Popular Conception

Forms of Taxation
• Income Tax
• Property Tax
• Consumption Tax
• Value Added Tax
• Tariffs or Customs Duties
• Transfer Tax
• User Tax
• Capital Tax
• Head Tax
Classifications of Taxation
Regressive

The HST is considered Regressive. As income rises,

an individual spends less of their income on goods
as a %. Therefore pays less HST.

Ex.
Mr. A earns $300,000 and incurs $10,000 in HST (3%
of income paid).

Mr. B earns $40,000 and incurs $10,000 in HST (25%

of income paid).
Classifications of Taxation
Progressive

The Income Tax is considered Progressive. As

income increases, tax rates rise.

Example:
Up to $43,000 24.1%
$43,001 to $87,000 34.1%
$87,001 to $135,000 38.4%
$135,000 to $245,000 43.3%
$245,000 and up 53%
Pitfalls from Progressive
Complexity – splitting income to reduce rates

Income Fluctuations – high/low year over year

Family Unit Problems – one earner vs. two

Economic Growth – Disincentive to earn more

Tax Concessions – Ability for high income to plan

Tax Evasion – Discourages income reporting

History of Income Tax
‘Temporary’ war tax established to fund World War
I in 1917.

Used for:
• Resource Allocation
• Distribution Effects
• Stabilization Effects
• Fiscal Federalism

Textbook quote on the ITA. “..running about 2,000

pages and which in our opinion, cannot be readily
understood by most individuals.”
Why Study Tax?
Large Corporate Planning – Offshoring?

Entrepreneurs – Local sources of

employment

Individuals – Optimizing resources

Goals of Planning
Tax avoidance or reduction

Tax deferral

Income Splitting
The Income Tax Act (ITA)
6(1) “There shall be included in computing the
income of a taxpayer for a taxation year as
income from an office or employment such of
the following amounts as are applicable:

(a) The value of board, lodging and other

benefits of any kind whatever received or
enjoyed by the taxpayer in the year in respect ,
in the course of, or by virtue of an office or
employment, except any benefit…
The Income Regulations (ITR)
ITA

Elections available to be late filed are as

prescribed.

ITR

For the purposes of subsection X(X) the

following are prescribed elections:
Treaties
Example: US-Canada Income Tax Convention

If a taxpayer is liable for tax in both the US and Canada, the treaty
will intervene so the taxpayer only pays tax in one country.

Uses: Avoiding Double Taxation OR Create Tax Avoidance

Bermuda does not tax capital gains. Gains that can be shifted into
Bermuda instead of Canada will reduce overall taxes owing.
Interpretation Bulletins (Folios)
IT-533-- Interest Deductibility and Related Issues

Disappearing source rules 19. In general terms, the disappearing source rules in
section 20.1 apply where borrowed money ceases to be used for the purpose of
earning income (i.e., the borrowed money can no longer be traced to any income
earning use). Generally, the borrowed money that is no longer linked to any
income earning use is nonetheless deemed to be used for the purpose of earning
income such that interest continues to be deductible for that portion of the
borrowed money. Several specific conditions in section 20.1 must be met for that
section to apply.

Example 6 Mr. O acquired property P with $1,000 of borrowed money, the entire
amount of which remains outstanding and the interest thereon is deductible. Mr.
O subsequently disposed of property P for its fair market value of $600 and used
the $600 to reduce the outstanding loan. If the conditions in section 20.1 apply,
the remaining $400 of borrowed money would be deemed to be used for the
purpose of earning income and the interest thereon would continue to be
deductible.
Others
Court Cases

Tax Court of Canada, Federal Court of Appeal, Supreme

Court of Canada

CRA website

[Link]/en/[Link]
Levels of Courts - Taxation
Tax cases are heard by
lower courts first.
Level 3 Supreme Court
The decision of a
lower court can be
“appealed” to a higher
court for a new
Level 2 Federal Court of answer.
Appeal
The higher court does
not have to agree to
the appeal.

Level 1 Tax Court of Canada Higher court decisions

have greater
precedence.
Persons
Include:
 Individuals (Natural
persons)
 Corporations (Limited,
Ltd, Incorporated, Inc.)
 Trusts

But not:
 Partnerships
Provincial and Federal Taxation
• Separate Tax Acts.

• Federal is more comprehensive, provinces tend to

mimic

• Combined Reporting (except QC)

Credits used in this course will be the Federal,

where possible I will use combined tax rates
assuming residence in NB.
Residency in Canada (Federal)
Corporations Individuals
 Incorporated in Canada  House
 Shareholders or directors  Spouse
reside in Canada  Children
 Employment
 Investments/bank accounts
 Assets and licenses
 Time and duration of visits
Residency in a Province
Corporations Individuals

 Wages paid in the province  Location of residency on

December 31st.
 Revenues earned in the
province
Basic Tax Concept
+ Earnings
- Expenditures to earn income (deductions)
-------------
Taxable Income
x Applicable Rate (provincial + federal)
-------------
Taxes Owing
(tax credits)
--------------
Net Taxes Owing
For illustration purposes only. Use more formal methods as taught later in course.
Net Income for Tax Purposes
 Net Employment Income
 Net Business Income
 Net Property Income
 Capital Gains and Losses
 Other Income
 Other Deductions
 Losses – Capital or Non-Capital
Who is in Charge of Tax?

