CHAPTER 3:

Liability for Tax, Income

Determination, and
Administration

Prepared by
Nathalie Johnstone
University of Saskatchewan

Electronic Presentations in Microsoft PowerPoint

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reserved.
Liability for Tax and Income Determination
I. Sources of Canadian Tax Law
II. Liability for Tax
III. Determination of Income
IV. Administration of the Income Tax
System
V. Income Tax and the GST/HST

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I. Sources of Canadian Tax Law
There are three separate sources that govern
income tax law in Canada:
1. Statute law:
a. Federal Tax system The Income Tax Act.
b. Separate provincial income tax act
2. Common law
3. International tax conventions

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Common Law

Is an integral source of tax law.

CRA often views a transaction differently than the
taxpayer.
Disputes are settled in the Canadian court system.
Sufficient jurisprudence helps define and
interpret tax laws.
Jurisprudence is now the primary source of definitions and
interpretations.

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 International Tax Conventions
Reciprocal tax treaties with foreign countries in order
to:
a) rationalize and define the jurisdictional authority; and,
b) avoid the incidence of double taxation.
Tax conventions are designed to limit the right of one
jurisdiction to tax income.
Treaties takes precedence over Income Tax Act (the
Act)

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Sources of Canadian Tax Law
Federal tax law is the responsibility of the
Department of Finance.
Assessing and collecting tax is the responsibility
of Canada Revenue Agency (CRA).

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Interpretation Bulletins and Information
Circulars
In order to assess tax, CRA must interpret the law.
CRA publishes its interpretation of the tax laws in
two forms:

- Interpretation Bulletins
- Information Circulars

The interpretations published by CRA are not law

and can be disputed through the court system.

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II. Liability for Tax
ITA 2(1) - Federal and provincial income taxes are imposed
on:
1. Individuals
2. Corporations
3. Trusts
Individuals Corporations Trusts

Employment Employment
Business Income
Income Property Income Income
Business Income Business Income
Capital Gains
Property Income Property Income
Capital Gains Capital Gains
Other i.e. pension Other i.e. pension
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Corporations
An artificial person
Has same legal rights and responsibilities as an
individual.
The affairs of the corporation are separate from its
shareholders.
For tax purposes, corporate profits earned or losses
incurred belong to the corporation.

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Resident Individuals and Corporations
Residency is the primary factor in determining how
an entity is taxed in Canada.
Subject to tax if considered resident in Canada.
Residents subject to tax on worldwide income.
Non-resident entities are only taxable on income
earned in Canada.

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Individuals - Residency
The concept of residency is not defined in the Act.
must maintain a continuing state of relationship with
the country.
Residence for tax purposes is not:
the same as domicile, or
Citizenship.

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Individuals - Residency
Residence is based on the legal or economic link an
individual has with Canada.

question of fact whether one is resident or not, and

each case is judged on its own special circumstances.

Residency is determined on a year to year basis.

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Individuals - Residency
Factors to consider in determining residency:

Amount of time spent in Canada on a regular basis;

Motives for being present or absent;
Maintenance of a dwelling place in Canada
Origin and background of the individual;
General mode and routine of ones life; and
Existence of social and financial connections with
Canada.

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Individuals - Residency
ITA 250(1) - Sojourner
Individuals who do not exhibit a continuing state of
relationship, but
Spend more than 182 days in Canada are deemed
residents.
Once the criteria are met, one is considered a
resident throughout the entire year.

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Individuals - Residency
ITA 114 - Part-time Resident
Subject to tax in Canada on worldwide
income earned while resident.
Once residency ceases only subject to tax on
Canadian source income.

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Corporations
ITA 250(1) - Corporations incorporated in
Canada are residents of Canada
subject to tax on world income.
Foreign corporation may be Canadian resident if
central management and control is exercised from
within Canada.

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Dual Jurisdictions
May be subject to tax in a foreign jurisdiction if
they carry on business outside of Canada.
The treaty may limit Canadas right to tax.
May be subject to taxation in both jurisdictions; if
so the Act generally allows a foreign tax credit.

