Tax Shocker? Rich Pay More than Their Fair Share in Canada

It will no doubt come as an interesting discussion point for those both on the right and the left of the political scene to learn that Canada is right up there near the top of countries in terms of taxing the highest income earners! Canada is far above the OECD average, trailing only four countries in the OECD. Now the ideological left can shorten the slogan for the upcoming federal election - "make the rich pay their fair share" can become simply "make the rich pay".

The USA, surprise, surprise, is the country that taxes its rich the most, repeat the MOST. And the country that has been given the image of socialist paradise, Sweden, only taxes the rich their fair share. Poland and Switzerland are refuges for big earners - they tax the least.

This comes from the Tax Foundation website's No Country Leans on Upper-Income Households as Much as the U.S. The place I found this, William M. Briggs, has a neat graph, where Canada hides under the Czech Republic.

CPP Adequacy "Myth" in Greg Hurst's Financial Post Pension Article

In Pension Myths published Dec.2, 2010 on the Financial Post website private pension consultant Greg Hurst rails against what he says are myths about CPP.

Myth 1 according to Mr. Hurst is "Canada's pension system is insufficient for the delivery of adequate pension income." He then cites the Mercer Melbourne 2010 Global Pension Index as a source to assert that Canada is well positioned compared to the rest of the world with a number two rank on the pension adequacy sub-index. Fortunately, the Mercer study is available on the web here, so your faithful blogger, ever the nit-picking detail guy, happily dove into the Mercer documents to do a reality check.

The reality:

• Mercer doesn't say that Canada's system is sufficient, it merely says that Canada's system is better than most of the other insufficient systems around the world. No country attains an A grade from Mercer as a "first-class and robust" pension system on an overall level and though Mercer does not actually assign grades on its three sub-indices, Canada's 75 score on the Adequacy sub-index would put into the B grade of "a sound structure with many good features ... but has some areas for improvement"
  
• Canada's score fell from 2009 to 2010 in Total and across every sub-index (p.19). Is that cause for complacency and doing nothing?
  
• Mercer's Adequacy entails a miserly low level of income. The Adequacy sub-index doesn't just use the CPP, it uses ten questions to arrive at a rating. Canada does comparatively well because of its score on the two heaviest weight questions (attachment 1, p.64). Question 1 assesses the ability to provide a pension to the aged poor. Thus, in Canada OAS/GIS enables people to receive 32% of the average single person's wage (0.32 x $40,600 = $13,000), which is, according to the OECD, where Mercer got its data on this question, enough to keep someone above the poverty line set at 30%. Whooppee, happy days, huh? It is ironic that Hurst should cite Mercer whose conclusion on Adequacy relies on OAS and GIS when his myth 3 says that those two programs are at risk because they are funded from general tax revenue. Would an increase in tangible funding to CPP through higher rates not then make sense? Q2 deals with a target income replacement rate. Mercer says the net (considering taxes and deductions) replacement rate of lifetime average earnings for a median income single earner should be in the range 70-100% and Canada is reasonably close at 63.6%. Lest these numbers seem to be a high target, Mercer reminds us that the lifetimes earnings model from OECD (found in Pensions at a Glance 2009 - gotta love the sly humour in that name for a 283 page document) on which the scores are based assume no real (though it does keep abreast of inflation) pay increase throughout a working career and should thus be targeted much higher than a replacement rate based on final salary. A median Canadian worker thus would get 0.636 x 40,600 = $25,820 to live on. Would that support an active fulfilling retirement or one that entails working to supplement income? Mercer themselves comment that "A net replacement rate below 70% of lifetime earnings suggests a significant reliance on voluntary savings" (p.24).

This last point is the nub of the current problem and debate, one which Hurst himself acknowledges, and Mercer confirms (see its recommendations for Canada on page 57). The reliance on voluntary savings in defined contribution plans and RRSPs isn't working too well, it needs improvement. People are not saving enough and the trend towards types of plans where they have to manage their own investments with all the exposure to their own mistakes and high fees makes the future quite problematic.

As I have blogged before here and here, the CPP seems to offer a better solution to meet retirees' needs. Probably, changing the CPP by both raising the contribution rate and increasing the earnings limit on which CPP is deducted will both help. So what if "Expanding CPP benefits is a very complex undertaking that would likely have widespread repercussions for Canada's pension system overall"? Perhaps one of those repercussions might be a reduction in Hurst's pension consulting business as no-longer-so-necessary private pension savings declined. But is that a reason not to make changes?

His conclusion that Canada merely needs to deploy targeted solutions (harkening back to the notion that there is only a pension problem for a limited few, which I doubt, as expressed in this blog post) and leave aside CPP-enhancement, while somehow boosting employer-sponsored workplace pensions or individual retirement savings, ignores the failures and deficiencies of such options.

CPP enhancement certainly doesn't solve all pension problems. It only pays off gradually over many years as people work and earn a higher pension. Present-day retirees without sufficient savings won't get anything - we'll just have to keep working or buying lottery tickets and/or reduce our standard of living down towards that OAS/GIS level.

I'd like to see arguments more convincing and practical regarding CPP than what looks too much like self-interest or guilt by association from the fact that major labour unions are backing such proposals. Though the labour movement too often itself proposes stupid things merely for ideological reasons, we shouldn't make the same mistake should we?

Financial Bubble Still Here with Yet More to Unravel?

Is there such a thing as a secular financial bubble? Has the financial sector become bloated out of proportion to the economy over the last few decades and is there be a contraction in store, abrupt or prolonged, back to a smaller financial sector? Was the crisis of 2008 merely the start?

I'm not sure of the answer but a couple of data points have stuck in my mind recently:

1) Below is a copy of two charts from the paper Fundamental Indexation by Rob Arnott, Jason Hsu and Philip Moore. Note how the Financial sector, both on a cap-weighted market value basis, the upper chart, termed the Reference Portfolio and on a fundamental accounting basis, the lower chart, has expanded steadily since the 1970s and now has become the dominant sector of the US equity market. By comparison, the Tech bubble was a fleeting aberration, now absent from the trends. In the same charts, updated to June 2007, found in their book The Fundamental Index, there was only a slight pullback in the share of the Financial sector in the Fundamental chart while the market value chart looked the same. Unfortunately, there are no numbers visible so it is hard to compare with today's data and I wish and hope that the folks at Research Affiliates where messrs Arnott et al work will do updates.


2) Financials have bounced back from 11.6% of US total market cap at the end of February 2009 to 16% in 2010, according to the proportions of holdings in Vanguard's Total Stock Market ETF VTI.