Department of Canada Revenue Department of Justice

Finance (Government) Agency (CRA) (Courts)

Creates the laws Administer the laws Settle Disputes

Collect the taxes
Fiscal
 Wrong
 This information you gave me is very fiscally

 Right
 The match-making industry is subject to
special fiscal conditions.
Important Individual Dates
 Individual Fiscal Year Ends

 December 31 if alive
 Date of death if died in the year

 Individual Tax Return Due Dates

 April 30 if alive and no Business Income

 June 15 if alive with Business Income
 The later of regular due date or 6 months after death.
Important Individual Dates
 Individual Tax Payment Due Date

 April 30th if alive

 April 30th (!!) if alive with Business Income
 The later of April 30th or 6 months after death.**
Important Individual Dates
 Example:
 Sam has business income, and hasn’t passed away in 2024
 Tax Return due June 15, 2025
 Tax Payment due April 30, 2025

 Example:
 Sam has business income, and passes away Sept 15, 2024
 Tax Return due June 15, 2025 (later of 6 mo & reg due date)
 Tax Payment due April 30, 2025
Important Individual Dates
 Example:
 Sam has no business income, and hasn’t passed away in
2024
 Tax Return due April 30, 2025
 Tax Payment due April 30, 2025

 Example:
 Sam has no business income, and passes away Dec 25, 2024
 Tax Return due June 25, 2025 (later of 6 mo & reg due date)
 Tax Payment due June 25, 2025
Individuals – How Taxes Are Paid
 By Employers
 Payroll taxes are withheld by an employer before salary
or wages are paid to an employee.

 By Banks
 Lump sum payments such as: Retiring allowances, RRSP
withdrawals, and RESP withdrawals typically also have
withholding tax on them.
Individuals – How Taxes Are Paid
 Self-Employed
 No withholdings for self-employed individuals or
contractors. These individuals may end up owing tax on
their tax returns.

 Quarterly Instalments
 Where taxes owed on filing an individual tax return are
$3,000 or higher in the current year, and in one of the
two preceding years, instalments will be required in the
next fiscal year.
Individuals - How Taxes Are Paid
 Instalments - Example
 $3,000 taxes owing on tax return in 2024, $1,000 owing in
2023, and $4,000 owing in 2022. Instalments required
for 2024.

 Final Calculation on T1
 After taxes are withheld or instalments are made, the
personal tax return calculates final taxes owing. Any
shortfall is owed to CRA and any excess is refunded.
Individual Interest & Penalties
 Prescribed Amount – 5% currently

 + 2% = what CRA pays on individuals refunds owing (7% total)

 + 4% = what CRA charges on balances due (9% total)

 Compounded Daily

 Interest is charged on top of penalties. Late filing penalty for personal

tax returns is 5% of the balance owing plus 1% for each month to a
maximum of 12 months (17%).
 For second offenses or where negligence exists, late filing penalties can
be higher.
Reference
 T1 Personal Income Tax and Benefit Return

 T2 Corporate Income Tax Return

 T3 Trust Return (beneficiaries receive T3 Slips)

 T4 Statement of Remuneration Paid (employees receive T4 Slips)

 T5 Statement of Investment Income (investors receive T5 Slips)

 Other information forms exist. T3010 for charities, T1044 for Not-for-
Profits, T2057 for Reorganization Transactions, etc, but these five are
the basics.
Definition: Statute Barred
 Statute Barred is a term that means that a tax year is
no longer eligible for review by the CRA or for requests
by a taxpayer.

 In ordinary circumstances, 3 years after a tax return is

assessed it becomes statute barred and CRA cannot
open it for investigation unless fraud or negligence can
be proven.

 In the case of fraud or gross negligence, an additional 3

year period is granted.
Tax Evasion
 Definition
 Willful intent to mislead the government and
misrepresent taxable income.

 Example
 contractors paid in cash – CRA is clever at finding ways
to identify these individuals.

 Impact
 Ability to impose fines and jail time where evasion is
identified.
Tax Avoidance/Planning
 Definition:
 Does not involve breaking the law
 May circumvent the concept of fairness or the “spirit” of the
law.

 Where we come in
 To be effective, tax planning should achieve the most positive
result for taxpayers while agreeing with the intent of the law.

 General Anti-Avoidance Rule (GAAR)

 A ‘smell test’ provision to assist where the spirit of the act is
violated but not the wording of the act.