The Decibel - Canada’s income tax law has become a ‘Frankenstein’s monster’

Episode Date: October 7, 2026

The law governing income tax in Canada is as complex as the legislation is thick – it’s over 3,000 pages long. All of this complexity isn’t just a nuisance for taxpayers. It can cost people and businesses money if they are unaware of deductions or exemptions, or if they have to hire help to make sure they are compliant.Chris Wilson-Smith looked into how the Income Tax Act became a Frankenstein’s monster, as one tax expert put it. Chris is on the show to explain why politicians keep adding to the income tax code but can’t seem to simplify it.Questions? Comments? Ideas? Email us at [e-mail] Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

It's spooky season. And in honor of that, we're going to talk about something that people find pretty scary. Taxes. Specifically, Canada's Income Tax Act, which is a 3,000-plus page piece of legislation that outlines all the rules around paying the government. Here's how one tax expert described it. Steve Suarez is one of the most prominent tax lawyers in Canada, one of Canada's largest legal firms.

And he used the phrase, Frankenstein's monster. to describe a system that has had new pieces bolt onto it for decades, while very little comes off. Chris Wilson Smith is a staff reporter for the Globe's report on business, as well as the author of the Daily Business Brief Newsletter. He's here to explain how Canada's income tax law ballooned to the size and why it's so hard to simplify. I'm Cheryl Sutherland in Forminica Raymond Wilms,

and this is the decibel from the global. and mail. Hi, Chris, welcome back to the show. It's great to be back. So Chris, can you actually start by explaining what exactly the Income Tax Act does and who it applies to? Sure. So it's easiest, if you think about it as a federal rulebook for taxing income and income is essentially what you earn in exchange for labor, services, goods, or investments over a certain period. The Act determines what counts as income, what expenses can be deducted, what credits and exemptions are available, how people, corporations, trusts are treated. It contains rules governing capital gains, corporate taxation, income, international income, tax avoidance. Just to say, though, the physical

act and regulations now run well over 1,000, 3,000 pages. I think I wrote that it was more than twice the length of war in peace. But page count alone doesn't really capture the complexity. This act has been around for over a century. So why did you decide to look into the state of this act now? We hear a lot from businesses about tax complexity. It's something that's talked about a lot, but not really kind of examined as a thing in and of itself. That is to say, yes, it's complex, but like what is the actual cost of it? So we get to thinking about complexity itself and how it was surprisingly difficult to define. But was it actually costing people money and how much that complexity is necessary.

So once I started looking into the history, the tax code became almost an archaeological exploration of Canada, wars, recessions, changing ideas about marriage and family, political priorities, investment strategies, attempts to close loopholes that all leave these layers behind. Very quickly, I felt like kind of like a boring Indiana Jones. So it's, what's interested, you know, interesting was like the complexity. isn't just like an elegant, messy thing in the tax code, although it's often those things. But even those things don't necessarily make something complicated. It's just the way that all of these things work together that make businesses and people spend real money and time navigating

it. And so I think early on I found that the bigger point is that the code captures more than a century of Canadian policy choices, but we've been much better at adding things than reconsidering them later. Right, like bolting things on, but not taking things off here. I'm curious to put that into contact with other countries. Is Canada unique or are other countries' tax laws just as complex? I would say just as complex, but that doesn't necessarily make it okay, if that makes sense. The tax systems and other developed economies have been become enormously complicated too. And the United States tax code is itself,

it makes Canada's tax code look like the one it used to be in 1917. At the same time, Canada doesn't compare especially well with peer nations. Dalhousie University researcher studied the readability of Canadian tax law and found that the Income Tax Act significantly harder to read than tax statues of comparable jurisdictions. So I mean like plain language, for example? Is that what they're talking about? Exactly.

It looks at sentence structure, jargon, cross-rances, dense definitions, long clauses. But he also found that the work linked, like the readability issue was a problem to access to justice. People are legally required to comply with rules. They might need a specialist to understand. So I wouldn't say Canada has the most complex tax code in the world. but there is evidence that important parts of it have compared poorly with peers on readability and accessibility. So we laid out that this applies to everybody in Canada.

But who specifically suffers the most from our income tax law being this complicated? On an individual level, for dumdums like me, technology, online software has made the experience a whole lot easier. That in a way is kind of hid how the underlying system has become more complex. I spent a lot of time speaking with Francois, he's a preeminent scholar on tax compliance and said, you know, that that could be particularly bad news for small businesses. On an individual level, you don't miss a lot of the new complications added, but small businesses in particular face a lot of the same rules

and incentives that a large corporation does. A large corporation can employ tax lawyers, accountants, entire internal department. A small business owner has to either learn the rules personally or pay outside experts. That takes money attention away from the actual business. And you can imagine it's not easy to get your feet off the ground. Okay. So what you're describing here, Chris, it sounds like, you know, you said dumb, dumbs like you, which I wouldn't call you a dumb dumb.