3) In Canada, one could almost say that the equity market consists of Financials and a few other bits and pieces - by market cap, Financials occupy 31% of the iShares TSX Composite ETF (XIC), while the Canadian RAFI Fundamental Index ETF of Claymore (CRQ), which contains 65 of the largest companies measured by a combination of sales, cash flow, dividends and book equity, has no less than a 47.4% weight in Financials. The folks who make the RAFI indices describe them as representing the companies' economic footprint. Is that really what the Canadian economy now consists of, and is it normal or healthy such that a change may happen sooner or later? The comparable market cap ETF to CRQ is iShares TSX 60 (XIU). Interestingly, it shows the market under-weighting Financials, especially insurance companies like Manulife and Sunlife, by some 13.4% (i.e. Financials are 34% of XIU) compared to CRQ.

4) The UK's FTSE All Share Index still has about 21% of its market cap weight in Financials as of the end of February 2010, judging by the db x-trackers ETF that tracks this index. Again, it is the single largest sector, though just barely ahead of oil and gas.

McKinsey deflates another bubble

Those who think that now that the recession is over, everything is fine and happy days are here again might think a second thought after reading strategic consulting company McKinsey's The Looming Deleveraging Challenge (free registration required for access to the report). We Canadians might be especially over-confident given the minimal harm our banks suffered during the 2008 crisis.

Despite having the lowest total of public and private debt amongst the 14 countries studied, Canada still likely faces deleveraging in the household sector according to McKinsey. The BRIC (Brazil, Russia, India, China) countries are all much less constrained by debt. The USA, Spain and the UK are more likely to have deleveraging in more sectors than Canada.

McKinsey says deleveraging countries face prolonged belt tightening and lower economic growth for two to three years. Given Canada's strong economic ties to the USA and their even worse state, I'd guess we are in that boat. Ssssssss is the sound of the slow leak in the hope bubble.

The good news is that GDP growth, based on past examples McKinsey studied, likely resumes strongly after that. It will again be time to take a deep breath and start inflating a new bubble.

Ordinary People Still Getting Squashed by Crippled Mortgage Market in Canada and UK

Today's Globe and Mail article Never missed a mortgage payment and still facing foreclosure about the nasty fallout on innocent responsible homeowners reminds me of a situation just as bad, if not worse, in the UK. A family member who has had a mortgage with lender Nationwide for the past two years is being refused a new mortgage for an attempted trade-up to a larger property. Like the unfortunate Ms. Matthews in Canada, this person has never missed or been late on payment, nor missed any payments on loans of any sort.

Worse than the Canadian situation, the person has an impeccable credit rating and a highly secure job. The reason given for the refusal of a new bigger mortgage - the person has used on a few occasions the planned overdraft facility on a bank account, an overdraft which was promptly paid back. It's ironic and laughable that a convenience which the banks happily provide and promote (for all the fees they garner) has been used as the excuse for the refusal.

I don't know for sure but I suspect that Nationwide in reality probably doesn't have the money to lend in the global aftermath of funding scarcity described in the Globe article. Even before the crash Nationwide had begun severely restricting mortgage availability according to the March 2008 Times article Nationwide shuts door on mortgage hunters.

The immediate consequence is one less house in Scotland that will be sold. We've gone from credit gluttony to credit starvation.

Inflation in Canada Over-estimated by CPI

Those prone to suspect that the government low-balls inflation estimates can rest a bit easier. What a nice surprise to come across Measurement Bias in the Canadian Consumer Price Index, written in 2005 by Bank of Canada economist James Rossiter. It examines the various biases that affect published CPI numbers and concludes that CPI has over-stated the actual cost of living increase in recent years by about 0.6% per year. In other words, instead of the approx. 2% annual inflation CPI says we have been seeing, the real number is closer to 1.4%. That helps those on fixed budgets.

Of course, CPI is an average and no individual actually buys exactly the basket of goods in CPI, so some caution is in order. The sources of bias cited in the paper can perhaps help one in making an adjustment:

• commodity substitution bias occurs, for example, when a real consumer notices a jump in the price of beef and starts buying pork instead (Michael James noticed a "swine flu special" on pork) but CPI continues to track beef the amount of beef consumed exactly as before. If you think pork and beef are not really equivalent, that such substitution is in effect a loss of real value, then subtract 0.15% from the 0.6% number above.
• outlet substitution happens when you buy the same designer jeans at lower price at the outlet store instead of the high-priced retail store with the loud music. CPI takes a while to catch up to this shift retail patterns. Think part of the pleasure of the jeans is the music? Take away another 0.1%.
• quality change bias might best be characterized by considering quality of the average car of 25 years ago compared to today. I for one prefer today's cars. If you really enjoyed the breakdowns and rust of bygone days, you can say inflation is not really lower by another 0.15% compared to CPI.
• new goods, new services and new brands bias happens when the increased in standard of living resulting from the introduction of such new products and greater choices is not reflected in CPI. If you think such things as microwaves and cell phones have not enhanced your life, then take away 0.2%

The paper mentions on page 22 that estimates in other countries show a similar but slightly higher over-estimation - the USA around 0.8% and the UK 0.35 to 0.8%.

Overall, I am most skeptical about the first bias, commodity substitution, since when I am forced by price to buy downward, it isn't the same value, though I can imagine other substitutions where I would not care. The other biases do ring true enough, so I'm happy to accept that CPI really does over-state inflation.

UK Immigration Rules Ruin People's Lives in Order to "Protect" Them

Through a sad and bizarrely crazy new set of immigration rules, the WWB (World Wide Bureaucracy) has struck again in the UK as a happily and voluntarily married young Canadian-Welsh couple will be obliged to live apart for a couple of years due to regulations supposedly designed to protect young British women of Pakistani or Bangladeshi origin from being forced into marriage. The woman involved is not British (she's Canadian), she has no Pakistani, Bangladeshi or any remotely Asian roots by all appearances ... I know, I know, I'm revealing my deep prejudice by coming to that conclusion by looking at her name (Wallis), her white face, her red hair ... and both she and her husband vehemently deny any coercion to get married.

She's not especially young either, being 19 years old, and sounding rather mature in the BBC news interview found in the above link. It's interesting that UK law permits 16 and 17 year olds to get married with their parents' permission. Above that age, Brit teens can marry if they like. By the logic of the regulations which deny marriage visas to foreigners under 21, the implication is that pure Brit teens are superior to non-Brits.

