G.Jamieson TAX FINAL- FALL 2015-O’BRIEN

BASIC CONCEPTS AND TERMS

What is a tax?

/
  • Compulsory and unrequited payment to government
  • Has to be imposed by law (no common law of taxation- no obligation unless it is attached to a provision)
  • Not Fines and penalties:
  • meant as punishment for acting contrary to law- meant to deter, even if they do raise revenue
  • fine increases with gravity of offence
  • Not Royalties: Crown owns the natural resources (each get a cut of the resources)
  • Not Prices/User Fees: Do get something back, right to do something, service provided
  • Pigovian taxes (sin taxes): tax things we want people to use less of, but government benefits from people who still buy the product
Direct: one which is demanded from the very person who it is intended or desired should pay it.
Indirect: those which are demanded from one person in the expectation that he shall indemnify himself at the expense of another.
  • ex. Import duties- will pay up front but pass it on immediately (increases the price) – about the choice of whether to pass it on?
Note: these definitions have been cited by the SCC (JS Mill)

Base

/ the amount, transaction, or property upon which the tax is levied. Three bases for broad based tax, where amount is a percentage of base:
  1. Income
  2. In Canada: just wages and salaries
  3. Amount spent (consumption)
  4. Essentially equivalent to an income tax that exempts the value of the tax payer’s savings from tax
  5. GST: multi-stage sales tax (applies at all stages of production)
  6. Excise taxes: only imposed on selected goods and services (normative justification is that these goods have social costs)
  7. Amount represented by an individual’s property (wealth)

Rates

(handout 1) / Tax Rate: The amount/percentage applied to the tax base (amount/transaction/property on which the tax is levied)
Statutory Rate: set out at s.117
Marginal Rate: the rate that applies to an additional dollar a T earns within each income bracket (The highest bracket that the income falls into). Usually used to assess the value of a deduction and whether to take advantage of it.
Average Rate: the rate applicable to the income as a whole (fraction of total income paid in taxes)
Effective Rate: similar to average, but uses a broader measure of income than just taxable income

Types

/ Progressive: Imposes a higher tax burden onthose with more ability to pay, eg increasing marginal tax rates
as income increases
Flat: Everyone pays the same proportion of their income, regardless of their ability to pay, eg Alberta's 10% income tax
Regressive: Imposes a higher tax burden on, those with less ability to pay, eg consumption taxes, (GST/PST/HST), the carbon tax

Exemptions – 81(1)

/ Means: An item exempted from tax is not included in the calculation of income, even though it increases an individual's ability to pay,statutorily exempted income does not have be reported (Lottery Winnings; Gifts; Strike Pay) as per s.81(1)
  • Are very specific
  • Examples:
  • gifts (may have implications from the donor)
  • lottery winnings
  • random acquisition
  • strike pay (controversial)
  • inheritance is exempt

Deductions

/ Means: They reduce the tax base against which the tax rate is applied. Their value varies according to the marginal tax rate of the individual; they benefit higher income individuals more than low income individuals.
Taxable income = total income – deductions
Examples: (RRSP/RESP; Moving Expenses; Childcare Expenses; Union Dues)
Notes: Worth more to higher-income earners (as opposed to credits)

Credits

/ Means: reductions in tax otherwise payable, apply AFTER income is calculated (gross income+ deducted deductions+ add rate of tax) = deducted from tax payable are the same value for all individuals
Examples: each tax payer will get the same number of dollars from each credit (independent from income)
Notes:
  • each tax payer will get the same number of dollars from each credit (independent from income – see handout)
  • there are a limited amount of credits you can claim
  • now CPP is a credit

Terms

/ GAAP and IFRS: bind the accounting profession, lead to conservative numbers, include ALL liabilities and potential liabilities
Cash Method:amounts received and amounts paid: individuals, and farmers and fishers (don’t report an amount as income in calculating profits until you receive it, can’t claim a deduction until amount is paid)
Accrual Method: more expansive, also includes income that is just receivable (entitled to receive, done everything that is required for payment) ex. Delivered the goods and gave a receipt to pay within 30 days

