Introduction Terms, Definitions, Etc
Introduction – Terms, Definitions, Etc.
What Are Some Non-Tax Payments
v Fines / Penalties– are not taxes. They often relate to the gravity of the offence and are a punishment for breaking a law (note: Finland has an interesting system of fining you based on your ability to pay)
v Prices / Fees – you pay these in exchange for a privilege (fishing license, driver’s license, etc.).
v Total Ban - Taxing is only one way that a government can regulate a product (i.e. sin taxes on cigarettes). The government can also place a ban on certain products if they wish to deter them (i.e. marijuana).
v Royalties – moneys paid to government for the right to extract oil and gas / exploit natural resources.
What Are Taxes ?
v Taxes help to define what individuals should pay for and what the state should pay for.
v Tax – a tax is a non-voluntary payment that is a forced contribution that is often a proportional contribution enforced pursuant to legislative authority for collective revenue to be used for public or government purposes such as raising revenues and, to an extent, redistributing wealth (MNR).
(a) Types of Tax – taxes can include: Income, consumption (GST & PST value added taxes ), excise tax (alcohol, gasoline, etc…all create “social costs”) and wealth tax (estate or inheritance tax).
§ Canada is one of the few industrialized countries w/out a wealth tax
(b) Tax Expenditures – allowing for tax deductions to promote earning and hence more collectible taxes. Incentives placed in the tax act to convince tax payers to do what the government wants them to do. This can be compared to a direct subsidy. Examples include RRSPs, child care (allows both parents to earn an income), educational expenditures
What Are Some Types of Taxes ?
v Progressive Tax – the percentage of income paid in taxes increases as the taxpayer’s income (tax base) increases
v Regressive Tax – percentage of income paid in taxes decreases as income (tax base) increases
Ø Example - sales tax – stays constant, but is more burdensome to those with less income. A growing tax exemption also fits in here
v Proportional Tax – tax rate that remains the fixed regardless of the amount of the tax base (most sales taxes)
What Are The Attributes of Taxes ?
v Tax Base – the tax base is what we actually tax. The ITA uses income (although others can exist) to create a tax base upon which we tax. Income taxes into consideration deductions, credits and xemptions
(a) Tax Payer – income tax is attributable to the income recipient
(b) Tax Period – the tax period is the time frame over which the base is measured (in Canada it is the calendar year)
(c) Tax Rates – a tax rate is the percentage applied to the base to calculate the tax owing
(d) Tax Administration – involves the tax collecting system. In Canada, this is done by the Canada Revenue Agency
What Are the Types Of Tax Rates ?
v Statutory Tax Rates – statutorily established rate of tax. Federally, they are set out in the ITA.
Ø Nation-Wide Exemption - The basic Federal personal exemption that everyone has this year. This basically exempts from taxation the first $9,600 that you earn regardless of the amount of income that you earn (ITA Section 117)
§ Current Rates - Federal Income tax - Approx 16% up to 36k, 22% up to 71k, 26% up to 115k & 29% above 115k. Then you have to add all of the provincial taxes, etc. Top bracket is around 43%
v Marginal Tax Rate – the rate that applies to an additional dollar a taxpayer earns w/in / when you transcend tax brackets. Thus, each additional dollar is taxed at the highest rate applicable to a TP’s total income
v Average Tax Rate – the rate applicable to the taxpayer’s income as a whole (the fraction of the total income paid)
v Effective Tax Rate – the percentage in relation to all moneys (transfers, non-taxable earnings). Reveals other sources
How Can the Tax Base & Rate Be Reduced ?
(1) Exemptions – Exemptions are amounts that you receive that do not have a recognized origin for income tax law and that you do not have to declare b/c they are outside of the ITA (i.e. strike pay, lottery, gifts, social assistance)
(2) Deductions – unlike exemptions, deductions MUST be specifically claimed on your tax form. You must fit the deduction w/in the definition of the ITA (i.e. union dues, moving expenses, etc.)
Ø Theory – deductions apply to your marginal tax rate & are thus worth more to a person in a higher tax bracket
(3) Credit – credits are reductions in tax otherwise payable (keep separate from deductions) calculated after you have already applied your tax percentage to your income
What Are the Types Of Accounting Methods Used To Calculate Tax ?
