Module B - 6 key concepts of Canadian Income Tax Flashcards
What is the meaning behind the 6 key concepts of Canadian Income tax?
These are six overarching concepts we should understand behind income tax.
What does the first concept state?
While tax laws in Canada may appear arbitrary their development is guided by economic policy and political or social goals.
(Why the government does what it does)
What is the concept behind the first concept?
Understanding the concept helps us understand Canadian government goals, thought processes and what the Canadian population needs.
What is an example of the first concept?
Canadian Digital News Subscription credit : It’s a tax credit for those who pay for a digital news subscription to a Canadian news media organization. (Globen mail)
The whole point of this credit is to support Canadian digital news media organisations in achieving a more financially sustainable business model.
They wanted to help boost subscriptions of these news outlets
When they do this it achieves;
1) Social goals → Canadians are receiving accurate news through Canadian channels.
2) Increase sales of news companies also increases the amount of income tax revenue the government collects.
What is key concept #2?
+ Taxation follows the legal structure of a transaction not necessarily its economics
On a Canadian tax return, items are broken out between income deductions and credits.
Sometimes the categorization is intuitive and sometimes it doesn’t make sense because the government doesn’t think from an economic standpoint or from a legal perspective.
What is an example on key concept #2?
CPP and EI contributions
When we get a pay stub from our employer you’ll notice that in addition to income taxes being withheld there are withholdings for CPP and EI contributions and because it’s being withheld from our pay we consider it a payroll tax from an economic perspective but the legal structure says its not a tax its a contribution to potential future benefits later as a result from employment:
To the Canadian government its a cost of employment and so they allow these contributions to later claimed as an employment related tax credit and it helps reduce your overall taxes payable
What is key concept #3?
There is a condition tension between the government and taxpayers
Explain the meaning behind key concept #3?
+ Tax payers want to pay the lowest amount possible while still abiding by the tax laws.
+ The government however wants to collect as much as possible within the same law.
Tax laws are ambiguous and because of this tax payers and the result of this government might have different views on taxes and results in tax reassessment and might end up in tax court.
What is an example of key concept #3?
John Tavares Canadian Tax court case: Over a tax treaty provision and he’s out 8 million if he loses.
What is key concept #4?
‘Income’ is a net (net taxable income) concept like accounting through tempered significantly by #3, leading to considerably less judgement or discretion than in accounting.
What is the idea behind concept #4?
The idea behind this concept is that the income subjected to tax is based on net taxable income (income less general deductions) and this net taxable income has less freedom and flexibility comapred to other things for accounting purposes
What is an example the explain concept #4?
GAAP (depreciation) VS Tax (ITA) purposes
Under GAAP there’s policy choices (straight line, DD) on how we depreciate an asset and that they choose the method that accurately represents and reflects the use of the asset.
Under the ITX we refer to depreciation as capital cost allowance (CCA) . There is no flexibility in choice as there’s only one way to calculate CCA.
How we compute net income and net taxable income is different due to the different rules and different levels of judgement on computing things.
What is concept #5?
Income is different from capital appreciation
What is concept #5 specifically referring to?
There is a difference between business income and capital gains
It’s important as each is taxed differently
Business income is taxed at the marginal tax rate
Capital gains are taxed at a lower rate as a portion of the capital gains is subjected to tax.
For this reason taxpayers are incentivized to characterize their transactions as capital transactions than to operating transactions so that they pay less tax.
Whether a transaction is business income or capital gains is a question of fact of what is so there’s no ambiguity.
Give me an example for concept #5?
House flipping
In the days of covid house prices increased and some taxpayers wanted to take advantage of this by flipping houses (buying a house living in it a bit) and buying another one.
Due to the principal exception rule the capital appreciation on these homes were not subjected to tax but soon the government realised this they realised this was not natural capital appreciation rather just investors trying to make a quick buck.
CRA came out with a new rule if you bought and sold a home in under one year → House flipping and the capital appreciation is business income. → tax at your marginal rate.
If you buy a home and stay in it for more than one year → Capital gains