Come on now. But, you know, for a person that's filing their income taxes, it's a bit easier to deal with this. But when it comes to small businesses, it's a lot more complicated. I'm curious. did you speak to any small business owners about their tax headaches? I did. And I spoke with one entrepreneur in particular who is almost, the nature of her company is almost like a perfect unicorn of an example of how a company can face different wrinkles and tax law. Serena Thompson is her name. Founded a Lighthouse Learning and Development Center in Markham, Ontario, because her autistic son wasn't getting the, the support she believed he needed in public school.

That was 12 years ago. It started with six employees and it grew to roughly 20. Tax-wise, it's significantly harder to explain. It's a private school capable of granting high school credits, an autism therapy center, a not-for-profit, a registered charity. It employs regulated health professionals and serves families using different government funding programs. So each one of those aspects of the organization brings its own tax wrinkles.

Different rules can apply depending on the service she's providing and the company's providing at the time. Eventually, she concluded paying experts was unavoidable. So the problem she described beautifully to me was not knowing what you don't know. You can unintentionally miss a requirement or fail to claim something you're entitled to because you didn't know it existed. And her quote that kind of resonates in my head is, if you're not an accountant, you're not an accountant. Okay.

So the big question here then is how much does all this income tax complexity cost us? It's hard to put a dollar figure on the entire ecosystem of complexity. There isn't a universally accepted complexity bill. But the cleanest number that I could find is from the C.D. How Institute. that measured business tax compliance costs. And in that area alone, we're looking at something close to $15 billion a year, including resources devoted to understanding the code,

calculating and complying with taxes, not just the taxes themselves, mind you, but just calculating and complying with those taxes. So the business number is probably the easiest one to use, but it doesn't capture everything, and it doesn't capture how much even the government spends on grappling with complexity. I asked the federal government, the Department of Finance, if they had an estimate, and it's not something that they track from a year-to-year basis.

So these are estimates of compliance costs, not a precise calculation of how much unnecessary complexity costs Canada, but compliance alone for businesses is $15 billion. The bill would be several times the size of that. We'll be right back. Okay, Chris, let's get into how we got here. And I want to go back to the start. Back to 1917, what did the first draft of the Income Tax Act look like? The first draft I described in my story as being something akin to what you'd find in a hotel lobby, a brochure for what to do while you're visiting. In 1917, during the First World War, Ottawa had wartime spending demands on a scale that it wouldn't have previously. imagined. So the income war tax was introduced in that setting with that simple goal, and that was to fund wartime spending. And so the idea was if we're going to be conscripting for the military, we're going to have conscription for wealth as well. Fourteen pages was enough to capture what was needed at the time.

14 pages. And now we're at this point where it's over 3,000, close to 4,000 pages. I mean, how did it go from being this simple law, this pamphlet, to what it is today? So three main forces, I would say, the economy became a lot more sophisticated. In 1917, there were no derivatives, modern multinational supply chains, sophisticated global capital markets. Governments also increasingly used the system to pursue policy. Instead of spending money directly, they could introduce a tax credit or special. special deduction. And those new rules generated new rules. A tax incentive creates kind of a

boundary. Businesses figure out where that boundary is. Government worries about abuse or something unintended pops up and anti-avoidance rule gets added. Then exceptions may be needed for a legitimate activity that rule catches. So the fed and those federal rules interact with provincial tax systems which have their own rates, credits and incentives. And so that that begets even more provisions. And that process has been repeating for decades, so we have this Frankenstein monster. And by the mid-80s, all of these investment credits and accelerated depreciation and other preferences had made corporate taxation so unwieldy that the finance officials began talking in earnest about cleaning it up.

