Tax Taxonomy: Definition, Classification & Terminology 5
What is a Tax? 5
Classification of Taxes 6
Five Components 6
Tax Base 6
The Rates of (Income) Tax 7
Statutory Rates 7
Marginal Tax 7
Average Tax Rate 8
Effective Tax Rate 8
Calculation of Rates 8
Progressive Tax: 8
Proportional Tax: 8
Regressive Tax: 8
A Note on Calculation of Rates 8
Exemptions, Deductions, Credits 8
Exemptions 9
Deductions 9
Credits 9
Accounting Principles 9
Cash Accounting Method 10
Accrual Accounting Method 10
Tax Policies 10
Tax Equity 10
Vertical Equity 10
Horizontal Equity 10
Tax Neutrality 10
Tax Simplicity 10
Tax Avoidance vs. Tax Evasion 11
Tax Expenditures 11
Government Bodies Dealing with Taxation 12
Taxation from a Constitutional Standpoint 12
Direct vs. Indirect Taxation 13
Tax Collection Agreements (Within Canada) 13
Tax Adjudication System 14
Tax Statute Interpretation 14
Computing Income 14
The Source Concept of Income 15
Defining Other Sources 15
The Surrogatum Principle 16
Interpretation Bulletins 18
IT-365R2: Damages, Settlements and Similar Receipts 19
Concluding Points on the Source Concept of Income 19
Nexus 19
Who is Subject to Canadian Tax Law? 19
Residence 19
Introduction to Residence 19
Individuals 20
Deemed Residence 21
Part Year Residence 22
Ordinarily Resident 22
IT-221R3 22
Avoidance of Dual Tax Residence 23
Tax Treaties 23
Provincial Residence – Establishing Residency in One Province Over Another 23
Residence of Corporations and Trusts 24
Non-Residents: Source as a Basis of Canadian Liability 25
s. 212 – Non-resident withholding tax 25
Non-Residents Employed or Carrying on Business in Canada or Disposing of Taxable Canadian Property 26
1. Employed in Canada 26
2. Carrying on Business 26
Income from Office or Employment 27
Basic Definitions and Provisions 27
Employee vs. Independent Contractor/Consultant/Sole Proprietor 28
Interposing a Corporation in the Employment Relationship: Personal Services Businesses and Incorporated Employees 28
Introduction to Benefits, Reimbursements and Allowances 30
General Info 30
Capitalization of Employment Benefit 30
Amounts Included in Computing Income from Office or Employment 30
Benefits 30
What Constitutes a Benefit? 30
Policy Considerations re Taxation of Benefits: 31
IT-470R – Selected Provisions [Handout] 31
T4130 Employer’s Guide – Taxable Benefits and Allowances 32
Royal Commission on Taxation No. 16 → Tax Treatment of Benefits 32
Valuation of Employment Benefits 33
Allowances 34
Exceptions: Special and Remote Work Sites 34
Automobile and Travelling Allowances 35
Deductions in Computing Income from Employment 35
General Limitations on Deductions à 8(2) and 67/67.1 35
Travelling Expenses 36
Legal Expenses 37
Deduction for dues or other expenses in performing duties. 37
Home Office Expenses 38
Income from Business or Property 38
Business as a Source of Income: Organized Activity & Pursuit of Profit 38
Carrying on Business vs. Earning Income from Property & Realization of Capital Gains 39
Income from Business or Property? 39
Business 40
Organized Activity 40
For the Pursuit of Profit 41
Adventure or Concern in the Nature of Trade 41
IB IT-459 à a Concise Summary of the Law 41
MNR v. James A. Taylor [1956, Exch. Ct.] 43
Regal Heights Limited v. MNR [1960, SCC] 43
Irrigation Industries Limited v. MNR [1962, SCC] 43
Carrying on Business vs. ANT vs. Investing in Capital Property 44
Arcorp Investments [2000, FCTD] 44
Income from Property 44
General 44
Interest 45
Groulx 46
Rent & Royalties 47
Spooner 47
Wain-Town Gas and Oil Company Ltd. 47
Dividends 47
Deductions in Computing Income from Business and Property 48
Structure of the Act 48
The Income Earning Purpose Test 49
Daley v. MNR [1950, Exch. Ct] 49
Imperial Oil Limited v. MNR [1947, Exch. Ct] 49
The Royal Trust Co. v. MNR [1957, Exch. Ct.] 49
Personal or Living Expenses 50
Benton 50
Childcare Expenses 50
Symes v. the Queen 50
Travel Expenses 50
Dr. E. Ross Henry 51
Moving Expenses 51
Home Office Expenses 52
Deduction of Interest Expense 52
The Queen v. Bronfman Trust 53
Singleton v. The Queen [2002, SCC] 53
Ludco Enterprises Ltd. v. The Queen [2001, SCC] 54
Policy Reasons for Denying Deductions 54
MNR v. Eldridge [1964, Exch. Ct.] 55
Computation and Timing 55
Capital vs. current expenditures 55
