Tuesday, December 1, 2020

The Grumpy Accountant

Canada’s tax system is very complicated.  It takes an army of accountants to help Canadians navigate the tax system and another army of tax collectors at Canada Revenue Agency (CRA) to police all the rules.  Author and CPA Neal Winokur thinks we need to simplify the tax system even if it puts him out of work.  He offers ideas to fix the tax system in his book The Grumpy Accountant.  The book also serves as an easy-to-understand introduction to the Canadian tax system.

The book is written in the style of a story, not unlike The Wealthy Barber, which works surprisingly well.  The “story” parts are very brief, so we get to each tax issue quickly, but the story helps to give context as we follow a couple throughout their tax lives.  This presentation, along with the fact that Winokur doesn’t get mired in unnecessary details, helps the reader get a good high-level understanding of the major aspects of Canada’s tax system.

Winokur advocates huge simplifications to the tax system.  He would get rid of all deductions, eliminate taxes on the first $50,000 of income, and cut the federal tax rate to 10% on income from $50,000 to $97,000.  He says these measures would offset so that the government would still collect the same total tax revenue.  He would eliminate all registered accounts, such as RRSPs, RRIFs, and RESPs, except possibly the TFSA.  He also suggests replacing GST payments, child benefits, OAS, and GIS with a simple guaranteed minimum income.

One question I have concerns how all this would affect individual Canadians.  Simplification is a good thing, but such substantial changes would help some Canadians and hurt others, even if the government gets the same total tax revenue.  It’s not clear which Canadians would end up paying more tax and which less.  We’d have to do an analysis of how different Canadians would be affected before agreeing to such sweeping changes.

As proof that simplification is possible, the author points to Spain, Estonia, Finland, Norway, Denmark, and England where aspects of taxation are simpler than what we have in Canada.  I’d be interested to know a little more about the ways the tax systems in these countries are simpler than what we have.

A common theme throughout the book is complaining about CRA.  A complaint I would add to Winokur’s list is the fact that an estate tax return after a person dies is lumped in with all other types of complex trusts that wealthy people set up.  If you’re handling your mother’s will, and her assets earn some income after she dies, you’re supposed to file a T3 Trust Income Tax and Information Return.  This form handles complex trusts along with your mother’s simple situation.  Here’s one of twelve questions you’ll have to answer: “Does the trust qualify as a public trust or public investment trust that has to post information about the trust on the CDS Innovations Inc. web site under section 204.1 of the Income Tax Regulations?”

One complaint about the tax system I didn’t agree with is the complaint that self-employed individuals have to make double-sized CPP contributions, but they don’t get double the benefits.  Employees pay half their own CPP contributions, and their employers pay the other half.  Presumably, employers offer lower salaries as a result.  CPP benefits are based on the total CPP contributions made on an individual’s behalf.  In this regard, employees and the self-employed are treated the same for CPP.

Another common theme in the book is how much reverence the characters have for their accountant.  One of the more amusing examples is where the main characters realized that their accountant “was a magical wizard with unlimited powers.”

There are some who think that we don’t need to simplify the tax system because software handles it now instead of having to fill out tax forms by hand.  This wasn’t covered in the book, but I think it’s worth pointing out that tax complexity isn’t just about filing a return.  It’s about deciding how to arrange your financial affairs, such as which types of accounts to invest in and which to spend first in retirement, along with many other decisions that only exist because of complex tax rules.  Much of the accounting information we have to collect only exists because of tax rules.

Among the many tax tips in the book is the advice to name beneficiaries on your various accounts.  I’m familiar with doing this for registered accounts to avoid probate, but Winokur says to do it for bank accounts as well.  I’ve been told by others that this isn’t possible for regular taxable accounts.

I recommend this book as a painless way to get a good high-level understanding of how the Canadian tax system works.  The suggestions for simplifying the tax system have strong intuitive appeal, but we’d need to drill deeper to see what unintended consequences they would cause.


  1. Hey Michael,
    Did the author explain how investments would be taxed if all the shelters were "removed". Say if a person was living on dividends and distributions of $500,000 they had built up through hard work and sacrifice over their working life, would those distributions not be taxed because its now your income under $50 k each year? The math seems to have some gaps in it.

    1. Hi Paul,

      The author didn't discuss anything about transition periods. An obvious question is whether the government would suddenly forgive any taxes owing on RRSPs and RRIFs. However, for the example you describe, a person living off $500,000 of savings (not in any registered account) almost certainly would pay no taxes because he/she could keep income under $50k/year.

      I think the author understands that there would have to be a lot of investigation of how to transition to a simpler tax system. I think we need to go a layer deeper with these plans before we could see how things would work.

  2. I don't believe it's possible to add beneficiaries to non-registered investment accounts or regular bank chequing or savings account. I've been told that the workaround is to make these accounts joint with your intended beneficiary.

    1. Unknown,

      That was my understanding as well. There are potential problems with making accounts joint, such as a financial judgment against the intended future beneficiary.