Division of Powers

(handout 2) / Federal  91(3): any mode of taxation is permitted for the federal government
Provincial  92(2):direct taxation as revenue for provincial purposes. There are still cases where a provincial tax is challenged as being indirect
  • 92(9): Licences (fees have to be within a licencing scheme, fees can also raise additional revenue within reason)

Federalism

/ Tax Collection Agreements: between the federal government and each province EXCEPT quebec for the taxation of individual.
  • Feds define tax base in ITA, then provincial ITAs adopt that base for individuals
  • ALL provinces agree that provincial residence is determined by the place of residence on December 31
  • POLICY: otherwise the system is fragmented
  • Quebec: has its own collection agency
  • AB and QC: separate tax systems for corporate tax, but they track the federal system closely
Features
  • Feds agree to be sole collector administrator and enforcer of income tax on behalf of agreeing provinces
  • Feds define income, exemptions and deductions under the ITA
  • Federal credits (personal, spousal, tuition ect) are usually matched by provincial credits
  • Provinces provide for provincial tax credits
  • Provinces apply an annual inflation index that may differ from the federal one

Process

/
  • report income, claim deductions, file a tax return, maybe receive a tax refund
  • receive a notice of assessment
  • can appeal a tax assessment, may be issued a new assessment or a reassessment
  • can object by sending a notice of objection within 90 days (will hem your arguments from her onwards).
  • CRA appeals division either confirms or varies assessment
  • Can appeal to TCC  FCA

Income Splitting

/ What is it? Transfer of income from one person to another who is taxed on the income at a lower marginal tax rate than that applicable to the transferor (shifting the nexus between the taxpayer and the income).
In Canada:
  • Pensioner can split up to half of income with spouse (s.60.03)
  • RRSP: one spouse contributes to other’s RRSP and can take a deduction
  • S.120.4: imposes tax at the highest marginal rate on certain income for individuals under 18. Generally applies to dividends and shareholder benefits, income from a partnership trust (page 114 for details)

Interpretation

Of Tax Statutes

/ Placer Dome : Driedger Method
  • SCC abandoned strict interpretation, adopts modern approach – tax instruments are social, economic instruments not punishment
  • Tax statutes are detailed and specific, therefore the textual interpretation usually gives an unambiguous result,
  • Burden of proof almost always on TP, assessment valid and binding unless TP displaces (BoP)
  • TP can demolish Minister’s assumptions or factual findings on which M made decision
  • Burden in s.152(8): assessment deemed valid and binding
  • “Residual presumption” in favour of taxpayer if ambiguity, accepted by SCC but used rarely
  • Fries - “in the nature of income from a source” not proper interpretation  strike pay is not income from a source

If Ambiguous, go to Trustco
  • go on to a textual and purposive interpretation
  • If STILL ambiguous: goes to the taxpayer’s interpretation (rare- last ditch argument, court must be on your side)  “the residual presumption”

ITA Provisions on Burden of Proof on TP
s. 152(7):assessment not dependent on return or information
  • M is not bound by a return or info supplied by TP, may assess tax payable notwithstanding info provided or if no return is filed
s. 152(8): assessment deemed valid and binding
  • SUBJECT to being varied, vacated, objected, appealed, is deemed to be valid and binding

Interpretation Bulletins

/ The CRA’s guide for how the CRA intends to assess certain funds. However, not binding on the department or the taxpayer, they are just helpful as the ITA is not always clear
NOTE: Occasionally see the court rule against bulletin for no basis in law, but some courts accepting bulletin (as reliance principle). Bulletins now being replaced by “folios”—interpretation of the Act for answers to common questions.

