Module B Flashcards
What are the six concepts in tax? (ALTNCE)
- Canadian tax laws may seem arbitrary, but development is guided
- Taxation follows transaction’s legal structure, not necessarily economics
- Continuous tension between taxpayers and government
- “Income” is a net concept, influenced by #3
- “Income” is different from capital appreciation
- Structure of the tax payable calculation
Explain the 1st tax concept in more detail
The development of tax rules are guided by economic policies, political, and social goals. Should look beyond the face value of the rules and look at why the rule was set.
Explain the 2nd tax concept in more detail
What they are treated as vs what they actually are. E.g. CPP and EI contributions: economically, treated as a payroll tax, but as a legal structure, a tax credit as they are a contribution for future benefits as a result of employment
Explain the 3rd tax concept in more detail
Taxpayers want to pay as little as possible, government wants to collect as much as possible
Explain the 4th tax concept in more detail
This concept leads to less judgement and discretion than accounting. E.g., in accounting, GAAP has choices of depreciation methods. In tax there is only one method is calculating CCA.
Explain the 5th tax concept in more detail
Business income is subject to the marginal rate. Capital gains, only a portion if subject to a lower rate.
E.g., House flipping
- buy home + sell < 1 year = business income
- buy home + sell > 1 year = capital gains
Explain the 6th tax concept in more detail
(add all sources of income less general deductions) * marginal tax rate less tax credits = taxes payable
What is employment income?
Income received from employment contract - for providing services to another party (employer)
Net employment income formula
(A + B + C) - D
A: Salary, wages, commissions, forms of remuneration paid
B: Taxable benefits received
C: Taxable allowances received
D: Deductions - permitted against employment income
What are the differences between being employed vs. self-employed in terms of income earned, deductions, withholdings, and risk and reward?
Employed:
- Income earned = employment income
- Deductions are heavily restricted
- Employer withholds income taxes, EI, CPP
- Lower risk vs reward
Self-employed:
- Income earned = business income
- Wider range of deductions
- Withhold and remit income taxes, CPP yourself
- High risk vs. reward
Why do people who are self-employed have a wider range of deductions?
They have less security (more risk) thus more deductions to offset it
What are the fundamental principles of employment income?
- Employment income is taxable when received (cash basis accounting)
- Any income/benefit paid/enjoyed is taxable unless there is an exception
- Any expense incurred/paid