This case leads one to wonder if the new regulations were cast in such an un-necessarily broad ill-fitting manner to adhere to political correctness and avoid singling out a particular country or ethnic group. The "for the greater good some have to suffer" explanation put forth by the Home Office is laughable. Since all of the cases cited in the What is a forced marriage? booklet of the Forced Marriage Unit website involved teens travelling to another country, maybe the government should simply have banned all foreign travel by British citizens under 21?

As a Canadian who, though considerably older than this couple, came to the UK through marriage to a British citizen and experienced frustrations dealing with the Home Office in getting the necessary visas, I have a great deal of sympathy for Adam and Rochelle. I really hope their problem gets sorted, though the bureaucratic stonewalling and circling of wagons to back up the idiotic Home Office regulations is all too evident in the BBC account.

Gail Bebee asks: Has the death knell sounded for mutual funds?

Author Gail Bebee sent me the following message with the above dramatic title:

"New exchange-traded funds from a Big Five Canadian bank will compete with mutual funds

Toronto, June 17 – The Bank of Montreal (BMO) is getting into the exchange-traded funds (ETFs) business with an offering of seven funds which largely mimic existing products from ETF industry leader, iShares. Says independent investor and personal finance author Gail P. Bebee “ETFs, the low cost alternative to Canada’s high fee mutual funds, are making major inroads into the mutual fund business and BMO wants to profit from this trend. The good news is that a major bank is offering ETFs to clients, so more Canadians will learn about the benefits of investing using ETFs instead of mutual funds. Hopefully, BMO’s decision will motivate other Canadian banks to launch their own ETFs. Canadian consumers will be the winners.”

According to Bebee, ETFs offer several advantages over mutual funds:

1. Better returns than most equivalent funds

2. Lower management fees

3. Greater tax efficiency

4. Ability to buy and sell throughout the trading day.

For more information or to arrange an interview, please contact:

Gail Bebee

Personal finance speaker and author of No Hype - The Straight Goods on Investing Your Money

All the investing basics for Canadians from a savvy financial industry outsider

Tel: 416-733-0221

gbebee@nohypeinvesting.com

www.nohypeinvesting.com"

To which I would comment, I hope not a death knell since there is nothing inherently wrong with the concept and structure of mutual funds. It's just that the current fees are so darn high, they do not provide good value to investors. However, the ability of mutual funds to take small amounts of new money efficiently and to automatically reinvest distributions and keep track of tax info such as Adjusted Cost Base are worthwhile attributes. Some fund company in Canada needs to go the route of Vanguard in the USA by providing ultra-low cost index funds.

The flight from mutual funds that Bebee refers to may just be a good thing. It reminds me of the situation many years ago when Canada's wine industry (which was more aptly described as the whine industry) contentedly produced horrible stuff in high volume until free trade opened up competition and the industry successfully shifted to high-value, high-quality niche wines. I hope the surge of ETFs is a wake-up call to mutual fund providers.

Inflation Ain't What It Used To Be If You Are Retired

Did you know that inflation is usually higher for retired people? At least it is to the extent that Canada is the same as the USA. Moshe Milevsky in a January 2009 presentation along with the heavy duty paper version on Lifetime Ruin Minimization at the IFID website reveals that the mainstream average inflation calculation understated that experienced by older people (age 62+) by about 0.5% a year since 1983. The reason is that retirees spend a much greater proportion of their income on housing and health care as this breakdown chart from the presentation shows.

Are things the same or different in Canada? Unfortunately, there is no such alternate inflation measure put together by Stats Canada. I phoned them just to be sure and they said they don't have one. It would be very helpful e.g. for the government to use to adjust CPP, OAS, GIS and other payments to retirees. Of course, different parts of the country have different inflation rates, not to mention large differences because of lifestyles. Another neat idea on the BBC website is a personal inflation calculator - just plug in your own spending habits and it takes the UK individual CPI components (called Retail Price Index in the UK) and adds them up with your spending proportions.

A negative consequence is that one financial product's effectiveness is undermined for retirees. Real Return Bonds are meant to counteract the effects of inflation by indexing the principal and interest using CPI. If an understated CPI is used, RRBs won't go up fast enough. The Milevsky presentation has another chart on page 10 that shows very poor correlation between the CPI-E (E = Elderly) and actual returns from US RRB funds, in other words the returns from the RRBs didn't match up with inflation from year to year at all. In fact, as a result of such poor performance, Milevsky concludes that RRBs should treated as just another asset class within a portfolio by retirees.

Canadian Capitalist had an interesting post Investing in a Period of High Inflation with good comments about RRBs. One commentor's statement that the Canadian RRBs use only Core Inflation, which strips out the more volatile, but essential to most people, components of mortgage interest, energy and food instead of the overall Total CPI is incorrect. The RRB fact sheet on the Bank of Canada website says the CPI measure used is the "All-items" CPI, which a Bank of Canada spokesperson confirmed is Stats Can's Total CPI.

Honda Civic Still Most Popular Car ... to be Stolen

The Insurance Bureau of Canada publishes an annual list of the Top Ten Most Stolen Cars. The latest tally for 2008 shows that models of Honda Civics retain the two top spots, a place they have held every year since 2005. Not only that it is the same two model years 1999 and 2000. They are followed by another repeat offender, the 2004 Subaru Impreza. Huh? Don't thieves update their cars too? Don't want to have your car stolen? Apparently the least stolen cars are 2003 Cadillacs,, 2002 Lincoln Continentals and 2001 Lincoln Town Cars.

A Modest Proposal for Preventing Older Retired People in Canada ...

... from Being a Burden to Their Children or Country (with acknowledgement to Jonathan Swift who long ago made another famous Modest Proposal)

It is a melancholy object to those who browse the web or travel through other media, when they see the news, the discussion forums, the blogs, and editorials, crowded with beggars of the boomer generation, followed by one or two children, their retirement savings in rags and importuning every government for an alms.

These boomers, instead of being able to retire in comfort, are forced to employ all their time in lobbying to beg sustenance for themselves: who as they grow older either turn tax cheats for want of income, or leave their dear native country to work for the Global Megacorporation in Spain, or sell themselves to the McDonald's.

I think it is agreed by all parties that this prodigious number of boomers in the arms, or on the backs, or at the heels of their government, and frequently of their children, is in the present deplorable state of the kingdom a very great additional grievance; and, therefore, whoever could find out a fair, cheap, and easy method of making these boomers sound, useful members of the commonwealth, would deserve so well of the public as to have his statue set up for a preserver of the nation.

But my intention is very far from being confined to provide only for boomers of professed low income earners; it is of a much greater extent, and shall take in the whole number of boomers at a certain age who are born of parents in effect as little able to support them as those who demand our charity in the media.

