Byrd & Chens Canadian Tax Principles 2009/2010 Edition

Chapter 1 Introduction To Federal Taxation In Canada

Alternative Tax Bases

Federal Revenues $224.9 Billion 2009/10
Personal Income (49.0%) Corporate Income (11.7%) EI Premiums (7.5%) GST (11.5%)

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Taxable Entities
Individuals Corporations Trusts

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Federal/Provincial System
Individual with Taxable Income of $20,000
Federal Tax - @ 15% Provincial Tax (Assumed) - @ 7% Total $3,000 1,400 $4,400

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Federal/Provincial System
Public Corporation With Taxable Income of $100,000
Federal Tax - @ 21% Provincial Tax (Assumed) - @ 13% Total $21,000 13,000 $34,000

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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 Doesnt Kill Initiative Doesnt Encourage Evasion Fairer If Income Fluctuates Fairer To One Income Families

Flat Tax Systems (Good For Simplicity)

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Tax Incidence
Tax Assessed On Corporation Who Pays?

Shareholders?

Customers?

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Tax Expenditures
Examples (2010 Estimates)
Charitable Donations $3.0 Billion RRSP Deductions - $9.8 Billion Capital Gains - $4.0 Billion Exempt Principal Residences $5.7 Billion

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Tax Expenditures
Reasons For Use
Less Costly To Administer Reduce Visibility Reduce Progressivity

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Tax Policy Objectives

Equity Or Fairness Neutrality Adequacy Elasticity Flexibility

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Tax Policy Objectives

Simplicity Certainty Balance Between Sectors International Competitiveness

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Income Tax Act

Parts I Through XVII

Within Some Parts

Divisions

Within Some Divisions

Subdivisions
Tax Library

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Income Tax Act

Within Parts, Divisions, Or Subdivisions Sections
Subsections Paragraphs Subparagraphs Clauses Subclauses ITA 84 (1) (a) (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 2) Subdivision b - Business And Property (Chapters 4, 5, and 6) Subdivision c - Taxable Capital Gains/Allowable Capital Losses (Chapter 7) Subdivision d - Other Sources (Chapter 8) Subdivision e - Other Deductions (Chapter 8)

Division C - Taxable Income (Chapters 3 and 10) Division E - Tax Payable (Chapters 3 and 10)

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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 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

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Basic Charging Provision

Taxation Year
Individuals Corporations Trusts

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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

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Taxation Of Non-Residents
Disposition Of Taxable Canadian Property
Canadian real estate Capital property used by a Canadian business Shares of Canadian private companies Some partnership interests

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Concept Of Income
Economists View
Not Very Specific Based On Wealth Or Assets

Accountants 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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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

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Net Income For Tax Purposes: Components

Items That Dont 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 (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, 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

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

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 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

Carry back three years to claim refund

Non-Deductible Current Year Losses

Carry forward various periods to reduce future taxes

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Net Income To Taxable Income

Net Income For Tax Purposes Less:
Loss carry overs Social assistance and workers 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 $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 $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 employers products

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Tax Planning Principles

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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Tax Planning
Income Splitting (2009 ignoring credits)
A. No Splitting
$505,056 Income Taxes = $136,570

B. Individual And Spouse

$252,528 Each Taxes = $126,674

C. Individual, Spouse, And Two Children

$126,264 Each Taxes = $106,880

Saves $29,690 At Federal Level

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