2L Tax I - Professor Loomr - 2013 PDF

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ALL YOU NEED for 2L Taxation I (crucial for corporate law): Full course/exam notes for Professor Loomer
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Professor Loomer

Tax Law Introduction and History of Tax There has been tax on goods throughout history, but it is only recently that broad based income tax schemes have been implemented. Economic Purposes of Modern Government  Allocation Function: raise revenue for public goods and services o Some goods and services are chosen to be funded in part by the government, i.e. education, health, armed forces, environment etc. In order to fund these the government needs revenue o Decisions about who should pay, should it be paid privately by those who benefit from the good or service, or should we pay publically and view the thing as a public good(i.e. education) o Market Failures  Private markets do not necessarily guarantee the most efficient allocation of resources, so the Gov must address such problems.  free rider problem  private sector fails to provide things well, such as defense, so countries have to provide such things as a public good  negative externalities  polluters  Natural monopolies  transportation  How much market failure there is depends on political views  i.e. public vs private health care Paternalism  Education/ health partially paid for by government as a welfare measure. Distribution Function: used to redistribute wealth and to encourage or discourage certain activities o people who are well off pay more  basis of progressive tax system o People who are less well-off receive monies from the government  ex. credits for GST o discourage certain activities  taxes on alcohol o encourage  public transport credit Stabilization Function: used to counteract business cycle o When inflation is rising increase taxes/ reduce spending  opposite if in down cycle  hence lower sales tax/ stimulus package after recession o

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Professor Loomer Canada wants to encourage domestic film industry, so deductions or credits are granted to producers who are using Canadian employees etc o Offset periods of high growth or low growth by raising or lowering taxes o Can use taxes to affect job rate and inflation rate Provincial governments tend to focus more on the allocation function because of constitutional restrictions o responsible for major programs such as health and education o Federal has wider base for redistribution o

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Sources of Income  Aside from tax printing money and borrowing are the main sources of money  Taxation is typically the best source though o Borrowing results in having to pay interest  may crowd out private investment o printing money increases inflation  devalues money so debtors get off easy  value of a fixed income diminishes – pensioners Taxation and the Income Tax  Defn- a contribution to government revenue compulsorily levied on individuals, property, or business  Governments use a mix of different types of taxes in order to follow multiple policy objectives o such as redistribution (income) and regulation (sales take on alcohol) o Less distortions i.e. not all eggs in one basket o less easy to avoid or evade o different taxes schemes for different levels of gov 

Income taxation is the most efficient way of redistributing wealth o also effective because income fluctuations tend to follow the business cycle o sales tax ineffective because poor people spend a greater % of wealth on consumption

History of the Income Tax  Originally just had custom duties and excise taxes  1916 first income tax on business profits  Income War Tax Act 1917 which applied to high income persons only o still use same principle of progressive rates i.e. more money taxed as income increases  Provinces introduced income taxes in 1930’s o need to pay for increasing infrastructure and social services after great depression  Mid 1900’s the Income Tax Acts of 1948 and 1952, there was a much lower basic exemptions (credits), and much higher marginal rates o WWII turned the income tax act into the mass tax scheme it is today o 1952- 400,000 at 80%  mostly avoided  1947 Fed convinces prov not to tax but just get let the Fed do it.

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Carter Commission report (1966) and led to income tax reform of the Income Tax Act in 1970-72; there was also an expansion of tax base and a reduction of tax rates o thought to be more neutral/simple/equitable o increased types of income taxed o new deductions  student/ family/ single and married couples/etc o Top bracket taxed less but made broader

Sources of Interpretation Constitution - s.91/ 92 division of powers o Federal government – “any mode” of taxation o Provincial government – direct taxation within the province Income Tax Act, RSC 1985  Consolidated in 1985. This was intended to be a temporary measure.  This is the primary source of law and is constantly being amended Income Tax Application Rules  Transition rules after major amendments in 1972 o therefore less and less relevant but still needed for issues reaching back prior to the amendments. o we don’t really use this Income Tax Regulations  Supplementary details for computation and collection of taxes  same force of law as the act itself International Tax Treaties  Canadian citizens getting income from other jurisdictions  prevents double taxation of income and enables proper enforcement  Canada has agreements with over 60 countries, all of which are bilateral o makes Canada more international competitive o Deal with USA most important  Don’t have the force of law unless they are ratified by enabling legislation Tax Cases  Subordinate to legislation, rules, and regulations  interpret terms i.e. flesh out ideas in the act  Cases go to the Federal court o fed tax court of appeal- fed court of appeal- supreme court of Canada Other Statutes and Provincial Law  Sometimes other legislation is used as a tool for interpretation o get the meaning of interest in the Tax act from the Interest act  Constitution and in particular the Charter come into play as well. o Values when determining redistribution/ regulation

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Private laws in the provinces also instrumental o gives definitions of terms widely used outside of tax law  i.e. characterization of an employee vs contractor

