Module A - Overview of the Canadian Tax System

Question 1

What is tax?

Answer 1

Its a fee we pay to the government and is considered government revenue and they decide how they want to spend the money.

Question 2

What does the government usually spend with the revenue they recieve from tax?

Answer 2

Public health care

Education

Infrasture (buildings and maintaining roads)

Question 3

How does the government decide to collect taxes? - The two step process?

Answer 3

1) who to subject the actual tax to

2) The different types of taxes that can be imposed

Question 4

What are the three entities that can be subjected to income tax?

Answer 4

1) individuals
2) corporations
3) Trusts

Question 5

What are the various types of taxes that can be imposed?

Answer 5

Income tax
Sales tax
Property tax

Question 6

In the video it shows that personal income tax makes up 50% of tax revenue, why?

Answer 6

1) Population (higher population than corporations)

2) Amount of income tax that can be charged (individuals are taxed more than corporations; if we think about it the highest amount a person can be taxed is 50% of their income

Question 7

What are the three tax systems in Canada?

Answer 7

1) Progressive tax system

2) Proportional tax system

3) Regressive tax system

Question 8

How do we know what our tax rate will be?

Answer 8

+ Its dependent on the type of tax we look at - in this case we compare our effective tax rate to our income

Question 9

What is the effective tax rate?

Answer 9

An effective tax rate is the average tax rate for an individual or corporate taxpayer.

Question 10

How does the relationship between effective tax rate and income change for each tax system?

Answer 10

Progressive: Effective tax rate increases as your income increases (usually used for income tax purposes)

Proportional : Your effective tax rate will stay the same regardless of the income you earn → Corporate income tax

Regressive: We usually use this system for GST/HST charged, when we think about it logically for the rates we can see that GST/HST is charged on our purchases not our income and because of this if our purchases remain the same GST/HST is the same. As income increases the effective tax rate paid will go down

GST/HST - This is called the ‘value-added’ tax

Question 11

What is the marginal tax rate?

Answer 11

+ Its a tax rate that would be imposed on your next dollar of income

Question 12

How can the difference of tax system affect whether your marginal tax rate and effective tax rate are the same or different?

Answer 12

Proportional = marginal = effective (same)

Progressive/Regressive = Marginal will not be equal to effective

Question 13

What is income tax?

Answer 13

It’s all possible income and individual may earn:

Employment
Business
Investment
Capital Gains
Retirement

Question 14

What rule book do we follow for taxes?

Answer 14

Income Tax act

Question 15

What form do we use for the personal income tax return?

Answer 15

Form T1

Question 16

Can you define the type of system we use for personal income tax?

Answer 16

In Canada we use a self-reporting system for personal income tax:

This means individual has to go and prepare their own taxes.

The reasoning behind this is the Government only has some knowledge of your income but not everything so it would be important to do it as it can help reduce your balance owing and increase refund.

Question 17

What is the equation for personal income tax (for this course)?

Answer 17

Step 1:

Taxable Income - Income (net)

Less; General Deductions

= Net Income for Tax purposes (Taxable income)

Step 2:

Taxes Payable

Taxable Income * Tax rate schedule (progressive tax rate table)

= Gross Taxes Payables

Less: Non-Refundable Tax credits (first) → It cannot create a refund but it can bring it down to zero

= Net Taxes Payables

Less: Refundable Tax credits → It can bring it down to a negative

= Balance Owing/(Refund)