3520-1: 8/25/2008 1-11
1 3520 Lecture 1
CTP Selected parts of Chapters 1 and 14 (see references below)
For those who are interested in learning more, check out the urls.
All Ch. 1 and 14 Exercises
All Ch. 14 Self-study problems
2 Introduction to Federal Taxation in Canada [ch. 1]
Any tax system has a
base (what to tax);
taxpayer or unit of taxation (who to tax); and
rate (how much to tax).
2.1 Alternative Tax Bases [1-1 to 1-6]
Several different tax bases in Canada:
For income taxes (i.e., personal and corporate income taxes), the base is income.
For social security/Payroll taxes (e.g., EI, CPP, EHT), the base is salary and benefits.
For the GST, the base is the FMV of (most) goods and services.
Canada relies more heavily on personal income taxes and less heavily on social security taxes
to raise revenues than do other countries.
See CTP Figure 1-1.
2.2 Taxable Entities Income Taxes [1-7 to 9]
The Income Tax Act uses person to refer to the three entities that are subject to federal
income taxation individuals, corporations and trusts
Individuals (not married couples) file T1s (i.e., personal tax returns) and are taxed at graduated
The unit of taxation is the individual and the rate is graduated
i.e., the rate is lower at lower income levels and rises as income rises.
Corporations file T2s (i.e., corporate tax returns) and are taxed at flat corporate rates with
special reductions for small businesses, etc.
Trusts file T3s (i.e., trust tax returns). Trusts created on death (testamentary trusts) are taxed at
graduated personal rates but trusts created by living taxpayers (inter vivos trusts) are taxed at
the highest personal rate (29%)
The base is taxable income (as defined in the Income Tax Act) for all these taxpayers, although
the rates differ
2.3 Federal Taxation & the Provinces Personal Income Taxes
Before 2000, only Quebec had different rules for personal taxes and a separate return. The
other provinces charged their personal income tax based on a % of federal taxes.
Jason Fleming [[email protected]
a] 3520-1: 8/25/2008 2-11
Now the federal government still collects personal income taxes for provinces other than
Quebec but the provinces have their own computation of taxable income and tax rates.
There are few significant differences so far. For example, Ontario uses the graduated rates and
tax credits similar to what was used before. Only Alberta has something entirely different: a
flat rather than graduated tax rate (i.e., the rate is the same no matter how much you earn).
See also CTP 1-12 to 16.
2.4 Corporate Provincial Income Taxes [1-17 to 18]
Alberta, Ontario, and Quebec have separate corporate tax returns and collect their own taxes.
Beginning in 2009, Ontario will harmonize its corporate income tax with the federal
income tax and the federal government (i.e., the CRA) will collect and administer Ontarios
corporate income taxation
Other provinces (and Ontario beginning in 2009) use federal taxable income: the computation
is done on the federal return and the federal government collects their taxes (and remits to the
province their applicable share).
2.5 GST and Harmonized Provincial Sales Taxes
Any person engaged in commercial activity in Canada must register, collect and remit 5% GST
on taxable supplies. See http://www.cra-arc.gc.ca/E/pub/gi/notice226/notice226-e.html.
However, there is an exemption for small suppliers having $30,000 or less in taxable supplies
each year. See p. 9 of the guide at http://www.cra-arc.gc.ca/E/pub/gp/rc4022/README.html.
In Quebec, Revenu Qubec administers the GST/HST.
New Brunswick, Nova Scotia, and Newfoundland have "harmonized" their PST with the GST
called the HST (H is for "Harmonized"). See p. 31 of rc4022 above.
All provinces other than Alberta collect provincial sales taxes and most of them use a different
base than the GST (i.e., goods but not services).
See also CTP 1-19 to 22.
2.6 Taxation and Economic Objectives [1-23]
With taxation, the government can
encourage certain activities
stabilize the economy; and
allocate resources among different levels of government.
See Where Your Tax Dollar Goes at
2.7 Taxation and Income Levels [1-24 to 1-33]
Progressive taxes: higher-income people pay more
The graduated federal personal income taxes
Regressive taxes: poor people pay proportionally more of the income in these taxes
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]3520-1: 8/25/2008 3-11
Sales taxes are regressive because lower-income individuals spend a higher % of their
income on consumption goods than individuals with higher incomes (and many
consumption goods are subject to PST and GST).
Tax credits for low income individuals at the federal and provincial level attempt to
offset this regressivity. The GST credit is paid quarterly. The Ontario PST credit is paid
when you file a return.
Flat taxes: all taxpayers pay tax at the same rate
Corporate income taxes
Provincial personal taxes in Alberta
Tax Incidence: who bears the burden of the tax [1-32 to 33]
Who pays corporate taxes? The shareholders, the employees or the customers?
2.8 Tax Expenditures [1-34 to 37]
A term coined by Harvard Law School Professor Stanley Surrey to refer to special tax rules
that reduce taxes to encourage certain types of social or economic behavior
The alternative to a tax expenditure is a direct expenditure, i.e. a government grant
Tax expenditures are better than direct government expenditures when it is more efficient to
deliver the relief (or grant) through the tax system.
An annual government report provides the cost of tax expenditures; this publication makes the
system more transparent. See http://www.fin.gc.ca/purl/taxexp-e.html.
2.9 Qualitative Chara