Remission Order o In extreme situations the gov will order an exception to taxes  i.e. hurricane Legislative History  Judges use reports from the development of an amendment to look at the broad intent of parliament in order to interpret legislation o Trend now is to allow these materials to suggest more specific intent if the law is ambiguous. o ex- white paper on child-care expenses to determine precluding deductions from a taxpayer’s income from a business  partisan though so treated with caution o issue of weight though not admissibility Canada Revenue Agency Publication  ex. explanatory notes/ publications  publications are often cited as authoritative expressions of administrative practise  no legal force but reliable summaries of applicable law  doesn’t estop them from review taxpayers contrary to their stated view of the law  They also give out advanced rulings that indicate how they will tax a transaction, but again they are not estoped from reassessing.  I.e. give a good interpretation, but in no way binding Scholarly and Professional Publications  useful source of interpretation  If all else fails Important Features/Criteria to judge a tax Equity, Neutrality, Simplicity (administrability) and sometimes International Competitiveness  Issue is that improving one usually hurts the other ones Equity: what is fair depends on political and philosophical views, if the system is viewed as unfair then there is more tax evasion. o Canadian income tax system is based on “ability to pay” o This has been pivotal in the 20th century, equal treatment of all doesn’t equal fairness.  Horizontal equity- same income should pay same amount  so even if one guy gets 100 from employment and one gets it from rental income should pay the same  Vertical equity- different income pays different amount  tough to decide what to take into account when determining what makes people different o But how do you decide how much more one should pay if they have the ability is extremely contentious  Many factors come into play, such as family. illness, etc. o Usually comes down to how progressive one wants the tax system to be

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We use “progressive” income tax rates  higher marginal rates at higher income levels o Progressive rate structure, the higher the measure one has re the ability to pay one pays more than progressively more - So opposite of a proportional rate - However, at highest levels it trails off because of better treatment for capital gains- more so in the USA o In our system while there is a progressive income tax (marginal rate, 15, 22, 26, 29 percent of one’s income) o There are some flat taxes, such as in Alberta In this class we focus on the Federal system, progressive/marginal rates in s 117(2) it tells you the four brackets/rates for 2009, they are adjusted for inflation after that (they are also found at the front of the income tax act) Since recession some places such as NS have created new brackets for very high income Because of exemptions some people don’t pay as much as they arguably should o inheritance/ capital gain/ lotto Compare proportional rate (means that there is just one rate) e.g 15% HST o Some people want a single rate/proportional/flat income tax o Problem with this is that under a certain level of income made, one needs all that money, and potentially more o So in Canada, Federally, we exempt a certain amount of money at the bottom of income tax and don’t tax it and then we tax progressively o Provincially, Alberta has a flat rate, but exempts the first 17,000, after that it is ten percent o It has some intuitive appeal, in that it is simple and seems reasonably fair o But many people don’t see it as progressive enough, and unless the proportional rate is high enough then the services that we like to be provided cant be provided o Doesn’t raise enough revenue, and more revenue would be needed for social assistance.

Neutrality: tax system should not create artificial distinction that will affect behaviour/choices, that people would act as they would with no tax rules  The Canadian tax system is far from neutral, often we invite/encourage or discourage certain types of behaviour (i.e. cigarette taxes, fitness credits)  These are often called “tax expenditures”, and there are many “tax expenditures”  Government isn’t spending money in the normal way, instead they are forgoing revenue via the tax system by allowing tax credits or exemptions, but it doesn’t do the same thing as government spending (example in the book is re 25% of children’s fitness activities) o usually less administrative fees  Sometimes it’s hard to determine whether or not a tax expenditure (i.e. credit to education) or if it just reflects the technical tax structure (as in does this influence you or not, and should it be credited, these are contentious questions) o Difference between personal choice/ or necessary expense o I.e. can develop programs through tax relief instead of spending o Incorporation a small business is very beneficial tax wise o Income tax not very neutral, but GST is more neutral

