, it adds up to millions of dollars. And it appears to be getting worse."

Compliance and Administrative Costs of Taxation in Canada calculates all the costs within Canada's tax system and puts a dollar figure to them. The study calculates that the total compliance costs of personal income taxes alone ranged from C$2.9 billion to C$3.9 billion. That's the cost of the time required to prepare, complete, and remit the tax return, the costs associated with tax preparers, and the costs of tax preparation software.

Total business tax compliance costs, including direct and indirect costs as well as overhead, were calculated at C$13 billion. Compliance costs for both personal and business property were also calculated, coming in at C$224 million to C$448 million.

Administrative cost estimates were collected from a variety of sources involved in tax collection in Canada, including the federal, provincial, and local governments. The total calculation for administrative costs for taxation in Canada was between $2.7 billion and $5.8 billion.

When it's all added up, the total cost for complying with and administering Canada's tax system ranged between C$18.9 billion and C$30.8 billion in 2005. This represents between 3.5 and 5.8% of total federal, provincial and local revenues and between 1.4 and 2.3% of GDP in that year.

"The goal of tax policy should be to raise sufficient funds for the government to provide services demanded by citizens in the least costly manner possible," Clemens concluded.

"Given the high cost of operating and maintaining Canada's tax system and the burden it places on the average taxpayer, governments need to look at measures to reduce these costs. The most obvious and most important measures are ones that reduce or eliminate tax policies that add complexity to the tax system, such as special preferences, multiple tax rates, and the number of taxes collected."

Compliance and Administrative Costs of Taxation in Canada is a chapter from a forthcoming book on tax reform to be published later this year by The Fraser Institute.


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