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Administrative Studies
ADMS 3520
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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. Recommended Problems 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 personal rates 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. See Corporations file T2s (i.e., corporate tax returns) and are taxed at flat corporate rates with special reductions for small businesses, etc. See 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 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 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 raise revenues; redistribute income; 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 Example The graduated federal personal income taxes Regressive taxes: poor people pay proportionally more of the income in these taxes Examples: Jason Fleming [[email protected]]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 Examples 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 2.9 Qualitative Chara
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