Shabro Investments 56
Gold Bar 56
Timing of Recognition of Revenue and Expense 56
Amounts Receivable 56
J. Colford Contracting 57
Benaby Realties [1960] 57
West Kootenay Power and Light v. The Queen 58
Amounts Payable 58
J.L. Guay Ltée 58
Losses 58
Capital Gains 58
Introduction 58
Policy Evaluation of Preferential Taxation & Capital Gains 59
Definitions 60
Deemed Dispositions and Deemed Proceeds 62
On Ceasing to Be or Becoming a Resident of Canada 62
On Death 63
Gifts and Sales Below FMV to Non-Arm’s Length Persons 63
Non-Arm’s Length Persons 63
Gifts and Sales not at FMV 64
Spousal Transfers 65
Transfer of Inter Vivos Property to Spouse/CLP 65
Spousal Rollover on Death, and Election Not to Have it Apply 67
Personal Use Property (PUP) and Listed Personal Property (LPP) 68
Principal Residence Exemption 69
TP must show excess beyond ½ hectare is necessary to use & enjoyment. 71
Spouses and CLPs 71
Determining TP Gain from Disposition of PR: 72
Depreciable Property and Capital Cost Allowance 72
Ben’s Ltd. 73
Undepreciated Capital Cost (UCC) 73
Reg. 1100(2): The Half-Year Rule 74
Terminal Loss 74
Recapture 74
Taxation and Aboriginal Peoples 75
Benoit 75
s. 87(1)(b) 75
Williams 75
Recalma [1998, FCA] 76
Akiwenzie 2004 DTC 6007 (FCA) 76
Southwind [FCA] 77
Bastien Estate v. Canada [2011 SCC] 77
Dubé v. Canada [2011 SCC] 77
Indian Act s. 90.(1) 78
Kakfwi [FCA] 78
Income Tax Exemption For Bands & Corps Owned Thereby: 78
Otineka Development Corporation Limited 78
Direct Taxation by First Nations 78
1
Tax Taxonomy: Definition, Classification & Terminology
· Taxes reflect what the society (generally) thinks should be paid for collectively, and what independently.
o Canada: public health care and education
o Social mores play a significant role
What is a Tax?
· Could be defined as “a compulsory transfer of money from private individuals or organizations to the government not paid in exchange for some specific good or benefit.”
o Distinguished from other forms of gov’t charges in that taxes are compulsory
o Courts accept this idea of tax as basically a non-voluntary payment – an enforced contribution demanded under legislative authority, payable in money and collected for the purpose of raising revenue to be used for public or gov’t purposes and not as payment for goods or services rendered. [Shawinigan Water & Power]
· Other amounts paid that aren’t classified as taxes include:
o Fines/penalties imposed by gov’ts to deter/punish unacceptable behaviour (though a side effect is to raise revenue – can be seen as tax of bad behaviour)
§ Generally imposed relative to gravity of offence, rather than wealth/income of the offender
§ Though some countries use a sliding scale based on income (e.g. Finland charges for speeding based on a percentage of income)
o Royalty payments to compensate gov’t for right to extract natural resources from gov’t-owned land/resources
§ Gov’ts charge royalties on private-sector enterprise for the right to exploit things like oil, natural gas; stumpage on timber is essentially a royalty
§ Usually Crown imposes royalty based on amount taken – right to exploit in exchange for a share of what is produced
§ (IP royalties are entirely different from this)
o Prices charged by gov’t for some goods and services sold to individuals
§ Requited payments – pay a fee and get a specific (optional) benefit from gov’t in exchange
§ Fishing licenses, e.g. – pay for the right to fish.
§ Bus tickets for right to ride the bus, etc.
§ Prices for services provided by gov’t monopoly
§ Complications arise when price is higher than the actual cost – should ferry prices, for example, be higher than cost in order to offset other things that need to be subsidized?
· Some things are difficult to distinguish from taxes; some things are both a charge and a tax
o E.g. if the amount paid to gov’t for a particular good/service is not performing the economic function of a price (i.e. to bring supply/demand into balance), then some argue that it should be regarded as a tax.
o Can’t rule out classification as tax just because it could be avoided – there is an argument that all taxes are theoretically avoidable, either by not buying the associated good/service, or not engaging in the activity to which the tax attaches.