(1) Generally Accepted Accounting Principles (GAAP) – the conventions, rules, and procedures that define approved accounting practices at a particular time (but these are not binding on the CRA)
(2) Cash method of Accounting – during the accounting period, you ONLY account for revenues actually received by the taxpayer AND expenses actually paid by the taxpayer. Income is usually accounted for this way.
Ø Examples:
§ 3rd Party - Payments received by a 3rd party on the TP’s behalf are considered received by tax payer
§ Types of Payment - Payments can be made in cash, kind, or by setting off an existing obligation.
§ Received Cheques - cheques are considered cash & are accounted for when “received” & NOT when cashed
§ Farms - expressly permits use of the cash method for computing income from a farming or fishing business (28)
(3) Accrual Method of Accounting – income is ONLY recognized in the year in which it was earned, regardless of when payment is actually received, & deductions are claimed in the year in which they occurred, regardless of when they are paid. This is used by most corporations & businesses
What Are The Policy Concerns Governing The Entire Income Tax Act ?
v Achieve Government Objectives - Taxes assist governments in achieving their broad objectives. They are evaluated by a number of criterion:
(1) Equity – taxes help to promote horizontal equity (people similarly situated should pay the same amount of taxes) and to promote vertical equity (unequals are to be treated differently). Equity tries to ensure that different incomes make the same sacrifice
§ Normative Theory – a normative theory is applied. A fair system is based upon a TP’s ability to pay
§ Individual As Tax Paying Unit - The individual is the taxpaying unit, not the family, etc. in Canada. Seemingly unfair. Canada, for the most part, implements the control system of taxation (and taxes people on income they control, regardless of whether they share it with others…i.e. a spouse)
· Example - think 100k family vs. 50/50k family & the extra 10k a year that the 100k family pays in taxes
(2) Neutrality – taxes should NOT distort the working of the market mechanism or personal decisions. This lies on the notion that the government should draft laws to minimize the excess burden of taxation.
§ Seemingly Flawed - People usually respond to tax changes with regard to (1) timing of transactions and (2) financial and accounting changes, (3) least responsive are individual decisions (where to work, how hard to work)
(3) Simplicity – simplicity can add to legitimacy. It is important to consider …
§ Comprehensibility – principles underlying tax rules should give rise to obvious / consistent logic.
§ Certainty – evident underlying purposes contribute to determinability, predictability and reasonable certainty
§ Compliance Convenience – compliance should be cheap. It is usually not, however.
§ Administrative Convenience – administrative costs of collecting and enforcing the law should be reasonable
§ Difficult to Avoid & Evade – system should offer minimal opportunity for non-compliance (goes to fairness).
(4) Tax Expenditure – provisions in the ITA that have nothing to do with equity, neutrality & simplicity. They are subsidies for persons acting in a manner desired by the government or b/c of personal circumstances (tax exemptions, credits, lower rates)
§ How It Works – the ITA is both a collecting statute and a spending statute. It is functionally equivalent to a direct government spending program. Furthermore, it allows the government to offset their subsidy against tax liability
Canada’s Tax System
What Sections of the Constitution Act Grant Taxation Powers ?
(1) Federal Legislators – have exclusive legislative authority over all matters not assigned exclusively to the provinces, including the raising of money by any mode or system of taxation (CA Section 91(3))
(2) Provincial Legislators – have exclusive authority over
Ø Direct Taxation – direct taxation w/in the province to raise revenues for provincial purposes (CA Section 92(2))
Ø Provincial Licenses – direct taxation w/in the province for shops, saloons (bars), taverns, auctioneers and other licenses to raise money for provincial, local or municipal purposes
§ Conflict – if there is conflict, lay out the issue and present all of the argument & counter-arguments for each party
What Are the NON-Exclusive Provincial Taxation Powers That May Be Shared w/the Federal Government ?