As to my own part, having turned my thoughts for many years upon this important subject, and maturely weighed the several schemes of other projectors, I have always found them grossly mistaken in the computation.

As little other nourishment; at most not above the poverty line, which the boomer may certainly get, or the value in scraps, by her CPP, OAS and GIS; and it is exactly at 75 years old that I propose to provide for them in such a manner as instead of being a charge upon their parents or the government, or wanting food and raiment for the rest of their lives, they shall on the contrary contribute to the feeding, and partly to the clothing, of many thousands. There is likewise another great advantage in my scheme, that it will prevent those voluntary suicides, and that horrid practice of children exploiting their infirm parents, alas! too frequent among us! sacrificing the poor innocent seniors I doubt more to avoid the shame than the expense.

Having thus paid homage to the immortal Mr. Swift, and perhaps having suggested that times have not changed greatly in the last three hundred years, only the particulars, let us turn to the simpler, more direct and less convoluted modern diction and style, the better to be understood.

CROAK (Canada Retirement Old Age Kaput)
"Ask not what your country can do for you - ask what you can do for your country" John F. Kennedy, US President, 1961
(In the time-honoured Canadian tradition, we adopt the words of a United States President as the theme for our program. Like the jealous little brother, we watch the USA's every move and resent its power and influence, then proceed to imitate it and adopt its ideas. Contrary to Canadian government tradition, the program is given an easily remembered and pronounceable acronym (viz RRSP, TFSA, LIRA) related to the subject matter.)

CROAK is proposed as the government's visionary response to the new reality of the 21st century. It can be thought of as a national "best before" date for people.

Whereas,

• a huge number of people in the baby boom generation is now entering retirement, which will increasingly outnumber and overwhelm the working population, with the effect that the working population will be insufficient if they are required to support the boomers
• longevity is increasing slowly but steadily, such that a person retiring at 65 may easily live twenty five years in retirement, with the effect that a lot more savings is needed to sustain an income
• defined benefit plans that assure lifetime income have been steadily disappearing, and people are being required to fend for themselves
  
• defined contribution pension plans give an uncertain income at best due to market fluctuations, with the effect that not only may the required money not be there at all, the uncertainty itself creates great mental stress for the retirees
• future expected rates of return on investments are forecast to be substantially lower than in the last twenty year "golden period", exacerbating the likelihood that income will be insufficient
  
• government pension programs like the CPP, OAS and GIS are insufficient to ensure a comfortable retirement, being in total somewhere around the poverty line and it would be impossibly expensive to drastically increase the amounts, not to mention being unfair and a huge burden on the younger generation that would be required to pay the taxes
  
• an individual cannot predict when he/she will die, creating more uncertainty and stress and a need for an excess cushion in funds to plan for a possible long life
• children have an increasing burden of caring for parents, who may be alive through modern medicine but require assistance; increasing longevity can impose many more years of such care than was the case in the past, all of which reduces the productivity of young adults and takes away from breeding and raising the next generation
• living disabled and/or with chronic illnesses in old age for many years is no fun for the old either
• the recent financial crisis has decimated such pension plans and savings as exist, with little hope for quick recovery, leaving the distinct possibility that sufficient recovery will not happen soon enough to make up shortfalls
  
• the combination of all these factors makes it extremely complex to plan and figure out what to do and Canada's professional self-professed "financial planners", being primarily licensed and remunerated to sell mutual funds, are on the whole woefully incapable of helping boomers cope with the situation

The Proposal: Therefore,

• at age 75, every Canadian will be required by law to, so to speak, cash in their chips, to retire from life, to relocate to another world, to change state from solid to gas (why 75? it's a nice round number and easy to remember); some innocuous sounding politically correct term like "Planned Departure from Life" needs to be found - perhaps readers can offer suitable suggestions?
  
• government will increase CPP payments to give older retired folks a more decent standard of living (using the savings described below as source of funding)
• the first $200,000 of funds in a person's estate will go tax free to persons named in a will, thus creating tax neutrality and removing tax distortion effects between different types of assets and accounts (e.g. a home is free of capital gains but an RRSP/RRIF/LIRA is taken into income all at once at death and thus likely to be taxed at a high rate); this will also create an incentive to leave some for the next generation.
  

The Advantages:
So great and numerous are the benefits of this program, and to all "stakeholders", that no one can fail to support it.

... for all concerned -

• a huge simplification in planning since there will be a precise target date for all streams of money, whether income or outgo

... for the government -

• reduction of about four years in pension payout now since average life expectancy is around 79
  
• large reduction in end-of-life health care expenses as older people avoid the trip to hospital as they enter their final fatal illness (see Australian study that says older folks occupied almost half of acute care beds); by contrast, the cost of an injection such as Fatal-Plus is minimal - in fact vets could be given this added power since they are familiar with the techniques and are much cheaper than doctors for what will, after all, become a routine task, as this article from the Salisbury Post suggests (simply substitute "person" for "dog" and you can easily imagine how it would go - note below how the vets are friendly and conversational)
  

  "Helms has difficulty holding the dog because he's so playful.

  "OK, it's all right," Blinn says. "What a good man you are."

  She pets the dog before administering the lethal dose, then verifies death and scratches his ear."

• by age 75, pretty well everyone has slowed down so much, they have stopped working and are thus not productive members of society, i.e. a burden; if people retire at 65, they have ten years to enjoy the leisure they have earned, so it is a fair trade-off
  

... for the children

• much reduced necessity to care for aged, infirm, sick parents in the last stages of life (at age 75 most people should be relatively healthy and capable), with several beneficial consequences - children's time off work is reduced, helping employers and the economy, less stress for children in managing their own lives, part of which is the mental distress of seeing the physical and mental deterioration of their parents and eliminating resentment children might feel towards their parents from the burden of care
  
• a much higher probability of receiving an inheritance due to two effects - first the tax incentive for parents to leave something; second, the shorter time before departure means parents are less likely to have spent it all; third, the fixed departure date means that parents can plan exactly how much they will leave to children and the fact that parents could chose to spend it all instead of having to keep some money in reserve means that children will have to pay attention and treat their parents nicely

... for the older retired people

• the opportunity to live it up and enjoy life to the max since they would know exactly their time left - no worries about money running out, it could be calculated to the penny and the limited time of ten years after 65 prevents inflation from eroding a fixed income's purchasing power too much. How much stress is there now for older people wondering if they will have enough and scrimping to make sure? Even procrastinators usually respond to a fixed deadline so a life of "no regrets" becomes much easier to attain.
• going out while you are in good shape spares the embarrassment and indignity of deterioration. The authority of a government program that applies to everyone removes the stigma of early departure, such as for those today who might consider suicide.
• both parents and children would have a much better chance of properly saying goodbye to each other (one could anticipate a change in the funeral industry from the sad tone of today to a feel-good "say goodbye in style"; whether the present funeral industry could make the huge cultural shift required is likely to provoke much debate by business professors but if it doesn't, one could reply that it is the creative destruction of capitalism at work, such as replacing horse-drawn buggy makers by car manufacturers)
  

