Chapter 1 Introduction 1

Background and Introduction History and Legislation – Canadian Tax System –Brief history of the Income Tax Act –Constitutional basis for income taxation 2

Introduction to Income Tax Legislation 3

Tax Principles and Concepts Classification of Taxes: Basis of the tax –Head tax, income tax, wealth tax, commodity tax, user tax, tariff tax, transfer tax, or business transfer tax Incidence of the tax Nature of the tax 4

Tax Principles and Concepts Desirable characteristics of an income tax: Horizontal equity Vertical equity Neutrality Flexibility Certainty Simplicity and compliance Feasibility and efficiency 5

Tax Principles and Concepts Tax reform guidelines: Fairness Simplicity and compliance Balance Stability International competitiveness Economic growth Canadian priorities Transitional implementation Consultation 6

Structure of the Income Tax Act and Interpretation 7

The Income Tax Act How do I reference the Act? Section – subsection – paragraph – subparagraph – clause 6(1)(b)(i)(A) 8

Structure of the Income Tax Act Parts I & I.2 – Income tax and tax on OAS benefits Parts II to XII.6 – Special transaction tax Parts XIII to XIV – Non-residents Parts XV to XVII – Administration and interpretation 9

Related References Historical footnotes Related matters Draft legislation: Pending amendments Income tax application rules International tax conventions or treaties Income tax regulations 10

Other Interpretive Sources Judicial decisions (common law) Forms ( Canadian Revenue Agency (CRA) publications Information Circulars Interpretation Bulletins Advanced Tax Rulings Technical Interpretations Information Booklets Income Tax Technical News Income Tax Folios Technical notes and explanations GAAP 11

Interpretation of Tax Legislation Considerations: Precision Plain and obvious meaning Intention of Parliament Remission orders Contextual Approach Form versus substance Exceptions override general Specific words followed by general Precedents Interpretation Act 12

Areas of Practice and Role of the Professional Accountant Why study taxation? Four Areas of Practice: –Compliance –Legal interpretation –Tax appeals and tax litigation –Tax planning Role of professional accountant in tax matters 13

Introduction to Income Tax and Taxable Income Approaches to defining income (not defined in the Act): –Income versus capital –The economist’s perspective –Role of GAAP –Doctrine of constructive receipt 14

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Computation of Income Sourcing or tracing of income Income/loss is computed from each source independently –i.e., Business expenses cannot be deducted from employment income 16

Computation of Income Sources of income & deductions under Div. B –Subdivision a – Employment Income –Subdivision b – Business or Property Income –Subdivision c – Taxable Capital Gains and Allowable Capital Losses –Subdivision d – Other Income 17

Determination of Income, Taxable Income and Federal Income Tax for Individuals 18 Taxable Income = Division B Income (Income for Tax Purposes) ̶ Division C Deductions Taxable income is the base for the application of tax rates to determine income tax.

Administration and Enforcement of the Act Onus of Proof – Taxpayer Appeals Administration and Enforcement – CRA Tax Evasion, Avoidance, and Planning 19

Tax Planning, Tax Avoidance, and Tax Evasion Tax PlanningTax AvoidanceTax Evasion Taxpayer GoalReduce taxes payable within object and spirit of law Deliberate planning of events and transactions to avoid taxes Avoid taxes by failing to disclose complete and accurate information LegalityLegalNot illegal; Transactions can be ignored if successfully challenged Illegal; Criminal offence; Civil wrongdoing PenaltyNoneArrears and interest plus taxes owing and possible penalties owing Fine, possible imprisonment, arrears, interest plus taxes, and civil penalties 20

GST/HST Tax on the consumption of goods and services in Canada GST – currently 5% Provinces with HST: –Nova Scotia –New Brunswick –Newfoundland –Ontario –British Columbia (exited on April 1, 2013) –Prince Edward Island (adopted effective April 1, 2013) 21

Supplies Provision of a supply includes: –Sales or rentals of goods; –Rendering of services; –Leases, sales, or other transfers of real property; –Licensing of copyrights or patents; and –Barter and exchange transactions and gifts. 22

Types of Supplies Taxable supplies –Subject to GST/HST and supplier entitled to input tax credit Zero-rated supplies –Subject to tax at 0% and supplier may claim a full input tax credit on purchases used to provide these supplies Exempt supplies –Not subject to GST/HST and supplier not entitled to an input tax credit on purchases used to provide these supplies 23

Point of Sale Rebates Intended to provide consumers with target sales tax relief on purchases of designated items 24

Input Tax Credits Refundable input tax credits available on business purchases To qualify for credit, goods and services must have been purchased for commercial activity Refund if input tax credits > tax payable 25

Legislation and Interpretive Sources GST/HST legislation in Excise Tax Act (ETA) –Divided into 12 parts and 12 schedules GST/HST Regulations also part of law Interpretive Sources: –GST/HST Memoranda –Technical Information Bulletins and Policy Statements –Pamphlets, booklets, and guides 26