Expenditures

Collecting Statute / Tax provisions: establish and define the elements of the system, rules allow the tax system to raise revenue and redistribute income. They are evaluated by the policy criteria.
Tax Expenditures (TE)  implicit subsidies /
  • Include: Deductions, exemptions or credits, lower rates
  • Evaluation of the effectiveness of expenditures, usually by budgetary criteria
  • What govt objective is being served by the expenditure?
  • Are benefits distributed fairly? Is a program efficient? Does govt have control over the spending and politically accountable for it? Can the money be better spent elsewhere?
  • Pros: encourages private decision making, encourages people to file tax returns, uses established admin framework, less stigma than direct gov handouts
  • Cons: open ended, if delivered as deductions rather than credits it can have a perverse effect on low income earners, not available to non-tax paying people, can be subject to abuse, increase complexity of the system and its administration, increased perceived unfairness because not everyone knows about them, gov doesn’t report them in the budget – less accountability, less transparent than direct subsidies
  • (see page 75 for disadvantages)

Evaluating Expenditures /
  1. Identify the government objective that the TE serves
  • Market failure?
  • Furthering social justice/gender equality?
  1. Apply budgetary criteria used with government spending programs
  • benefits distributed fairly?
  • Target efficient (go to the intended person, avoid unintended effects)?
  • Reasonable admin costs (expenditures are calculated automatically, whereas direct subsidy requires an application ect and can be more expensive)?
  • Does the government have control over the spending program (can get out of control with subsidy, because you don’t know how many people will take it up)
  1. Identify alternative means to achieve objective(like a direct spending program, regulation)

EQUITY AND POLICY

Equity (fairness)

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  • Vertical Equity: Those who have more should pay more.
  • Horizontal Equity: those who have the same accretion to income (regardless of type), should be subject to same levels of taxation (ex. taxation of employee fringe benefits)
  • Tax is premised on the notion of equity/fairness – most important factor
Some notes:
  • Regressive taxes represent a higher proportion of a low income person’s disposable income (lower proportion for rich)
  • The ITA attempts to address this regressive aspect by providing refundable credits to those people who file their tax returns (Note the difference between refundable and non-refundable credits)
  • System provides exemptions for other necessities
  • Overall the Canadian tax burden is proportional
  • People who pay more pass their taxes on (corporations pass to employees as lower wages, consumers as higher prices, shareholders as reduced dividends ect)

Neutrality

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  • tax should not unduly affect personal economic decisions
  • Difficult to obtain because tax system is built on encouraging/discouraging certain actions (honoured in the breach)  not much neutrality left (many taxes are changing our behaviour and are intended to do so)
  • Rationale: If behaviour is influenced by the tax system, will effect allocation of resources which may lead to less efficient allocation (market = best allocation of resources). Assumes that people are rational actors who make decisions based on cost/benefit calculations
  • Neutrality is often compromised by the government in aid of other objectives
  • Certain tax policies are designed to necessarily violate neutrality; they exist to affect behaviour
  • Compromises are made for deliberate policies of, for example, promoting savings for retirement (thus RRSP and pension deductions) or other deductions, credits or reduced tax rates to promote certain activities or induce certain behaviour.

Simplicity/Efficiency

/ comprehensible: rational (someone should be able to follow the logic), understandable to the people to whom it applies, the principles should be apparent and consistently applied.
certainty/Predictability: someone should be able to determine in advance the tax consequences of an event (should be able to plan affairs). It should not be a vague test or at the collector’s discretion
  • tax amendments: have effect from the date of announcement, not when it is enacted
Compliance convenience: Main points: Taxes should be difficult to avoid or evade, if there are incentives/opportunities for non-compliance, it becomes unfair (people who are in compliance will end up paying more), Should apply across the board- and appears fair to all
  • perhaps not achieved in income tax.
Administrative Convenience
  • If tax system is difficult and expensive to administer, then cost of collecting the tax is a larger portion of the tax collected (have to have the right ratio). In Canada: efficient system (2% of the tax collected goes to administration)
Difficult to Evade/Avoid:
  • Avoidance: minimizing tax in a legal but aggressive way (general anti-avoidance rule = if avoidance is unduly aggressive then the CRA can put you into a different rule) – while not illegal, won’t be allowed to stand
  • Means you are reporting honestly, and the CRA can just disagree
  • Not illegal, can be distasteful
  • GARR: general anti-avoidance rules, if you violate GARR you pay a fee, amount owing, and interest
  • Evasion: is fraud, and a crime
  • Provincial court offence, can result in fines or imprisonment
  • Means: haven’t reported income, hiding it, claiming deductions with no foundation, sham
  • There is an obligation to ensure your tax filings are correct

