Tax Introduction

CHAPTER ONE - INTRODUCTION

HISTORICAL BACKGROUND:

1917 - Income tax first introduced in Canada as temporary measure to finance Canadian troops in World War I.

Jan 1, 1972 - Major revisions to Income Tax Act and introduction of taxation of capital gains.

1988 - Significant changes to personal and corporate taxation, including conversion of many personal tax deductions from income to income tax credits. (effectively increasing taxation for all but low rate individual taxpayers)

AUTHORITY TO LEVY INCOME TAXES:

British North America Act,1867 (renamed Constitution Act, 1867 in 1981) whereby Great Britain agreed to allow Canada to become self-governing, granted authority to federal and provincial powers to impose income taxes.

CLASSIFICATION OF TAXES BY NATURE OF TAX LEVY:

Flat tax - Rate of tax is fixed, irrespective of income level.

Eg. Corporate income tax in Canada.(affected by type of corporation and type of income, but not amount of income)

Progressive tax - Rate of tax increases as income level increases.

Eg. Personal income tax in Canada. (see current tax brackets in reference tables at front of Income Tax Act)

Regressive tax - Rate of tax decreases as income level increases.

Eg. Sales taxes such as PST and GST in Canada. (high income earners spend a smaller proportion of their income on items subject to sales taxes)

A commonly accepted characteristic of income taxation is that those with higher incomes have a greater ability to pay and therefore should bear a greater proportion of the tax burden. ("tax the rich") Therefore regressive income taxation is unheard of in democratic societies.

ORGANIZATION OF THE INCOME TAX ACT:

(See Exhibit 1-2 in Beam & Laiken Text.)

CCH Income Tax Act with Regulations includes interrelated legislation:

Income Tax Act - source of income tax legislation.

Income Tax Application Rules, 1971 - transitional rules relating pre-72 and post-71 tax law, referenced in the ITA (relates to capital gains and losses)

Income Tax Regulations - details set out with respect to specific legislation in the ITA and cross-referenced therein. (Eg. CCA rules in Reg.1100 and Reg. SchII)

International Tax Conventions - Canada/US, Canada/UK and list of all other treaties negotiated to date by Canada. (Tax Conventions or Treaties override the Income Tax Act where they are in conflict.)

The Income Tax Act is divided up into successively smaller units for purposes of referencing:

Parts; Divisions; Subdivisions; Sections; Subsections; Paragraphs; Subparagraphs; Clauses; Subclauses; Sub-subclauses. (This referencing is used rather than chapters or pages as we do for literary works.)

This referencing system is necessary because of the writing style employed by the lawyers who drafted the statutes.

Eg. S6(1)(b)(i)(A) is a complete specific reference to the ITA. In order to read and understand it, one must start reading at Section 6, continue on to subsection 1, then to paragraph b, then to subparagraph i and finally to clause A. This then makes up one complete sentence. To read any less, is futile. Section 6 of course is within subdivision a (employment income), of Division B(computation of net income), of Part 1 (other Parts deal with surtaxes, income taxes on specific transactions or taxpayers and administrative matters) of the Income Tax Act.

OTHER SOURCES OF TAX INFORMATION:

Judicial decisions (results of court cases) are published.

CRA publications and forms. (IT Bulletins, IC - See CRA Website: http://cra-arc.gc.ca)

Department of Finance technical notes and explanations provided with all new legislation.

GAAP, where ITA is silent in relation to income from business.

SECTION 3 AND DEFINTION OF INCOME:

No statutory definition of "income"; therefore refer to judicial decisions or dictionary.

Income includes an exchange for money or "money's worth". (Barter is legal, provided both sides of transaction record it at fair market value.)

Section 3 provides a formula for computing (Division B) income rather than a definition of income. (See Exhibit 1-3 in Beam & Laiken text. This formula will be used once we complete the first 9 chapters of the text.)

Think of it as a tool or "framework" to assist you in your calculations, rather than a cumbersome piece of legislation to be avoided.

SECTION 4 AND TRACING OF INCOME:

This section requires a taxpayer to compute his or her income or loss from each source independently, as if it was the only source of income. (Sources include employment, business, property, capital gains/losses, other)

Eg. Employment