§ E.g. cigarettes, alcohol – gov’t taxes these goods and also regulates their purchase. So we can see taxes as an adjunct to regulation: we may use one or both in a given situation, based on policy reasons/social value.
o A price set above cost on a gov’t provided good/service may be considered a tax
§ E.g. lottery ticket – full price includes a premium above the cost of running the lottery à this surplus (monopoly profit) could be considered a tax
o It is a purely conceptual distinction – no way to empirically ascertain whether something is a tax, and the only impact is generally in public opinion.
Classification of Taxes
Five Components
· 1. Base upon which the tax is levied
· 2. Tax-filing unit that is responsible for paying the tax
· 3. Rate that is to be applied to the base in arriving at the tax owing
· 4. (unless the taxes are imposed on individual transactions) a period over which the base is measured and the taxes collected
o income tax – annual period (calendar year – some businesses have several actual years in a calendar year)
o GST/HST – annual tax, in the sense that there is a base exemption for small suppliers (>30,000/year), and after that must resubmit every year or every quarter, depending on sales)
o Property transfer tax – pay when register title to land (transactional basis)
· A set of administrative arrangements for collection
o Someone must collect, assess, review, enforce
§ CRA for GST/HST etc.
Tax Base
· The most common way to classify a tax is by reference to its base – the amount, transaction or property upon which the tax is levied.
· Three obvious tax bases:
o Income (amount that an individual earns)
§ Definition in the Act is complicated
· Mainly defined by sources, but could also be defined by uses à i.e. value of consumption plus increase in net wealth
§ Haig-Simons Theory suggests that everything a person gets should be taxed, b/c put in better pos’n to pay.
§ Difficulty of definition arises because there are all kinds of things that are not taxed.
o Consumption (amount than an individual spends)
§ Essentially an income tax that exempts the taxpayer’s savings.
§ Consumption taxes favour saving over consuming
§ GST is a value-added tax – tax rate is applied to the value added to goods/services at each stage in their production.
§ PSTs are single-stage taxes, collected by retailers when goods/services are sold to consumers
§ Excise taxes are consumption taxes that are only applied to certain goods/services
· E.g. alcohol, cigarettes, lotteries, some luxury goods
· Normative justification: consumption of these goods creates social costs, which are reflected in the price by the tax.
o Wealth (amount represented by an individual’s property)
§ Most countries tax wealth as it is transferred (i.e. either as a gift or upon death)
§ Wealth transfer taxes are variously referred to as estate or inheritance taxes (or, pejoratively, as death taxes)
§ Some justification arguments: need for more distribution of wealth, to increase progressivity of tax system, to act as backdrop to income tax system, to generally increase the efficiency of the tax system
· All contentious arguments.
§ Canada is one of three industrialized countries that do not have a general tax on wealth. We do, however, have substantial partial wealth taxes
· All provinces or local gov’ts impose a tax on real property
· We don’t tax on net worth (i.e. we don’t ask ppl to declare what they actually own)
· Tax incidence
o The person who is named as having to pay the tax is not always the one who actually pays – e.g. corporations don’t pay taxes, they just advance money to the gov’t on behalf of shareholders, employees and customers, and then collect it back
o So a corporation pays money for EI, for example, but if they didn’t have to pay that then the employees or shareholders would get that money.
o So the incidence of EI is on the shareholders/employees, or possibly even passed on to consumers in the higher price of goods from that corporation.
· Corporate and income tax are the biggest revenue-generators
o Personal income tax accounts for 51% of the federal budget
o Corporate income tax is 11% (but remember that they pass on all the taxes they pay in some way)
§ Businesses can carry losses forward and back some years.
The Rates of (Income) Tax
Statutory Rates
· The Act provides for a personal tax credit that offsets the tax liability on a taxpayer’s first $10,527 of income
o S. 118 expresses this as a credit for 15% of $10,527, which zeroes out since the tax rate is 15%.
o Brackets are set out each year based on indexing at an average inflation rate. For 2011, the inflation rate is 1.44% (so each bracket had 1.44% added on to them)
· Corporations
o Corporations pay tax on first dollar of income – no personal exemption as for individuals
o Two rates: small business rate and general rate
o BC & federal combined small business rate for a Canadian controlled private corporation doing active business w/ income up to $500,000 is 13.5% [11% federal + 2.5% BC]
o BC & federal combined rate for other corporations’ income: 26.5% [16.5% federal + 10% BC]
§ In 2012, the overall BC rate will be down to about 25%
· Federal tax schedule is set out in s. 117 of the Act
o 15% on taxable income up to $41,544
o 22% on additional taxable income up to $83,088