Five ideas for tax simplicity

Simplicity can be a double-edged sword in tax policy.

“A simpler tax system can help regular people pay their taxes accurately, collect their benefits and participate in the fiscal space with confidence. But simplification could also mean removing safeguards or mitigation measures that were put in place to ensure fairness and prevent fraud.”

Simplifying the tax code should not mean giving well-financed people or companies a roadmap to tax avoidance or aggressive tax planning at the expense of those who can’t afford professional expertise.

“The Canadian Tax Observatory is convinced that digital tools and clear thinking can make the tax system simpler for everyday taxpayers without having to compromise on policy objectives.” We at the Observatory have only scratched the surface in our research in this area but intend to do more.

For now, this document identifies five focused opportunities where unnecessary complexity may be reduced. The aim is a practical agenda for testing whether existing rules and delivery mechanisms achieve their objectives in the least burdensome way reasonably available.

Here are five areas that are ripe for simplification. Each one connects with a larger complexity problem embedded in our tax system:

1. Disability Tax Credit

The DTC was designed as a tax equity measure to help offset the higher cost of living people with disabilities encounter. DTC certification has now become a gateway to more than a dozen other federal and provincial programs for people with disabilities. Applying for one program to get permission to then apply for other programs is complicated enough. But the certification process itself is also riddled with problems that stand in the way of many needy people with disabilities.

The Canadian Tax Observatory has done some groundwork on the problems and proposed some options to improve the system, including expanding eligibility criteria and the definition of disability, as well as streamlining administrative processes.

We are in the midst of doing further work in two separate areas: how to design technical improvements to the process in order to make certification easier for those in need; and modelling what a broader definition of disability could look like. We would welcome collaboration with the federal government, especially the Department of Finance, ESDC and CRA.

The issues with the DTC raise a bigger question related to simplification: at what point does using the tax system to deliver social programs become counterproductive?

2. Housing Affordability

With every passing election, each political party promises to solve the conundrum of costly housing, and they often turn to the tax system for tools. As a result, we now have multiple tax expenditures related to housing affordability, without much coherence or examination of how they inter-relate.

The Canadian Tax Observatory has done some initial research in this area. We zeroed in on the First Home Savings Account and found that the program, in practice, undermines its policy goals by favoring well-off home buyers of any age (or their parents) who could afford to buy a home regardless. We also pointed to the need for future research on other tax expenditures to look at unintended consequences.

For now, it’s unclear whether the mix of tax expenditures is actually improving affordability.

The issues we found with the FHSA raise a bigger question related to simplification: does the ever-growing list of tax expenditures match policy goals in an efficient way?

3. Anti-Avoidance Rules

The General Anti-Avoidance Rule is meant to complement targeted anti-avoidance rules in order to uphold the integrity of the Canadian tax system and stifle tax avoidance. However, there is a growing number of specific anti-avoidance regimes that are meant to solve specific problems but that are not necessarily aligned with each other or with the GAAR.

As one expert told us, “We’ve effectively created overlapping safety nets with no clear hierarchy, which drives complexity, cost and uncertainty – and doesn’t necessarily produce better policy outcomes.”

We recognize that federal budgets in 2024 and 2025 included changes to the GAAR regime. Now, in 2026, it’s worth looking at what effects those changes have had on overlap, duplication and the ability for those with deep pockets to lawyer up and navigate the system.

Clarity, transparency and predictability can make for improved compliance. Here’s some further exploration on that subject from the Canadian Tax Observatory.

4. GST Breaks

History shows that when the government narrowly targets HST/GST cuts to specific products (the tampon tax, holiday spending, etc), businesses often keep the windfall and also have to grapple with an additional burden of compliance. The tax revenue is foregone, complexity increased and the benefit to consumers is usually not achieved.

The GST system is riddled with exemptions and exclusions, some of which make sense but others that have become outdated.

Narrowly targeted tax measures can be efficient and effective if they’re simple to administer and easy to understand. But they can backfire if the administrative burden is too high or if the windfall doesn’t go to consumers.

5. Automatic filing

We were glad to see some progress on automatic tax filing in the 2025 budget. However, complexity still stands in the way of many low-income people who are missing out on benefits because they don’t have their notice of assessment. With better user-oriented design, tax filing could become far more automatic, benefiting in particular those citizens who need every iota of help.