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Non-Resident Individuals and Corporations
Non-residents of Canada are taxable on specific
activities.
Taxed in Canada on net income arising while
non-resident if:
carries on business in Canada (through a Permanent
Establishment);
disposes of Taxable Canadian property; or,
is employed in Canada.

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Tax on Canadian Source Income
Withholding Tax
Tax on amounts originating in Canada but paid to a
non-resident.
ITA 212 - General rate is set at 25% by the Act.
Most tax treaties have reduced the rate to 5%,
10%, or 15% on most types of revenues.

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Tax on Canadian Source Income
Major types of payments subject to
withholding tax are:
Interest (only to non-arms length)
US/Canada treaty - amounts paid to arms length
no longer subject to withholding
Dividends
Rents
Royalties
Pension benefits
Certain management and administration fees

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III. Determination of Income
Each entity is required to pay tax on its taxable
income in each taxation year.
What is taxable income?
The Act does not specifically provide a single definition
of income.
The Act provides a framework to help determine:
Income from each category of income, and
Deduction from income in each category.

Taxable Income = Net Income Special reductions

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Types of Income
An entitys world income is derived from five basic
sources:
1. Employment income
2. Business income
3. Property income
4. Capital gains and losses
5. Other specific sources
Income is determined by applying basic principles
specific to the particular category.

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The Taxation Year
ITA 249.1 - Corporate taxpayers can choose the
taxation year.
Once chosen, it cannot change it without concurrence
is given by CRA.
A taxation year cannot exceed 53 weeks.
May be less than 12 months.
Exception is Professional Corps fiscal year must
coincide with calendar year.

ITA 249(1) Individual tax year = calendar year.

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Net Income for Tax Purposes
Next step:

Aggregating the five types of income eligible for

inclusion.

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Formula for Determining Net Income for Tax
Purposes
Segment A includes income net of deductions only positive net
income
Employment +

Business Income +

Property Income +

Other items +

Subtotal 1 (must be positive or Zero) + or 0

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Segment A
Each of the income items should be reported at their
net amount. Example:
Business Income = Gross Revenue Expenses

Each category of income may have more than one

source within it.
Includes only positive net income.
Any source resulting in net loss are deducted in
segment D.

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 Segment B
Segment B deals with capital property.

Increase Subtotal 1 by

Taxable Capital Gains +

Exceeds
Allowable Capital losses - + or 0

Subtotal 2 (must be positive or Zero)

Means that Capital losses in the year can offset capital+ gains.
or 0

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Segment C
Reduce Subtotal 2 by:

Other items Deductions -

Subtotal 3 + or 0

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Segment C
Other items of deduction are subtracted at
this point:
RRSP contributions
Moving expenses etc.
These items can be offset against any form of
income.
These deductions cannot exceed the total of
income included in segments A and B.

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Segment D
Reduce (but not exceed) subtotal 3 by

Employment losses -

Business losses -
Property losses -
Allowable business investment losses - - or 0
Total net income for tax purposes (must + or 0
be positive or zero)

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Segment D
Includes losses incurred from:
employment,
business,
property, and
allowable business investment losses.
These losses can offset all forms of income
previously included.
Losses can only reduce income for the year to
zero.

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Taxable Income
Net income for tax purposes is reduced by
limited number of specified reductions to
arrive at taxable income.
The items that reduce net income for tax
purposes to taxable income are different
for individuals and corporations.

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Reductions Applicable to Individuals
Unused losses of other years.

Employee stock option deductions.

Capital gain deduction on certain property.

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Reductions Applicable to Corporations
Charitable donations.

Unused losses of other years.

Dividends from Canadian corporations.

Dividends from foreign affiliates.

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IV. Administration of the Income Tax
System
Filing Returns:
Every taxpayer must file an income tax return.
Filing deadline is different for each of these entities.
ITA 150(1)(a) - Corporations due 6 months after taxation
year.
ITA 150(1)(d) - Individuals:
April 30 for most recent calendar year, or
June 15 if individual (or spouse) carries on a business.
ITA 150(1)(b) - Deceased Individuals due the later of:
6 months from date of death, or
Normal filing deadline (April 30 or June 15)
ITA 150(1)(d) Trusts 90 days after fiscal year-end.

