Chapter 1

Introduction

1

Background and Introduction

• History and Legislation – Canadian Tax System– Brief history of the Income Tax Act

– Constitutional basis for income taxation

2

Introduction to Income Tax Legislation

3

Tax Principles and Concepts

Classification of Taxes:• Basis of the tax

– Head tax, income tax, wealth tax, commodity tax, user tax, tariff tax, transfer tax, or business transfer tax

• Incidence of the tax• Nature of the tax

4

Tax Principles and Concepts

Desirable characteristics of an income tax:• Horizontal equity

• Vertical equity

• Neutrality

• Flexibility

• Certainty

• Simplicity and compliance

• Feasibility and efficiency

5

Tax Principles and Concepts

Tax reform guidelines:• Fairness

• Simplicity and compliance

• Balance

• Stability

• International competitiveness

• Economic growth

• Canadian priorities

• Transitional implementation

• Consultation

6

Structure of the Income Tax Act and Interpretation

7

The Income Tax Act

How do I reference the Act?

Section – subsection – paragraph – subparagraph – clause

6(1)(b)(i)(A)

8

Structure of the Income Tax Act

Parts I & I.2 – Income tax and tax on OAS benefits

Parts II to XII.6 – Special transaction tax

Parts XIII to XIV – Non-residents

Parts XV to XVII – Administration and interpretation

9

Related References

• Historical footnotes• Related matters• Draft legislation: Pending amendments• Income tax application rules• International tax conventions or treaties• Income tax regulations

10

Other Interpretive Sources• Judicial decisions (common law)• Forms (www.cra.gc.ca)• Canadian Revenue Agency (CRA) publications

• Information Circulars• Interpretation Bulletins• Advanced Tax Rulings• Technical Interpretations • Information Booklets• Income Tax Technical News• Income Tax Folios

• Technical notes and explanations• GAAP

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Interpretation of Tax Legislation

Considerations:

• Precision

• Plain and obvious meaning

• Intention of Parliament

• Remission orders

• Contextual Approach

• Form versus substance

• Exceptions override general

• Specific words followed by general

• Precedents

• Interpretation Act

12

Areas of Practice and Role of the Professional Accountant

• Why study taxation?• Four Areas of Practice:

– Compliance

– Legal interpretation

– Tax appeals and tax litigation

– Tax planning

• Role of professional accountant in tax matters

13

Introduction to Income Tax and Taxable Income

• Approaches to defining income (not defined in the Act):– Income versus capital

– The economist’s perspective

– Role of GAAP

– Doctrine of constructive receipt

14

15

Computation of Income

Sourcing or tracing of income• Income/loss is computed from each source

independently– i.e., Business expenses cannot be deducted from

employment income

16

Computation of Income

• Sources of income & deductions under Div. B– Subdivision a – Employment Income

– Subdivision b – Business or Property Income

– Subdivision c – Taxable Capital Gains and Allowable Capital Losses

– Subdivision d – Other Income

17

Determination of Income, Taxable Income and Federal Income Tax for

Individuals

18

TaxableIncome =

Division BIncome

(Income forTax Purposes)

G Division CDeductions

• Taxable income is the base for the application of tax rates to determine income tax.

Administration and Enforcement of the Act

• Onus of Proof – Taxpayer

• Appeals

• Administration and Enforcement – CRA

• Tax Evasion, Avoidance, and Planning

19

Tax Planning, Tax Avoidance, and Tax Evasion

Tax Planning Tax Avoidance Tax Evasion

Taxpayer Goal Reduce taxes payable within object and spirit of law

Deliberate planning of events and transactions to avoid taxes

Avoid taxes by failing to disclose complete and accurate information

Legality Legal Not illegal; Transactions can be ignored if successfully challenged

Illegal; Criminal offence; Civil wrongdoing

Penalty None Arrears and interest plus taxes owing and possible penalties owing

Fine, possible imprisonment, arrears, interest plus taxes, and civil penalties

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GST/HST• Tax on the consumption of goods and services in

Canada• GST – currently 5%• Provinces with HST:

– Nova Scotia

– New Brunswick

– Newfoundland

– Ontario

– British Columbia (exited on April 1, 2013)

– Prince Edward Island (adopted effective April 1, 2013)21

Supplies

• Provision of a supply includes:– Sales or rentals of goods;– Rendering of services;– Leases, sales, or other transfers of real property;– Licensing of copyrights or patents; and– Barter and exchange transactions and gifts.

22

Types of Supplies

• Taxable supplies– Subject to GST/HST and supplier entitled to input tax

credit

• Zero-rated supplies– Subject to tax at 0% and supplier may claim a full input

tax credit on purchases used to provide these supplies

• Exempt supplies– Not subject to GST/HST and supplier not entitled to an

input tax credit on purchases used to provide these supplies

23

Point of Sale Rebates

• Intended to provide consumers with target sales tax relief on purchases of designated items

24

Input Tax Credits

• Refundable input tax credits available on business purchases

• To qualify for credit, goods and services must have been purchased for commercial activity

• Refund if input tax credits > tax payable

25

Legislation and Interpretive Sources

• GST/HST legislation in Excise Tax Act (ETA)– Divided into 12 parts and 12 schedules

• GST/HST Regulations also part of law• Interpretive Sources:

– GST/HST Memoranda

– Technical Information Bulletins and Policy Statements

– Pamphlets, booklets, and guides

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