... for the economy -

• money will be recycled sooner, either by the parents spending every last penny by 75 or by the children who receive a bigger inheritance sooner
• Canada could have a unique selling point amongst developed countries, all of which are aging, with a much younger and more dynamic workforce
  

Certainly, there are those who object that many people at 75 are still contributing members of society and it is thus highly unfair that they should also be forced out. True enough. There could be exemptions granted but creating criteria for those eligible would turn this into another bureaucratic mess typical of many (most?) past government programs. The present day calls for a new approach with simple, streamlined programs. And is modern society fair? Is it fair that the government should bail out GM and Chrysler but not Nortel or any of the hundreds of businesses hammered by the recession? Is it fair that a responsible young driver should pay exorbitant insurance rates to subsidize the bad ones of the same age? A small sacrifice for the common good of society would seem reasonable to all right-thinking people. People over 75 would still have the liberty to emigrate.

A transition period is of course advisable to allow everyone to get prepared. A very straightforward plan would be to apply the new rules for anyone turning 65 as of July 1st or some other arbitrary date and allow anyone already 65 to be "grandfathered" (that such an expression already exists in common language is a sign that this proposal makes sense).

Thus can one see how the application of logic and reason, along with a bit of imagination and drawing upon examples from the past (indeed, circumstances of life for the original inhabitants of Canada caused action similar to this proposal to occur, as the article Did the Eskimos put their elderly on ice floes to die? from The Straight Dope explains about the Inuit), enables the formulation of innovative solutions we so urgently need.

Pension Issue Now on the Table at Last

One of the silver linings from the slide into oblivion of GM and Chrysler is that the issue of pensions may finally be moving to be a front and centre public policy issue. The auto unions have been agitating for a rescue of their pensions but the online comment reaction to the Toronto Star editorial of April 25 on pensions shows that there is a high level of passion and opposition to the idea of guaranteeing / bailing out auto union pensions. Everyone is yelling "what about me and my (sometimes non-existent) pension?" A simple government/taxpayer handout cannot and will not happen.

Fundamental pension reform needs to happen and the sooner the better. Governments need to lead the creation of a single national solution (in the process getting rid of one area of needless provincial duplication and variation). A good place to start are proposals like the Universal Pension Plan discussed on the Wealthy Boomer blog, the Canada Supplementary Pension Plan of Keith Ambachtsheer on the CD Howe Institute website, or Peter Benedek's Pension Reform paper on his Retirement Action website.

One thing I know for sure is that some form of pension system providing a decent minimum retirement income needs to come about. I spend a lot of time acquiring knowledge about investments, diversification, asset allocation, risk management, international investing, longevity estimation, taxes, annuities, RRSPs, LIRAs, TFSAs to plan my own retirement income and it is darn complicated to plan properly. How could everyone do that? A simple, mandatory, fair, equitable, well-managed, self-funding system that removes much of this planning burden and attains economies of scale is required. The CPP seems to be quite successful along those lines so there's no reason it cannot be done again.

Tax Credit for Student Loans

In the process of helping some students in my family with their finances, I came across the fact that certain types of student loans benefit from a tax break on the loan interest.

The benefit is in the form of a tax credit, meaning that it is a straight reduction of tax. Other key features and conditions (see CRA's page on tax matters for students) include:

• the credit is non-refundable, meaning that if the student has no tax to pay before applying the credit, the credit is not refunded and the credit goes to waste; in other words, apply for the credit only when there is tax to pay.
• the credit does not have to be used in the same year as the interest on the loan was paid, it can be carried forward and used up to five years later
• the credit is not transferable to another person, like a parent or spouse, only the student him or herself can use it, even if someone else actually paid the interest
  
• the credit is calculated at the lowest Federal tax rate (currently 15%) plus the lowest Provincial tax rate (e.g. Ontario is 6.05% so $100 interest would get the student $21.05 in tax credit/reduction); Québec as usual does its own thing and gives 20% flat credit; the credit does not change or increase if the student is in a higher tax bracket and since it is a tax credit not a deduction that reduces taxable income it cannot help to bring someone down into a lower tax bracket; in other words, there is no advantage in waiting - as soon as the student starts earning enough income to have tax to pay, he/she should claim the credit.
• the credit only applies to loans issued under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or similar provincial or territorial government laws for post-secondary education (to check if a loan qualifies, ask the national student loans service center or see the list of provincial student loan contacts here on Canlearn.ca); loans from banks or private lenders don't qualify, nor does a qualifying loan if it has been combined with or refinanced as a private loan
• the claim is made on line 319 of Schedule 1 Federal Tax of the T1 and on the corresponding line in the provincial tax form - e.g. line 5852 on ON428 Ontario Tax
  

Optimizing Tuition/Education Tax Credit Transfers: TaxChopper Wins Again

It's time to throw another test at the web tax software contenders. The challenge this time: transfer of Tuition and Education amounts. I refer to the calculation of the "just-enough" amount of tuition and education tax credits (see CRA IT-516R2 or TaxTips.ca simpler explanation here) to transfer from a student to another eligible person like a spouse or parent. If a student has no or low taxes to pay, which is often the case, the education credits can be transferred to reduce or eliminate taxes of the other person. But you want to transfer and claim only as much as needed to eliminate taxes since the students can carry unused amounts forward to future years to reduce their own taxes when they start earning.

Scenario: this scenario was constructed so that the various programs would completely eliminate taxes of the parent but the optimal amount to transfer is less than the full amount of credits.

Student: $0 income, Tuition $3000, 6 months full-time study = 6x$400 = $2400 giving $5400 in total credits but $5000 is the max in credits that can be transferred (with the equivalent indexed provincial amount being $6003).

Parent: $18,500 income (T4 box 14), $742.50 CPP paid (T4 box 16), $320 EI paid (T4 box 18), $3000 tax paid (T4 box 22), $2300 LSIF purchase (LSIF box 4). Low income and an LSIF tax credit will ensure that less than $5000 is the optimal transfer.