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Assessments

After filing a return, CRA is required to assess

it within a reasonable time.
Means CRA will scrutinize the calculations

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Assessments

CRA has the right to reassess returns at a later

time, subject to limitations:
individuals, trusts and CCPCs - reassessed within three years of
original assessment.
For public corporations extended to four years.
Unless:
taxpayer has made any:
misrepresentation that is attributable to neglect,
carelessness, or wilful default, or
has committed any fraud in filing the return or supplying
information.

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Payment of Tax Individuals

ITA 153 (1) - Pay tax on certain income when

received:
Ex: Employers are required to withhold and remit tax to
CRA on employees behalf.
Other types of income, payments must be made
on an instalment basis.

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Payment of Tax Individuals
ITA 156.1(2) - Instalment are required whenever
federal tax owing exceeds $3,000 for both:
the current year and
either of the past two taxation years.
Instalments are due quarterly, beginning on
March 15.
The balance of taxes payable is due on April 30.

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Payment of Tax Corporations
Instalment payments are the primary method of
remitting corporate tax.
ITA 157(2.1) - A corporation must make 12
instalments per year.
Monthly instalments are equal to 1/12 of prior
years tax owing, unless:
Current year taxes estimated to be lower than prior year.

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Payment of Tax Corporations
ITA 157(1)(b)Balance owing is due two months
after taxation year-end.
Extended to three months for a CCPC whose:
taxable income does not exceed the $500,000 annual
business limit,
if during the year or previous year a small business
deduction was claimed, and
Have taxable capital employed in Canada of
$10,000,000 or less.

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Payment of Tax Interest
CRA charges interest on any tax that is due and
payable but not paid.
Interest is charged on late or deficient tax
instalments.
ITA 161(1) Interest rate prescribed by the
regulations and is adjusted quarterly.
Not deductible for tax purposes.

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Payroll Taxes
Employers are required to deduct CPP, EI and
income tax from remuneration
Must remit to CRA (depending on average monthly
remittances)
Less than $3,000 (and perfect compliance history): due 15 th
of month following each quarter
Less than $25,000: 15th of the following month
$25,000 100,000:
25th for remuneration paid in month before 16th
15th of the following month for remuneration paid on the 16th to
the end of the month
$100,000 or more: 3 workings days following pay day.

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Penalties and Offences
ITA 162(1) - Failure to file an annual return:
5% of the tax unpaid for the year, plus 1% for each
month after the due date, to a maximum of 12
months.
ITA 162(2) - Repeated failures to file an annual
return:
10% on a second or further late filing.
increased by 2% for each month after the due date,
for a maximum of 20 months.

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Penalties and Offences
ITA 163(1) - Failure to report an item of income:
10% of the unreported income if the failure to report
occurs more than once in a three-year period.
ITA 163(2) - Knowingly making a false statement
or omission:
50% of the tax owing on the excluded or understated
amount.

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Objection and Appeal
Taxpayers can appeal an assessment they do
not agree with:
The first step is to file a formal notice of objection.
Unsatisfactory results of this first appeal may be
appealed to the Tax Court of Canada.
Still not satisfied then appeal to:
the Federal Court of Canada, and
perhaps to the Supreme Court of Canada.

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IV. Income Tax and the GST/HST
GST is imposed at a rate of 5% on the value of most
goods or services sold.
Most business entities are entitled to a full rebate of
the tax on all goods and services purchased (input
tax credit or ITC).
Result is the tax applies primarily to ultimate
consumers.
Not required to be a GST registrant if annual
revenues are below $30,000.

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Zero-rated Goods and Services
Vendor does not collect the GST. Includes:
Prescription drugs
Basic groceries, etc.
Vendor still entitled to input tax credit for any
GST paid.

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Exempt Goods and Services
Vendors do not collect GST on these items.
Includes:
Used housing
Education services
Financial services, etc.
Vendor not entitled to the input tax credit for any
GST paid on costs associated with those items.

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