CTP13 Chapter 01

Canadian Tax Principles

Chapter 1

Introduction To Federal Taxation
In Canada

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Alternative Tax Bases
•

Federal Revenues
$263.8 Billion – 2013/14
– Personal Income (49.8%)
– Corporate Income (13.1%)
– GST (11.3%)
– EI Premiums (8.3%)

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Taxable Entities – Income Tax
•
•
•

Individuals
Corporations
Trusts

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Taxable Entities – GST
•
•
•
•

Individuals
Corporations
Trusts
Others
– Partnerships
– Unincorporated businesses
– Charities
– See Chapter 21

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Federal/Provincial System
•

Individual with Taxable Income of $20,000
– Federal Tax - @ 15%
– Provincial Tax (Assumed) - @ 7%
– Total

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$3,000
1,400
$4,400

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Federal/Provincial System
•

Public Corporation With Taxable Income of $100,000
– Federal Tax - @ 15%
– Provincial Tax (Assumed) - @ 11%
– Total

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$15,000
11,000
$26,600

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Economic Objectives
•

Resource Allocation

•

Distribution Effects

•

Stabilization Effects

•

Fiscal Federalism

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Taxation And Income Levels
•

Progressive Systems

•

Regressive Systems

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Taxation And Income Levels
– Evaluation
• Progressive Is Viewed As Fair (Ability To Pay)
• Regressive Or Flat
– Less Complex
– Doesn’t Kill Initiative
– Doesn’t Encourage Evasion
– Fairer If Income Fluctuates
– Fairer To One Income Families
– Less Pressure For Concessions
• Flat Tax Systems (Good For Simplicity)

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Tax Incidence
Tax Assessed On Corporation
Who Pays?

Shareholders?

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Customers?

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Tax Expenditures
•

Examples (2012 Estimates)
– Charitable Donations – $2.3 Billion
– RRSP Deductions - $7.6 Billion
– Capital Gains - $4.2 Billion
– Exempt Principal Residences – $4.5 Billion

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Tax Expenditures
•

Reasons For Use
– Less Costly To Administer
– Reduce Visibility
– Reduce Progressivity

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Qualitative Characteristics
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•
•
•
•
•
•
•
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Equity Or Fairness
Neutrality
Adequacy
Elasticity
Flexibility
Simplicity – Ease of compliance
Certainty
Balance between sectors
International competitiveness

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Canadian Tax Principles

Income Tax Act
•
•
•

Parts I Through XVII
Within Some Parts
– Divisions
Within Some Divisions
– Subdivisions

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Income Tax Act
•

Within Parts, Divisions, Or Subdivisions
– Sections
– Subsections
– Paragraphs
ITA 84 (1) (a)
– Subparagraphs
– Clauses
– Sub-Clauses

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(i) (I) (A)

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Part I
•
•

•
•

Division A - Liability For Tax (Chapter 1)
Division B - Net Income For Tax Purposes
– Subdivision a – Employment (Chapter 3)
– Subdivision b - Business And Property (Chapters 5, 6, and 7)
– Subdivision c - Taxable Capital Gains/Allowable Capital Losses
(Chapter 8)
– Subdivision d - Other Sources (Chapter 9)
– Subdivision e - Other Deductions (Chapter 9)
Division C - Taxable Income (Chapters 4 and 11)
Division E - Tax Payable (Chapters 4 and 11)

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Other Income Tax Legislation
•

Draft Legislation

•

Income Tax Regulations

•

International Tax Treaties

•

Income Tax Application Rules

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Other Sources Of Information
•
•
•

•

Electronic library resources
CRA web site
CRA Publications
– Interpretation Bulletins
– Income Tax Folios (Replacing Interpretation Bulletins)
– Information Circulars
– Income tax technical news, news releases and fact sheets
– Guides and pamphlets
– Advance rulings and technical interpretations
Court Decisions

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Basic Charging Provision
ITA 2(1)
Tax payable by persons resident in Canada
An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

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Basic Charging Provision
• Meaning Of Taxable Income
– Net Income
– Less Specified Deductions (e.g., loss carry overs)

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Basic Charging Provision
– Taxation Year
• Individuals – Calendar
• Corporations - Fiscal
• Trusts
– Inter Vivos - Calendar
– Testamentary - Fiscal

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Basic Charging Provision
– Meaning Of Person
• Individual
• Corporation
• Trust

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Basic Charging Provision
• Resident – See Chapter 20
• Note: U.S. taxes on citizenship rather than residency

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Taxation Of Non-Residents
• Employment income earned in Canada
• Income earned by carrying on a business in Canada
• Disposition Of Taxable Canadian Property
– Canadian real estate
– Capital property used by a Canadian business
– Shares of Canadian private companies
– Some partnership interests
– Detailed Consideration In Chapter 20