Global Competitiveness

/ • The effective rates that businesses pay in Canada should be competitive with other jurisdictions; there should not be a big incentive to move money out of the country
• Also consider how certain and complex the system is; it seems you can have higher rates if the system is clear and fair

Arms length and Non Arms Length

Step One: Determine Who Is Related

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Persons
251(2): Related persons areIndividuals connected by blood, marriage, CL partnership or adoption.
Does NOT include Aunt, Uncle, Niece, Nephew, Cousin
251(6)(b) and (b.1): Spouses and CL partners are related to each other, and to relations of their spouse (in-laws are related)
248 (1):Definition of common-law partner:
(a) live together for one year; OR
(b) if you have a child together and you live together, regardless of length.
Relationship ends only if you live separate and apart for 90 days due to breakdown of relationship /
Corporations
251(2)(b)(i):Corporation is related to a person who holds voting control
i.e. over 50%-->can elect board of directors
251(2)(b)(ii):Corporation is related to a person who is a member of a related group that controls the corporation
A related group means a group of persons, each member of which is related to each other member.
251(2)(b)(iii):Corporation is related to any person related to either the person who controls it, or any member of the related group that controls it

Step 2: Determine If Arm’s Length

/ 251(1)(a):Related persons are deemed not to deal at arm’s length, even if their interests conflict
251(1)(c): Q of fact whether unrelated persons are dealing at arm’s length at a particular time
Consider:
-Do the parties have a “common-mind” which directs or controls the bargaining for both sides
-Do the parties act in concert w/o separate interests?
-Business partners may or may not be at arm’s length
-EE’s normally arm’s length from employers unless related
NB: business partners are generally at arm’s length, although depending on the circumstances they may not be. Employees are also normally at arm’s length from their employer, unless they control or are members of the family, the controls the corporate employer.

RESIDENCY

General Notes
  • WHO is subject to Canadian tax?
  • Includes deemed and ordinarily resident
  • ITA does not define the residence of an individual  go to caselaw  a question of fact
  • Residency for tax purposes is established by facts and circumstances unless deemed to be a resident

Are we dealing with a resident?

s. 2(1): Tax Payable by persons resident in Canada / 2. (1) 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.
  • Note that s.114 Part year resident rules reduce impact

s. 2(3): Tax payable by non-residents / 2(3) where a person who is not taxable under s (1) for a taxation year
(a) was employed in Canada
(b) carried on a business in Canada
(c) disposed of a taxable Canadian property

1. Is the TP Ordinarily resident under 250(3)?

/ 250(3) In this Act, a reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada.
Thomson[1]
  • Resident under 2(1): a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences or at the place in question.
  • Refers to residence in the course of the customary mode of life of the person concerned, and is contrasted with special or occasional or casual residence (Thomson)
  • Should be contrasted with “stay” or “visit” (Thomson)
  • There is a presumption that everyone is a resident of somewhere. Ordinary residence refers to the place where a person normally lives (Thomson)
  • A person can still be considered an ordinary resident of Canada, even if the time spent in Canada is a minority portion of the year (Thomson)
  • (Although tp only lived in Canada about 150 days of the year, he settled in when he moved to Canada and had community and family ties in the area)
  • Intention is not a determinative factor when it does not reflect the actual circumstances (Lee[2], Thomson)
  • You can be resident in multiple places (Thomson)
  • Risk of juridical double-taxation
Lee
  • Question of fact. There is not one determinative factor that definitively determines when a person becomes a resident of Canada[3].

