Why Is Canada Still Doing GST the Hard Way?

Every month, millions of Chilean business owners do something their Canadian counterparts can only dream about. They log in to the tax authority’s portal, glance at a return that has already been filled in for them, make any necessary corrections, and hit submit. The entire exercise can take less time than washing down a couple of lip-smacking alfajores with an ulpo.

Chile’s Servicio de Impuestos Internos (SII) mandates that businesses issue and clear electronic invoices through its platform before those invoices are delivered to customers. That real-time data stream gives the tax authority everything it needs to draft monthly value-added tax (VAT) returns automatically — a system that covers 99.4 per cent of Chilean VAT filers, the vast majority of them small or medium-sized businesses. The result is a compliance experience that is fast, accurate and largely painless. 

Canada’s 3.7 million business tax filers should be so lucky.

Despite the global momentum towards automating VAT and sales tax returns — Chile, Estonia and Italy are among the countries that have already made the leap — the Canada Revenue Agency (CRA) still requires businesses to compile their GST/HST data manually, enter it line by line, reconcile it against their own records, and submit it on a schedule that, for many small filers, means quarterly deadlines on top of an already demanding administrative load. 

The CRA mandated electronic filing for nearly all GST/HST registrants beginning with reporting periods in 2024, but electronic filing and automated filing are two different things. The portal is digital; the grunt work is not.

A new study by economists at Queen’s University puts a depressing dollar figure on what that gap costs the Canadian economy. Implementing a system of pre-filled GST/HST returns, the researchers estimate, would generate savings in compliance costs of $14.3 billion over 10 years. More than 99 per cent of those savings would flow to small enterprises and the self-employed.

“Innovations in tax administration arising from digitization, like this one, are revolutionizing the relationship between taxpayers and the government,” says Foroogh Chamaki, a postdoctoral researcher in economics at Queen’s. Chamaki conducted the study, the first of its kind to quantify what the move to pre-filled returns would be worth in Canada, with fellow Queen’s economists Glenn Jenkins and Frank Milne.

From data collector to form reviewer

To understand why automated filing matters so much to small businesses, consider just how onerous the current compliance burden is. The typical business must spend considerable time on maintaining records, preparing financial data for accountants and answering CRA inquiries — and that doesn’t include professional fees and late-filing penalties.

Drawing on a 2016 Statistics Canada survey of GST/HST compliance costs by firm size, the Queen’s researchers estimate that a self-employed, non-employee business spends an average of $591.20 a year meeting its GST/HST obligations, while a small business (under 99 employees) spends $924.20. (The average compliance bill for large businesses, which make up less than one per cent of all filers, is $1,963.40.)

The concept behind pre-filled VAT returns is elegantly straightforward. The researchers use the credit card analogy: Rather than cardholders having to total every transaction themselves and submit the results to their bank, credit card companies simply send customers a statement of expenses. All transactions are automatically recorded and totals pre-calculated, leaving the cardholder to simply review, confirm and pay.

“In a digitally enabled tax regime,” Chamaki says, “invoice data or third-party transaction data could be streamed to the tax authority to generate draft returns for taxpayer review rather than forcing businesses to compile everything manually.”

The foundation for such a system is electronic invoicing. When businesses are required to issue invoices through a government-validated digital platform — as Chilean businesses do through the SII — the tax authority already possesses the transaction-level data it needs to draft a return. The business owner’s job shrinks from data collector and form-preparer to reviewer and confirmer. 

That distinction matters. According to EU survey data cited by the Queen’s researchers, data collection and form preparation account for approximately 77 per cent of the total compliance costs businesses incur in meeting their VAT obligations. Pre-filling eliminates most of those two tasks. The researchers calculate that doing so would save large Canadian businesses $1,511.80 per year, medium-sized businesses $916.30, small businesses $711.60, and self-employed individuals $455.20.

Lessons from early adopters

The countries that have moved first offer a useful window into what Canada could expect. Estonia’s e-Tax platform pre-fills individual income tax returns using data automatically transmitted by employers, banks and government databases. According to the European Commission, most Estonian businesses can review and submit their pre-filled returns in under five minutes. 

Italy’s experience is instructive on a different dimension: fraud reduction. The mandatory rollout of e-invoicing in 2019 produced measurable compliance gains, with researchers estimating the reform reduced cross-border VAT fraud by €2.2 billion to €2.6 billion in the year following implementation. 

Chile’s trajectory is most relevant for Canada, given that the two countries have similar GST/HST filer profiles. In both, around 98 to 99 per cent of registered businesses are small or micro enterprises. The Chilean experience shows that administrative efficiencies compound over time: After implementing pre-filled returns, the ratio of the SII’s operating costs to total revenue collected fell steadily from 2018 to 2024. 

Pre-filled returns are a gift to governments as well, according to the study’s cost-benefit analysis. When businesses spend less on compliance, their reported costs fall and taxable income rises. Higher taxable income means higher income tax payments. The researchers estimate that this channel alone would generate $3.3 billion in additional income tax revenue over 10 years, two-thirds to Ottawa and one-third to the provinces. 

After accounting for the CRA’s implementation costs — estimated at $625.6 million — the economic welfare improvement for the Canadian economy as a whole is estimated at $13.6 billion, Chamaki says.

The CRA is not oblivious to the problem. Its own 2024 filing compliance study acknowledges persistent frictions in the GST/HST filing process and identifies simplification and digitalization as active priorities. It already allows taxpayers to securely import tax slips and other information directly into NETFILE-certified software, via its Auto-fill My Return service. The tool pre-populates returns, minimizing manual entry and potential errors.

Starting in March 2027, the CRA plans to build on this by offering pre-filled tax returns for certain taxpayers, so that they don’t have to import the data for the documents themselves. The pilot is expected to initially cover about one million taxpayers, scaling to 5.5 million by 2029. When Canada’s small businesses will be able enjoy these benefits of automated tax returns is unknown. 

The Queen’s researchers are explicit about the cost of inaction. “Prompt action is essential,” says Chamaki. “As digital tools are readily available, any delays will result in unnecessary and unrecoverable costs.”