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Concept Of Income
• Economist’s View
– Not Very Specific
– Based On Wealth Or Assets
• Accountant’s View
– Recognize Revenue
– Match Expenses
– GAAP Based

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Concept Of Income
• CRA View
– Employment Income
– Business Income
– Property Income
– Net Taxable Capital Gains
– Other Inclusions And Deductions

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Net Income For Tax Purposes:
Components
•

Net Employment Income
– Division B, subdivision a
– Inclusions less deductions
– Only individuals
– Rarely negative

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Net Income For Tax Purposes:
Components
•

Business Income
– Division B, subdivision b
– Inclusions less deductions
– Individuals, corporations, and trusts

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Canadian Tax Principles

Net Income For Tax Purposes:
Components
•

Property income
– Division B, subdivision b
– Inclusions less deductions
– Individuals, corporations, and trusts

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Net Income For Tax Purposes:
Components
•

Capital Gains and Losses
– Division B, subdivision c
– Taxable Capital Gains (50%)
– Allowable Capital Losses (50%)
– Losses only deductible against gains
– Individuals, corporations, and trusts

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Net Income For Tax Purposes:
Components
•

Items That Don’t Fit Basic Categories
– Other sources of income
• Division B, subdivision d
(e.g., pension income or spousal support received)
– Other deductions from income
• Division B, subdivision e
(e.g., RRSP contributions or spousal support paid)

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Net Income For Tax Purposes
Calculation Rules - ITA Section 3
ITA 3(a) Non-Capital Positive
Sources Of Income

ITA 3(b) Excess Of Taxable Capital Gains
Over Allowable Capital Losses

ITA 3(c) Subtract Subdivision (e) Deductions
From The Sum Of ITA 3(a) And 3(b)

ITA 3(d) Subtract Non-Capital Losses

Net Income For Tax Purposes

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• Includes positive amounts of:
– Employment income
– Business income
– Property income
– Other inclusions

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• Includes
– Excess, if any, of Taxable Capital Gains over Allowable
Capital Losses
– If losses greater than gains in current year, this amount is nil – Stated alternatively, allowable losses can only be deducted to the extent of taxable gains.

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•

ITA 3(c) is equal to:
– the sum of ITA 3(a) plus ITA 3(b)
– less Division B, Subdivision e deductions
•
•
•
•

•

Moving expenses
Child care costs
RRSP contributions
Spousal support paid

ITA 3(c) will be positive or nil – It cannot be negative

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Canadian Tax Principles

•

ITA 3(d) equals ITA 3(c), less
– All current year losses other than Allowable Capital Losses
– If losses exceed the amount from ITA 3(c), this amount will be nil, it cannot be negative.

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Loss Carry Overs

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Non-Deductible
Current Year
Losses

Carry forward various periods to reduce future taxes 37

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Net Income To Taxable Income
•

Net Income For Tax Purposes Less:
– Loss carry overs
– Social assistance and worker’s compensation receipts
– Stock option deduction
– Home relocation deduction
– Lifetime capital gains deduction
– Northern residents deduction

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Net Income Example
Data for Marianne Nobel
Employment Income
Business Loss
Taxable Capital Gains
Allowable Capital Losses
Subdivision e Deductions

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$58,000
( 23,000)
20,000
( 12,000)
( 3,000)

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Example Solution
Net Income For Tax Purposes
ITA 3(a) – Employment Income
ITA 3(b) - TCG Less ACL
Subtotal
Subdivision e Deductions
ITA 3(c)
ITA 3(d) - Business Loss
Net Income For Tax Purposes

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$58,000
8,000
$66,000
( 3,000)
$63,000
( 23,000)
$40,000

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Tax Planning Principles
•

Introduction
– Too soon to deal with in detail
– Only a description of general principles

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Tax Planning Principles
• Tax avoidance or reduction
– private health care
– lifetime capital gains deduction
– discounts on employer’s products

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Canadian Tax Principles

Tax Planning Principles
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Tax Deferral
– Registered pension plans
– CCA on rental properties

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Tax Planning
• Income Splitting
– Based on progressive rates
– A given sum allocated to more individuals results in lower aggregate tax payable
– Generally involves family members

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Canadian Tax Principles

Tax Planning
• Income Splitting (2013 ignoring credits)
– A. No Splitting
– $540,216 Income

Taxes = $146,077

– B. Individual And Spouse
– $270,108 Each

Taxes = $135,492

– C. Individual, Spouse, And Two Children
– $135,054 Each
Taxes = $114,320
– Saves $31,757 At Federal Level

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