Packages: only the top 5 in my first ratings review are included - UFile & H&R Block (not tested separately since H&R Block is a re-branded clone of UFile), TaxChopper, WebTax4U and QuickTax

Results:
WebTax4U and QuickTax have no optimization routine built in the program itself. They require you to enter the transferred amount manually. You are on your own plugging in numbers by trial and error until the right amount to reduce the parent's tax to zero is found. When the maximum transferable of $5000 federally and $6003 provincially (Ontario) is entered manually neither program rejects the excessive amount so the credits would be wasted.

WebTax4U allowed a transfer of more than the maximum permissible and available (I entered $6500) though it restricted the federal amount claimed to $5000 (I tried entering $5400). Not very impressive error prevention. QuickTax at least signals an error and prevents it being saved.

TaxChopper and UFile both have an optimization routine where you click a box to have the program find the best amount to transfer. Only TaxChopper figures it out correctly as $4518.50 federal claim on line 324 of Schedule 1 and $2582.95 provincially on line 5860 of ON428. UFile gets the same amount for the provincial claim but evidently screws up the federal claim and enters $5000, evidently because it miscalculates the LSIF tax credit as only $272.77 (line 414). Both QuickTax and WebTax4U get the same $345 LSIF credit as TaxChopper.

All the programs calculate the same maximum refund of $3000 - all of the tax paid - for the parent but saying that means they all give an equally good result for the family ignores future tax that will have to be paid because those tuition and education credits are no longer available.

CRA Comments on "Accuracy" of NETFILE Certified Web Tax Software

The folks at CRA called me back last Friday after checking the huge differences in taxes owing that I found after testing the eleven web tax preparation software packages which have been NETFILE certified by the CRA.

CRA says this is entirely possible and acceptable to them! How so?

1. CRA only tests that all the income is correctly transferred and summed - that lines 150 Total Income and line 236 Net Income are correct. In my test line 150 was identical across all packages. All but one package - TaxChopper - had the same line 236 and the CRA confirmed that TaxChopper's application of foreign tax credits to line 232, which had the effect of reducing my taxes owing by about $35, is legitimate.
   
2. CRA does NOT test whether deductions and tax credits are claimed, nor whether taxes could be reduced by allowable transfers, such as tuition costs from student to parent or spouse, pension income between spouses or other optimizations. It is not CRA's job to lower anyone's income tax. Thus, the fact that a number of programs neglected to claim foreign or provincial tax credits, causing the big differences in my tax owing, is not a concern to CRA.
3. CRA has itself noticed differences amongst the programs in the course of their testing, though it is not their job to recommend any program as being worse or better than others. But for those taxpayers like me who want to legally pay the least amount, it is significant to receive confirmation the differences I found are not erroneous, anomalous or rare. CRA is considering adding words to its disclaimer on the various NETFILE packages to say that taxpayers should shop around.
   

What's to do now?

• Everyone should shop around and enter their data into several of the programs to see which gives the least tax owing or biggest refund for them. After all, most of the work of doing taxes is gathering the slips and data, so re-entering it a couple of extra times isn't a lot of extra effort. Is that effort worth the possible hundreds of dollars or more difference? With the web programs, there's nothing to download and install, nor is it necessary to pay before seeing what the bottom line is. Based on my own test, I'd suggest TaxChopper is worth a try - if they have incorporated a fairly subtle deduction that no one else does, chances are that they might be more thorough in claiming other advantages.
• More testing - I think it's time to go back and try a couple of other optimization scenarios such as pension splitting and tuition transfers to see which package performs best. I'd be curious what other people may have found for their own case.

The words "most accurate" are not the best way to describe the differences among the bottom line tax amounts calculated by the web packages. There isn't only one correct, CRA-acceptable, number. It is better to think of the lowest tax result.

Students and Low Income People - for TFSA's Sake, Make Sure You File a Tax Return

The new Tax Free Savings Account allows any Canadian over 18 to contribute up to $5000 per year into an account whose earnings are completely exempt from tax. The $5000 contribution room accumulates with every year, whether you use it or not, so even if you are not able to contribute this year, down the road when your income increases or your expenses drop and that becomes possible it is very worthwhile to have those yearly $5k amounts built up.

But how do the government tax people at the Canada Revenue Agency monitor and police who has the contribution room each year? The answer is provided by D&H Group Chartered Accountants in their 2008 Year End Tax Planning Tips:
"With the new TFSAs, it is important that all individuals who are 18 or older file income tax returns even if they do not have any income because the Canada Revenue Agency is tracking TFSA contribution room only for individuals who file income tax returns."

Working after Retirement - It Can Be a Happy Reality

Working after retirement is the new reality. In Canada, the USA and the UK, it is the same. The reality arises from necessity for most people, a result of rising longevity, inadequate private and public pensions and insufficient saving. The on-going credit crunch market downturn, from which recovery is likely to take many years, has plunged a dagger into the hopes of many for a comfortable non-working retirement. A falling housing market puts another big dent into a supposedly safe store of personal wealth.

That's the negative view of life. Rather than bemoan our fate - and I say "our" because I am in that very boat, having only my investment portfolio and the meager CPP/OAS/GIS to live off in future - I think it is worthwhile to try making lemonade from those lemons life is handing us and look on the positive aspects of working after retirement.

And I don't think that is just pretending that the financial equivalent of cholera is a good thing. It isn't an accident that many people voluntarily continue working after their retirement, even when their rock solid (government) defined benefit pension is more than capable of supporting their lifestyle. A number of my friends are doing exactly that - working despite their financial security being assured.

Benefits of working after retirement:

• Sense of worth and accomplishment - isn't one of the most important sources of happiness a feeling that one is doing something worthwhile on this planet instead of just occupying space?
• Connection with people and social interaction - part of the rewards of work is talking with others and doing things with them; being isolated and lonely can be deadly in a very literal sense, particularly as one gets older
  
• Responsibility and obligation - the sense that others are relying on you and that you have to deliver something, is a valuable pressure; no deadlines, no responsibilities tends to turn people into mental and physical slobs
• Financial diversification - maintaining a work capability is the equivalent of having a revenue generating asset/investment that is likely fairly (you may still lose your post-retirement job if the economy goes too badly) uncorrelated to stocks or bonds
• Double effect on retirement finances - every dollar one earns can be spent on living expenses while at the same time avoiding the withdrawal from an investment portfolio; this is especially valuable in times of market downturn when portfolio withdrawals can dramatically lower how long a portfolio lasts (see this simple example from Wachovia)
• Equivalent to a large investment asset - if your part time job earns $20,000 a year, that is the equivalent of owning a bond yielding 5% that is worth $400,000.
• Health insurance, possibly - some employers offer health insurance for part-timers
• Double-dipping with the CPP and OAS - once you start receiving CPP, you can then begin to work again without losing the benefit (make sure you conform to CPP rules explained here); with OAS, paid after age 65, you can continue to work and receive it, though benefits are progressively taxed back when income goes over about $64k (see TaxTips.ca Seniors page)
  
• More, better sex! - if all the above is true, this will inevitably follow, right?
  

