ADMS 4562 Lecture Notes - Lecture 1: Harmonized Sales Tax, Regressive Tax, Inter Vivos
11 May 2018
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3520-1: Last updated September 7, 2014 1-15
This edition of the notes was updated by Priya Shah [[email protected]].
1 3520 Lecture 1
▪ Canadian Tax Principles (CTP) – Selected parts of Chapters 1 and 2 (see references below)
▪ Recommended Problems:
▪ Ch. 1: Exercises One-1, 3, 4, 6 and Self-Study Problem One-1
▪ Ch. 2: All Exercises and 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 exist 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 HST/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 1-10]
▪ The Income Tax Act (the “Act” or “ITA”) uses “person” to refer to the three entities that are
subject to federal income taxation – individuals, corporations and trusts
▪ The ITA uses “individual” to refer to a human taxpayer
▪ Individuals (not married couples) file T1s (i.e., personal tax returns) and are taxed at
graduated personal tax 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
▪ Corporations file T2s (i.e., corporate tax returns) and are taxed at flat corporate rates with
special reductions for certain private corporations earning business income, 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% federally)
▪ The base is taxable income (as defined in the Act) for all these taxpayers, although the rates
differ
▪ Certain entities are exempt from income tax including: municipal governments; most Crown
corporations; registered charities; most non-profit organizations; and pension trusts and
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3520-1: Last updated September 7, 2014 2-15
This edition of the notes was updated by Priya Shah [[email protected]].
pension corporations (including RPPs, RRSPs, deferred profit sharing plans and registered
retirement income funds)
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
▪ Now the federal government still collects personal income taxes for provinces other than
Quebec but the provinces have their own 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 1-13 to 1-17
2.4 Corporate Provincial Income Taxes [1-18 to 1-19]
▪ Alberta and Quebec have separate corporate tax returns and collect their own taxes.
▪ Ontario has harmonized its corporate income tax with the federal income tax and the
federal government (i.e., the CRA) collects and administers Ontario’s corporate income
tax
▪ Aside from Alberta and Quebec, provinces use federal taxable income: the computation is
done on the federal tax return and the federal government collects the taxes (and remits to the
province their applicable share)
2.5 GST, PST and Harmonized Sales Tax (HST)
▪ See http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/menu-eng.html?=slnk
▪ Any person engaged in commercial activity in Canada must register, collect and remit 5%
GST on taxable supplies (HST is discussed below)
▪ Taxable supplies include most commercial activities (i.e., providing goods or services for
profit) other than zero rated supplies and exempt supplies
▪ Zero rated supplies include: prescription drugs; basic groceries; and goods and services
exported from Canada. Zero rated supplies are not subject to GST; however, the supplier can
still claim input tax credits (ITCs) for GST paid by the supplier (to provide the zero rated
supply)
▪ Exempt supplies include: health care services; primary, secondary and post-secondary
education; financial services; sales of used residential housing; and rentals of residential
properties. Exempt supplies are not subject to GST and the supplier cannot claim ITCs for
GST paid by the supplier (to provide the exempt supply)
▪ However, there is an exemption for small suppliers having $30,000 or less in taxable supplies
each year. Small suppliers do not have to collect and remit HST/GST if they don’t want to
▪ See the guide at http://www.cra-arc.gc.ca/E/pub/gp/rc4022/README.html
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3520-1: Last updated September 7, 2014 3-15
This edition of the notes was updated by Priya Shah [[email protected]].
▪ In Quebec, Revenue Québec administers the QST which is mostly “harmonized”
▪ New Brunswick, Nova Scotia, Newfoundland, Ontario and Prince Edward Island are all
“participating provinces” that have "harmonized" their PST with the GST. The combined tax
is called the HST (H is for "Harmonized") and the CRA administers it. See rc4022 above.
▪ The combined HST rate in Ontario is 13% (5% GST plus 8% PST).
▪ The HST uses the same rules and tax base as the GST (i.e., it applies to goods and services).
HST/GST registrants are eligible for ITCs for almost all of the HST/GST that they pay
▪ British Columbia’s HST was repealed effective April 1, 2013 and replaced with a PST and
GST.
▪ Prince Edward Island became a participating province on April 1, 2013 with a combined HST
rate of 12% (5% plus 7%).
▪ All the remaining provinces have a PST except for Alberta.
▪ See also CTP 1-20 to 1-25
2.6 Taxation and Economic Policy [1-26]
▪ 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 http://www.fin.gc.ca/tax-impot/2012/html-eng.asp
2.7 Taxation and Income Levels [1-27 to 1-34]
▪ Progressive taxes: higher-income people pay more
▪ Example
▪ The graduated federal personal income taxes
▪ Regressive taxes: lower income individuals pay proportionally more of their income on these
taxes
▪ Examples:
▪ 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, or HST)
▪ Refundable tax credits for low income individuals at the federal and provincial
level attempt to offset this regressive tax. Low income individuals receive the
quarterly GST credit and (starting July 2012) the monthly Ontario Trillium
benefit. The monthly Ontario Trillium benefit combines 3 refundable credits:
sales tax, property tax and the northern Ontario credit. Before July 2012, the 3
amounts were paid separately and quarterly.
▪ Flat taxes: all taxpayers pay tax at the same rate
▪ Examples
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Document Summary
3520 lecture 1: canadian tax principles (ctp) selected parts of chapters 1 and 2 (see references below, recommended problems, ch. 1: exercises one-1, 3, 4, 6 and self-study problem one-1: 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). 2-15 pension corporations (including rpps, rrsps, deferred profit sharing plans and registered retirement income funds) 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: now the federal government still collects personal income taxes for provinces other than. Quebec but the provinces have their own 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.
