Chapter 7: Basics of Taxation Flashcards
What are the 6 most common reasons for collecting taxes?
- Source of government revenue
- Regulatory measures
- Moral suasion
- Redistribution of wealth
- Economic incentive or disincentive
- Information gathering
What are “sin taxes”?
A form of moral suasion. Tax measures to discourage certain behaviours such as taxes on gasoline, alcohol, and tobacco.
What are the two types of income tax systems?
Progressive tax system and flat tax system.
How do progressive tax systems work?
A lower amount of tax is imposed on lower income earners, and tax rates increase as income levels increase.
What are regressive taxes?
Cause a lower income earner to pay more tax than a higher earner. This is seldom done by design, but can occur if taxes are poorly implemented.
What are consumption taxes?
Include sales tax, charged at the point of purchase. Goods and Service Tax (GST) and Harmonized Sales Tax (HST) are two common examples in Canada.
How are consumption taxes seen to reduce economic activity?
Like flat taxes, they seem to penalize low income earners as high income earners and low income earners pay the same amount on the purchase of goods.
What are excise taxes?
Generally charged selectively on certain types of services or commodities such as airline travel, gasoline, and alcohol. In the case of gasoline, the tax is paid by the seller, but the cost is usually passed on to the end consumer.
What are inheritance taxes?
Although not applicable in Canada, these are taxes that are assessed on amounts inherited.
What are estate taxes?
Taxes paid based on the value of a deceased person’s estate at the time of death, often only applied to estates with relatively high values. Canada does not assess estate taxes, though the US does and the top estate tax rate in the US is 40%. Probate can be considered a form of estate tax although in Canada, the highest probate fee is only 1.695% in Nova Scotia.
What is land transfer tax?
Tax assessed on the party receiving the transfer of land when property is transferred from one owner to another.
Which provinces assess a land transfer tax?
No federal land transfer tax. All provinces except Alberta and Saskatchewan and rural Nova Scotians.
What is property tax?
One of the oldest forms of taxation. Assessed against the value of real property owned.
What is payroll tax?
Assessed against employers who have a certain number of employees or who pay a certain amount of remuneration. Sometimes levied against employees directly. Often used to fund unemployment insurance. Fairly rare in Canada, except some provinces assess payroll tax on employers who exceed thresholds for amount of payroll or number of employees.
What is capital tax?
A tax based on the amount of capital (similar to property tax) normally not assessed on individuals. Common for banks and insurers to pay tax based on their holdings of capital.
What is investment tax?
Tax assessed on financial transactions such as stock purchases, designed to create a degree of regulation of the financial services industry. Not assessed in Canada.
What are user fees?
Fees or taxes assessed when certain services are accessed. These include garbage collection, driver’s license fee, business permits, probate fees, etc. Some provinces assess it as a fee, some as a tax (little difference between the two).
Which type of tax is considered an indirect tax and why?
Excise taxes as they are taxed to the importer or manufacturer, not the consumer, even though they increase the eventual consumer’s costs. Indirect as the consumer ends up paying a tax without being made directly aware of it.
What is tax avoidance?
When a taxpayer reduces their burden while still working within the strict interpretation of the rules. “Using loopholes”
What is GAAR?
The General Anti-Avoidance Rule which can be invoked by the CRA when it appears that a taxpayer has re-arranged their affairs to avoid taxes.
What is tax deferral?
Earning income now, but paying tax on it in the future.
What is the definition of income splitting?
Earning a source of income, but having another taxpayer pay tax on it.
When was the first income tax instituted in Canada and why?
In 1917 due to the high cost of World War 1. Was supposed to be temporary but high government debt compelled the government to make it permanent in 1922.
On which basis do jurisdictions tax on?
Net income, which is income from all sources reduced by certain deductions.
How is provincial tax handled in common-law provinces?
In provinces such as Quebec, two separate returns are filed - one federal, one provincial - each with their own separate calculation.
What is the surtax on income tax?
Effectively a tax on tax payable for higher income earners. Only PEI and Ontario apply a surtax to personal income.
What does Section 85(1) of the Act refer to?
Subsection 1 of section 85 of the Income Tax Act.
What does Part I of the Act deal with?
Almost all information related to taxation of individual and corporate taxpayers. Sections 2 through 180.
What does Part IV of the Act deal with?
Passive dividend income earned by corporations.
What does Part X of the Act deal with?
DPSPs. Subdivided into X.1, X.2, etc.
What does Part XI of the Act deal with?
RDSPs. XI.01 deals with taxes in respect to TFSAs.
How many parts and sections of the Act are there (at the time of writing)?
17 Parts and 270 sections.
What is the difference between a married couple and common-law couple under the Income Tax Act?
No difference. A legally married couple is just one that has been married under the Marriage Act.
What defines a common-law couple for the purposes of the Income Tax Act?
Any couple that has lived together in a conjugal relationship for at least 12 months or lie together and are parents of the same child/raise a child together.
What defines separation under the Income Tax Act?
End of a marriage or common-law couple defined by 90 days of being separated.
What is a sham separation?
When a couple separates for tax purposes only. CRA has been known to challenge the separated status of some taxpayers in some cases.
What does the Income Tax Act define as a “child”?
Legal children, children dependent on the taxpayer under 19 years old, child of the taxpayer’s spouse or common-law partner, spouse of the child of a taxpayer.
What does a “person” refer to under the Income Tax Act?
Can be an individual (flesh and blood person) or a corporation.
What are the 2 other types of taxpaying entities beyond individuals and corporations?
Trusts and partnerships.
When does a partnership become a taxable entity in its own right?
If there are more than 5 partners.
How are partnerships taxed?
Nearly identical to the taxation of individuals.
On which bases are Canadian taxpayers taxed?
On the joint bases of residency and location of income.
How are non-residents of Canada taxed in Canada?
To the extent that there is Canadian-resident income, most likely from carrying on business or investment activity in Canada.
Who enforces the Income Tax Act?
The Department of Finance is responsible for the review and implementation of most tax measures, with other Departments often providing recommendations.