Authors like Sherry Cooper in the New Retirement (my review here) and Warren Mackenzie and Ken Hawkins in New Rules of Retirement (my review here) tell us how to prepare financially and mentally for the reality of retirement. There is also a book called Working after Retirement for Dummies but I don't think it is a dumb thing to do at all.

TaxChopper (formerly CuteTax) Living Up to Its New Name

The folks at TaxChopper are on the ball. They've read my review of web tax software packages posted earlier this week and contacted me to check my result using TaxChopper, which showed the least amount of tax owing. I had expressed my disbelief that TaxChopper could be right since it is the only package with a deduction on line 232 Other Deductions.

For those with an interest in the intricacies, here is the email explanation I received from Benjamin Gao of TaxChopper after I gave him permission and he looked at my account entries:

"I checked your account. Line 232 is the unused foreign taxes. You paid 596.80 in total to the U.S., however, you can only claim 209.74 federal foreign tax credits and 96.91 provincial foreign tax credits, so the unclaimed part (596.80 - 209.74 - 96.61 = 290.25) is deducted at line 232 of your return.

The deduction is allowed under Canadian tax law. I am not a lawyer, however, our consultant is a chartered accountant, he okayed this a few years ago. We also have some clients deducted this amount before and got questioned from CRA (because in NETFILE, there is no place to put descriptions, CRA don't know where line 232 came from), and after explanation, none of them got bothered any more.

You can check the tax guide at CRA's form T2209, at the second page, second last paragraph, which reads

Also, on line 232 of your return, you may be able to deduct the amount of net foreign taxes you paid for which you have not received a federal, provincial, or territorial foreign tax credit. This does not include certain taxes you paid, such as those on amounts you could have deducted under a tax treaty on line 256 of your return.

You can get the T2209 at

http://www.cra-arc.gc.ca/E/pbg/tf/t2209/t2209-08e.pdf

I have to admit the calculation is not that easy. For example, according to other calculations, you would have claimed 338.67 total foreign tax credits. But once you apply the unused amount, both net income and foreign income (used to calculate the credits) will also change, and you will find you can only claim a less amount so you will have more unused taxes to deduct. If you do it manually, you can go several rounds to make them balanced or almost balanced.

To comply with CRA's test data (which are not optimized), we have a page to disable this feature, you can find it at our software

General Credit => Foreign Non-business Tax Credit

You tick-check the very last box at that page and save, then you will find we have the same refund as others, but it is $35 less.

I have no idea why all other companies are not claiming this deduction automatically, there is an obvious difference between the foreign taxes paid and foreign credit claimed. and the tax guides are there in black and white."

TaxTips.ca in Foreign Tax Credit seems to say the same as TaxChopper but if there are any tax accountants reading this it would be good to see your comments.

Lessons:

• Canadian tax rules are crazily complicated - we'll have to replace the expression "he's no rocket scientist" with "he's no tax accountant" as the measure of intelligence
• it appears that the various tax packages are more or less competent at finding and applying rules that can minimize taxes
• NETFILE certification testing does not test all legitimate tax minimization action and optimizations - note how Benjamin says that the CRA test data does not cover this particular optimization! ... if CRA were to develop its own free plain-jane online service, which by definition would only present the forms in a passive state without active optimization routines (and thus this is not an accusation of nasty motives against CRA), many people would grab it not realizing that they could actually save on taxes with private software such as TaxChopper's, so I'm gonna backtrack and say, CRA, please DO NOT develop a free online tax package! People would unwittingly pay more in taxes than they would save from the software being free.
  
• CRA could and should add further explanation to its NETFILE Sotware page in the yellow box, something to the effect, "Certification testing does not cover all the ways that the software packages may claim deductions, effect transfers of credits and deductions or perform optimizations that may result in legitimate differences in the net amount of taxes owing by, or refund payable to, a taxpayer. The packages may produce different results and yet still be acceptable to NETFILE."
  
• I only tested using one set of data and circumstances, so the lowest tax for any individual may come out of another package ... therefore, shop around and take the trouble to enter your data into a couple of different packages to see which gives the best result - they all will give you a bottom line refund due or amount owing before you pay. I note that TaxChopper offers a Maximum Refund Guarantee or your service fee refunded if any package beats them. I especially like guarantees that are never used, like warranties on cars that never break down.
  

No news yet from CRA, which is looking into the wide variability of my testing results. My ratings will need to be revised when the most accurate / lowest legitimate tax-payable package is revealed. Suffice it to say for now that TaxChopper has a leg up on everyone else.

Why Canada Revenue Agency Should Provide Free Tax Preparation Software

One would have thought that the computer and Internet age would make the annual chore of filing a tax return easier and cheaper than the days of paper-only. The Canada Revenue Agency's NETFILE (for self-filing) and EFILE (for filing through a professional prep service) certainly make it easy and I applaud that success as something government has done right. But cheaper it is not, since the only way to file a tax report electronically is through private companies and their software, which they charge for, naturally.

There are a good dozen private suppliers charging anywhere from $6 per return to $70, with market leaders QuickTax and UFile averaging a base price of about $15 (see Wikipedia's list of NETFILE suppliers and prices).

Why do we individual Canadians have to pay?

CRA's answer is: "Development, distribution, and the subsequent ongoing maintenance of free tax software would represent a tremendous expenditure for the CRA. It would also require a continuous support network to assist users of the product. Regardless of our efforts to provide free software, some Canadians will always prefer to purchase products from the private sector market, as many of these products offer tax-planning tools and are often compatible with home accounting software."

My answer is, as the Scots say,rubbish! Here's why I think everyone would be better off, CRA and average Joe Canadian NETFILEr with free tax prep software provided by the CRA.

1) Paper tax forms are free and all it costs is a stamp to mail them in. The precedent, the starting point of the argument and the onus is on CRA to continue that way.

2) Private software makes tax calculation errors, as I pointed out in my previous two posts. This result happens with software that CRA has tested and certified. We and CRA cannot be sure tax reports are accurate. Let us keep in mind that CRA makes up and interprets the rules so private companies are necessarily using second-hand knowledge of tax rules with attendant misinterpretation possible.