Folio S5-F1-C1
(page 131)
(SRT = significant residential ties)
Evidence of Intention
  • Evidence of intention to permanently sever residential ties with Canada (Shih)[4]
  • When there are no other residential ties, an intention to return to Canada is not enough to establish ordinary residence
  • Length of stay abroad is one factor but there is no particular length of stay which necessarily means the individual becomes a non-resident
  • Look at if the individual's return to Canada was foreseen at time of departure; this may make the remaining residential ties more significant
  • eg if an employment K exists if and when the individual returns to Canada
Steps Taken to Comply with ITA
  • Look at if the individual complied with the ITA provisions around individuals ceasing to be resident in Canada and individuals who are not resident in Canada
  • s.128.1(4): Deemed disposition and reacquisition (see pg 28 of outline)
  • s.212(1) and (2): Withholding tax on payments to non-residents (see pg 35 of outline)
  • Whether the individual informed any Canadian residents making payments to the individual that he/she intended to become a non-resident upon leaving so that certain payments would be subject to a withholding tax under Part XIII  DEPARTURE TAX PAID?
Regularity and Length of Visits
  • Occasional return visits will not affect an individual's status as a non-resident if he/she has severed all ties
  • But if visits are more than occasional and some secondary residential ties exist this factor will add weight to those ties (especially if visits are regular)
Residential Ties Elsewhere?
  • If an individual establishes no SRT's outside Canada it makes the remaining residential ties in Canada more significant
  • An individual can be resident in multiple countries so having SRT's abroad does not necessarily mean no longer resident in Canada

Dwelling place /
  • whether owned or leased, will usually be a SRT
  • look to relationship between TP and person leasing the dwelling place
  • Salt: house leased to 3P, NOT immediately available
  • Shih: owned a house where wife and sons lived but not a resident
  • if someone has no existing ties, and purchases a dwelling place and leases to family member (not spouse) for lower than FMV  usually will not be a SRT

Spouse or Dependents /
  • see if partner stayed behind  indicates SRT
  • if individual was already living apart from spouse prior to leaving  likely not an SRT
  • Schujahn: wife and child remained behind only temporarily to sell home

Secondary Residential Ties /
  • personal property
  • social ties (Schujahn, gave up social ties and re-established US ones)
  • economic ties (business ties, employer, retirement savings plan)
  • work permits
  • medical coverage
  • driver’s licence
  • vehicle registration
  • seasonal dwelling place
  • passport
  • memberships in unions, professional organizations

Other Residency Ties /
  • mailing address
  • business cards with address
  • telephone listings
  • local newspaper subscriptions

Are they a deemed resident? (Individuals and Corporations)

s. 250(1): Person deemed to be residence / 250(1) For the purposes of this Act, a person shall, subject to subsection 250(2), be deemed to have been resident in Canada throughout a taxation year if the person
(a) sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more;
(b) was, at any time in the year, a member of the Canadian Forces;
(c) was, at any time in the year,
(i) an ambassador, minister, high commissioner, officer or servant of Canada, or
(ii) an agent-general, officer or servant of a province,
and was resident in Canada immediately prior to appointment or employment by Canada or the province or received representation allowances in respect of the year;  MEANS WHEN INDIVIDUAL HIRED, NOT STARTED WORK
Notes:
  • Easiest way to get to residency
  • Someone could be deemed resident under this section but not be resident in a particular province for provincial tax purposes
  • SOJOURNERS  s.114: will be taxed on worldwide income for ENTIRE year due to s.2(1)
  • R&L Foods

Sojourning