(1) Provincial:
Ø Natural Resources – the provincial legislatures can make taxes relating to NON-renewable natural resources and forestry resources in and primarily produced in that province (CA Section 92A(4)(a))
Ø Electrical Energy – the provincial legislatures can make taxes relating to electrical energy productions sites for provincial use or exportation BUT provincial law can not impose different levels of taxes on the energy they keep and the energy they export (CA Section 92A(4)(b))
(2) Federal:
Ø Public Revenue – tax bills appropriating any public revenue must originate in the HofC (CA Section 53)
Ø National Enactment – ITA provisions extend to provincial legislature as if they were re-enacted in each and every province (CA Section 90)
Ø National Admissibility of Provincial Goods – all articles of growth, produce or manufacture of one province is admissible into any other province (CA Section 121)
Ø Government Land Not Taxable – no land or property (assets) belonging to Canada or to an individual Province is taxable (CA Section 125)
What Tax Collection Agreements Are In Place B/W the Federal & Provincial Governments ?
v Bilateral Tax Collection Agreement - all provinces (except QB) entered a bilateral Tax Collection Agreement (TCA) with the Federal Government (1997)
v TCA for Corporations - Every province EXCEPT QB & AB have TCA’s for corporations (but follow Feds closely), which means B.C. has them
v December 31st Decides Provincial Residency - all provinces have agreed to determine residence of an individual on Dec. 31 of a tax year
v Current TCAs – the Canada Revenue Agency (Federal) is the sole collector, administrator & enforcer of income tax law on behalf of the “Agreeing Provinces” (this is an “agreement”). QB collects its own.
Ø Department of Finance – the Department of Finance defines income, credits and exemptions. Federal credits (tuition, spousal, personal, etc.) are usually matched by Provincial credits under the relevant provincial income / corporate tax Acts.
Ø Provinces Set Their Own Rates - Provinces set their own brackets & rates, personal exemption level, provide for provincial tax credits, & apply their own annual inflation indexation rate.
What Are The Federal Tax-Related Departments ?
(1) Department of Finance – (tax) they develop, evaluate & recommend (draft) tax policy & legislation in the areas of personal income tax, business income tax & sales & excise (charged on goods produced w/in the country) tax.
(2) Canada Revenue Agency (CRA) & Department of National Revenue – collects & interprets tax laws for the Federal governmentt & “most” provinces, international trade legislation, numerous social and economic benefit (redistribution) programs, the registration of charities in Canada.
(3) Department of Justice - provides legal advice, litigation services, and drafting services to the Canada Customs and Revenue Agency in respect of all fiscal matters including income tax, excise tax and GST, employment insurance, customs and border services and international trade.
How Does the Tax System Operate With Regard To Assessment & Judicial Review ?
Issue: if a TP disagrees with the Minister’s assessment, it is the TP who bears the burden of proving, on a factual basis, that the Minister has made a mistake.
v File a Tax Return – a TP sends their (self-assessed) tax return to the CRA
v CRA Assessment – the CRA then checks and/or corrects your return & sends you a notice of assessment. A TP may get a refund or owe some more taxes. Furthermore, the CRA can go back and do a re-assessment.
v Notice of Objection – an unhappy TP can send in a notice of objection w/in 90 days
v CRA Appeals Division - CRA Appeals division affirms or sends you a new assessment.
v TCA then FCA then SCC – the TP can further appeal to the Tax Court of Canada (has exclusive original jurisdiction in income tax appeals), then the Federal Court of Appeal and then the Supreme Court of Canada (TP must apply for leave).
v 2 Tax Court of Canada Procedures:
Ø General - similar to normal civil procedure under the BC Supreme Court Rules. Normal pre-trial discovery of documents & parties applies, & formal rules of evidence followed. Costs are awarded against the unsuccessful party. The TP must be represented by a lawyer.
Ø Informal – a TP can elect this, BUT must be under 12k in tax & penalties. There is no pre-trial discovery. The TP can represent himself or get a lawyer.
§ Limitation - There is no appeal from a judgment under the informal procedure, just judicial review re jurisdiction, fairness, error in law, error of fact made in perverse, capricious manner or without regard for the evidence, that TCC based decision on fraud or perjured evidence, otherwise acted contrary to law (and this procedure does NOT set a precedent)