3) Cost to taxpayers - CBC' Netfiling 2009 reports from a CRA source that 4.3 million returns were filed in 2008 using NETFILE. At $15 a return, that is c.$65 million every year. That's wasted money in an economic sense. No one is fed, clothed, housed or entertained in the process of filling in a tax return. On the other hand, the CRA could fund an awful lot of software development using that money. Anything less than $65 million a year would be a net gain. Some of the existing private software packages are built by what are obviously very small companies. A basic package should be very cheap to build.

4) Cost to CRA - The indirect costs to CRA of the present system include:

• extra resources to deal with the certification process, building and running test suites, communicating back and forth with the companies
• extra resources to fix returns that are incorrect despite the certification process
• lost revenue from higher non-compliance and effort to deal with non-compliance using private packages. CBC reported last August a CRA finding that people using NETFILE and software understated their taxes by almost $570 million. Though the apparent main cause of non-compliance - absence of receipts - would certainly not be eliminated by CRA-supplied software, there would certainly be a "big brother is watching you" deterrent effect. The vast majority of people who cheat, i.e. putting aside those who are saints or incorrigibly immoral, do so because they think they can get get away with it. If a person were to be using the official free CRA web browser program that they know is hosted on the CRA's own servers, I bet they would be a lot less likely to try overstating expenses. Even a 10% reduction in non-compliance would give the CRA $57 million more in annual funding for building a free tax prep package.
  

5) People want free software from CRA - Check out the comments on the CBC Netfiling report and see how many people give the thumbs up to suggestions that CRA do so.

6) Other countries offer free tax software - like the UK, Australia and the USA, though the latter program appears to be income-limited and offered jointly with private companies

7) Privacy and security vulnerability of web-based packages - Only the CRA has a right to an individual's tax data. Using a commercial web preparation service exposes that data to an extra step and an extra location where that data might be compromised. No doubt all the companies claim that their security procedures are 100% bullet-proof but one cannot be sure since CRA does not audit them and no one else does either in any systematic way. I can guarantee if it is not measured and tested it not as good as it can be.

In certain cases I discovered in doing my review of the various web packages, the license and corporate connections of the companies mean that a Canadian's tax data might end up being disclosed to US authorities. In its anti-terrorism efforts, the US government is not shy about going after financial data and US laws are far-reaching.

What a Free CRA Package Could Look Like:

• basic forms only fill in the boxes and add them up or calculate schedules and forms automatically from raw data
  
• could be fillable pdf or web package - to avoid desktop PC compatibility issues and support
• no optimization functions - if people want that let them use a private package, which I would see being allowed to continue being offered so that people have a choice to pay if they think it's better or easier than CRA's
  
• help consists of links to each line item in the CRA guides as a base but CRA should include links to its own suggestions for deductions and other assistance to help ensure people claim what they are due
  

Review and Ratings of Web Tax Software for NETFILE

Which is the best web-based income tax preparation software for Canadians? Below is my assessment based on four factors:

• Security & Privacy, i.e. how well is your data and privacy protected
  
• Flow, Readability, Layout aka user ease of use and friendliness
• Help, or how much and how good is it
  
• Responsiveness or speed of operation

I was going to rate the various packages on accuracy but did not include accuracy considerations in my ratings since I am not absolutely sure which package results are accurate and which not. As noted below, CRA is doing some testing. All packages have received the Canada Revenue Agency's NETFILE certification.

The winner by a good margin is UFile, which combines superb help, easy navigation, thoroughness and speedy operation with reasonable privacy and security. And I believe it provides the correct calculation of taxes, unlike some of the other packages. At $15.95 for one return, UFile isn't the cheapest but is good value for money.

Honourable mention goes to three packages tied in second place: H&R Block, TaxChopper (formerly named CuteTax) and WebTax4U. H&R Block is a clone of UFile re-branded in different colours but with additional license conditions that I consider unwelcome. HRB's license gives it permission to bombard a user with marketing offerings, not just from itself but also from its 3rd party partners. HRB also shares data with its US parent, possibly resulting in data ending up in US government hands.

TaxChopper(CuteTax) and WebTax4U are best on privacy and security and have a flow and readability I found generally easy to use, though they offer significantly less help. I have serious doubts about the accuracy of the tax calculation result of both programs. CuteTax says I have the lowest amount owing amongst all the packages, so maybe I should file through them and see how it flies at CRA ;-)

QuickTax Standard is a good package - you will be certain not to leave anything out - but it drove me nuts with its laborious one question at a time interview process combined with sluggish processing performance. It took me twice as long to complete my return with QT than any other package. QT is the package for the ultimate tax dummy, in the nice sense of the word, like the Dummy series books. QT also suffers from its constant pushing of other products in the corporate stable and the license allows for such marketing, including disclosure to 3rd parties. Opting out is possible but isn't a convenient process. The use of QT may also result in your data ending up in the USA and exposure to US laws.

The packages below that in my rankings all are characterized by much more limited help and not quite as slick or intuitive or well explained user interfaces. I found myself clicking and scrolling back and forth too much, even though I knew exactly what I needed to do ... after the third or fourth entry of the same data, it should go more smoothly, right? Perhaps if you have a very straightforward return and know how the tax forms work inside out, they may be ok. Only one of these lower rated packages produced the same bottom line tax owing as the #1 package UFile and market leader Quicktax, which I guess are most likely to pan out as correct in the CRA testing. That was FileTaxOnline.

Detailed Ratings and Comments
#1 - UFile

#2 (tied) - H & R Block

#2 (tied) - TaxChopper (CuteTax)

#2 (tied) - WebTax4U

#5 - QuickTax (Standard)

#6 - AceTax

#7 (tied) - MBO Tax



#7 (tied) eTaxCanada

#9 - EachTax

#10 - FileTaxOnline

#11 - Taxnic.ca

The Bottom Line Question of Accuracy
As I mentioned in my previous post Caution about Web Tax software, the different packages produced a wide range of taxes owing using the same input. I know I entered all the data because in every single package line 150 Total Income was identical. In every package but one - CuteTax which had a deduction at line 232 that none of the others did - they all had the same Net Income line 236 as well.

The problem lies in the tax credit parts of the return. Several packages calculated no line 479 credits - eTax Canada and EachTax. Others failed to give credits for Foreign Tax paid - WebTax4U and probably AceTax (I couldn't tell for sure since you don't see al the numbers till you pay and I'm too cheap to pay just to do a review).

CRA was concerned when they heard what I had found and is now testing the packages to try replicating this. So stay tuned, when they get back to me I'll pass along what CRA says.

Prices and Possible Free Return Preparation - Wikipedia has a great list of all the packages together at Canadian Tax Preparation Software for Personal Use.