What Proportion of Tax Returns Could the Canada Revenue Agency Complete?

Abstract

Governments transfer resources to low-income families both directly, with social
assistance payments, and indirectly, through the tax system. In Canada, several
important benefits aimed at low-income families are delivered through the tax
system, but only to those who file tax returns. Furthermore, the tax system is
frequently used to verify eligibility for a wide range of income-tested public goods
and services. As we pointed out in a previous article (Robson & Schwartz, 2020) up
to 12 percent of Canadians do not complete tax returns. Those who do not file are
disproportionately those with low incomes and many miss out on cash benefits and
public programs for which they are eligible.

One way to get those benefits to their intended recipients would be for the Canada
Revenue Agency (CRA) to absorb more of the administrative burden of initiating
and completing tax returns on behalf of low-income individuals and families. To do
so, however, given the current Canadian tax system, might require a wider range of
third-party information or a set of administrative changes.
In this paper, we estimate how many families have simple returns that the CRA
could readily complete with information it already collects from third parties. Our
calculations are based on the family-level variables constructed by Statistics Canada
for the Longitudinal Administrative Databank (LAD), a 20% sample of all tax
returns.

We conclude that the CRA, if so directed, could complete returns for two-thirds of
the families with income from provincial social assistance programs. And we
estimate that collecting third-party information from new sources or instituting
alternative administrative procedures could substantially increase the number of
returns that the CRA could complete. We conclude there is a reasonable pathway for
the tax agency in Canada to do much more to reduce the administrative burden
imposed by the current tax filing system and a strong case for it to do so.

Keywords: tax, automatic-filing, tax agency, administrative burden, Canada, low-income, welfare, transfers

JEL Classification: H24, D02, 139