Jack Mince, who's a prominent economist, said, and who was working in the finance department at the time, remembers the... the room saying, the government saying, we've got to clean the system up. It's just not working. When you say clean up, what did they do? So the Moorini government, the progressive conservative government at the time undertook broad tax reform. That was something that was widely known. They were interested in doing. The old manufacturer's sales tax had become especially problematic. It was imposed at the manufacturing stage, embedded in prices increasingly ill-scent. suited to an economy shifting towards services. So consumers would pay that tax. They just wouldn't

know that it was because manufacturers were kind of passing along that cost to them. So the solution was a broad consumption tax, the goods and services tax, and one that would be more plainly evident on your receipt. It was initially proposed at 9%, eventually introduced at 7%. And they found, and they kept basic groceries zero rated, meaning that they would remain free of taxes so that consumers and lower income families weren't punished by it. Politically, it was famously explosive and led to an unprecedented Senate showdown. Okay, so what did this moment teach us about, you know, how hard it is to, quote unquote, fix the act? So with the introduction of the GST and a promise to keep basic groceries untaxed, you have a pretty existential question left to bureaucrats, which is, what's a snack and what's a grocery? That is to say, we had bureaucrats who were running math and having debates about what distinguishes how many muffins is something that you're probably just going to eat in your car.

outside the grocery store or how many you're bringing home to constitute a grocery item. So who would have thought that this debate around snack versus grocery would be such a big deal? That's right. I mean, they had to distinguish between, you know, what the quantity of muffins and donuts or sweet bake goods across the board are taxable. So they landed upon a mysterious kind of math that no one could really explain that that six or more muffins, for example, can qualify as groceries, so zero rated, no tax. If you were buying just the one muffin, you're probably just eating it in your car, and it's a luxury item in the view of the government.

So it sounds ridiculous until you ask the question, if bread is a grocery and a restaurant dessert is taxable, where do you draw the line? Every exception requires a definition and every definition creates these kind of edge cases. Professor Vinecourt's broader point was that GST was never the last seen as a successful sort of Big Bang reform in which it was vastly unpopular, but people absorb one large change rather than an endless string of small ones. And he even said it was implemented like a Big Bang once and now it's working because everybody had to do something once. I think what I'm hearing here is a lesson is that even trying to change it can create more complexity here. And then you get into these situations where six muffins, groceries, and one muffin is a luxury item. Yeah, it's adding new rakes in your yard everywhere you step. If you're trying to fix one thing, you're just going to step on another rake.

And we know how that ends. Thank you so much for that Simpsons reference. and sideshow Bob, sipping on many rakes. I love it. Okay, let's bring it to today and Prime Minister Mark Carney. Is this on his radar? Well, it was during the election campaign. The Liberals promised an expert review of the corporate tax system,

focused on competitiveness and simplification, using those words in the platform. It was a sweeping review. It's one that has been sort of promised by governments over the decades. That seems to have dot. out, the government might say, as other governments have, that it has more pressing issues than simplifying the tax code. Instead, the Prime Minister Carney has added more things. The government told me, when I asked if the review was still underway, they didn't answer that question. Instead,

they kind of pointed to the elimination of some underused, how is it like something like underused housing tax and streamlining of some things and all of it that had the effect of actually adding to it in an ironic way. So that expert panel seems to be no longer a priority or even in existence anymore. So Ottawa is clearly changing the tax system with measures like this megabill, but that is different than sitting down and asking what can come out of it. So, Chris, what you've laid out here today is that is a very, complicated system, and that can be very difficult, especially when you are a small business owner. And so I guess I'm curious to know, what do experts want to see in terms of simplification?

And do they think it's possible? It really is a challenge to get even experts to say, well, here's where we need to start. There isn't an ambitious camp of experts who want another sort of big bang that the Professor of Vyingcourt. mentioned about GST, and that would essentially look like broadening the tax base, eliminating special preferences, simplifying personal taxation, lower rates where possible, stop using the tax code for quite so many unrelated policy goals. The problem is in actually doing those things. there's a more incremental camp that wants to that says that even without like a

Royal Commission, Ottawa can dramatically improve its housekeeping. There's low hanging fruit here with every new credit exemption or deduction. It should have a stated objective, measurable outcomes, and periodic review. And that is just simple business caretaking. And that's just something that the federal government doesn't do on a. on a regular basis. It doesn't look at something and say, is this working? If it no longer achieves its purpose, can you fix it? Can you remove it? There's no baked in system like that. The problem is political, as much as technical. Once people organize their affairs around a tax benefit, taking something

away becomes much harder than introducing it. He said it's asymmetric, right? It's easier to introduce, but it's much harder to take away without making someone angry, some constituent angry who may punish you at the polls. Chris, I appreciate you walking us through all of this. Thanks for coming on the show. It was my pleasure. That was Chris Wilson Smith, a staff reporter for the Globe's report on business,

as well as the author of the Daily Business Brief Newsletter. That's it for today. I'm Cheryl Sutherland. Minica Remen-Wilms is the host of the decibel. I produced this show, along with Madeline White, and Rachel Levy McLaughlin. Our editor is David Crosby. Adrian Chung is our senior producer,

and Angela Pichenza is our executive editor. Thanks for listening.