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Simplicity: system should be simple so that taxpayers can easily comply and revenue administration (e.g. CRA) can easily administer o This is virtually never achieved in any tax system o certainty/ predictability o More simplicity usually limits the ability to ensure equitability o But more simplicity usually helps limit tax evasion and avoidance International Competitiveness: o high-income earners (i.e. corporations) are very mobile, they will go where they are the most economically viable. Income tax is one element that is taken in to consideration (not the only consideration, and not the most important, but definitely a consideration) o Less of an issue for income tax o A more recent consideration o Also an issue interprovincial wise o Tax is only one consideration though for international competitiveness o labour/ connection to western countries/ legal system/ environment/ safety o Don’t want your tax rates to be so burdensome that it drives people away, as without high income people there will be fewer revenues o However the talk of tax competitiveness is sometimes overblown, rates are not the only consideration for high-income earners. o More importantly is often what public services do you get for your taxes o This is why the Intel is in Ireland because they have to pay almost no Tax o Gov okay with this because they get money from income built o Thus, if equality is increased i.e. higher progressive rates then people may leave so lower competitiveness o Tax rates have come down significantly since the 1970s (average and marginal). At that time there were major issues with evasion/avoidance. Federal rates have come down, but provinces may be stuck raising taxes if they have to do so in order to provide necessary services. Overall, Canada’s average rate is high, but nowhere near the highest internationally. We are a bit higher than the US, but Denmark is far higher than Canada (see tables on the slideshow). Some would argue that our services are much better than what is offered in the US (i.e. Medicare). We also cannot look only at the tax rate. We also have to consider the credits that are applied, which the lower the taxable income. Generally Canada ranks in the middle for average tax rate and for marginal tax rate For corporate tax rates, the rates have fluctuated rather than coming down. The federal government has a goal to have federal rates at 15% and provincial at 10%, so that we can be competitive with countries such as China/Japan. But the federal government cannot make the provinces comply. o

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o Overall corporate taxes continue to get lower and lower internationally Our sales tax rates a relatively low as compared to other OECD countries, particularly countries in the EU (VAT). o o

NS has a harmonized sales tax USA has no federal sales tax, but some states do

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What is a ‘Tax’  Tax is often defined as: a contribution to government revenue compulsorily levies on individuals, property, or business; or as a compulsory extraction of money levied by a government body for a public purpose  Distinguish Income Tax from Licensing Fee that you pay for a particular benefit or service that you want  They are different because taxes are compulsory, you have no option but to pay, and secondly the tax money is used broadly for public purposes not for a specific benefit to you  Drivers Licence Fee, not really a tax because you can choose not to drive  Probate Fee, see RE Eurig Estate 1998 SCC o Money paid on the value of estate when someone dies (provincial thing) o SCC decision said that probate fees in Ontario were a tax. This is important because it was ruled to be an unconstitutional tax because of how the provincial government was going about it o Ontario government subsequently fixed it  Distinguish a “tax” from a “license fee” o a fee provides you with some advantage/benefit, whereas taxes are more general and not earmarked for a particular benefit. There may be a specific purpose in mind, but not as specific as a licence i.e. drivers license is a fee for the privilege to drive 

CPP and EI premiums? o Income monies withheld to go to these things. In some senses they are taxes, as they provide general public services and you have to pay them if you work and they may never benefit you personally. o Arguably a tax because compulsory but less clear if for a public good or if instead for a particular personal benefit o Sometimes called payroll taxes

What are the different types of tax? Lots of taxes other than the income tax (see chart in text) Note that Canada relies on a mix of taxes  Personal Income Tax and Corporate Income Tax  GST/HST  Carbon tax  Import Duties  Excise Taxes  Property tax  Capital Gains tax on estate (not technically a wealth tax)  Stamp duty- tax on securities transfer- not in Canada  Inheritance Taxes (in the US/UK, not in Canada) 

Wealth Tax- Not in Canada- Not a consideration of income, but instead they look at total assets o In USA they have inheritance tax on death  only on 5.2 mil assets

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The most important tax re revenue is personal income tax which makes up 48% of Federal Revenue

Class Three: Structure of the Income Tax Act September 14, 2012 [Part 1, with a few defining terms in part 17] In the ITA (Income Tax Act) unit, base, and period are mentioned in s 2(1),(2); tax rates are mentioned is s 117(2) for individuals Tax Unit: o Who or what is the tax payer, could be an individual, or a corporation or if it’s a sales tax a consumer o Every Person resident in Canada (ITA s 2(1)); and Certain non-resident persons (ITA s (2(3)) Tax Base: o Taxable income ss 2(1)-(2); non residents taxable income earned in Canada 2(3) o Ex. non-resident – disposed of income on Canada property, or employed in Canada, or run business in Canada o What does the tax apply to, for income tax it applies to income, sales tax based on value of the good o Sources of Income Tax Period: o Over what time period do you calculate it, e.g. sales tax is on a single transaction, income is for a yearly period o Each taxation year s.2(1) Tax Rates: o Four rates and brackets for individuals ss 117(2) and 117.1(1) o May also have tax credits that reduce the amount payable: apply rates and credits may offset this Section 2 of the Income Tax Act o 2.(1) Tax payable by persons resident in Canada o An income tax shall be paid, as required by this Act, on the taxable income [base] for each taxation year [period] of every person resident in Canada at any time of the year [unit] o (2) Taxable income [base] o The taxable income of a taxpayer for a taxation year is the taxpayer’s income for the year plus the additions and minus the deductions permitted by section C. o 2(3) Tax payable by non-resident persons — Where a person who is not taxable under subsection (1) for a taxation year (a)

was employed in Canada,

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carried on a business in Canada, or

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disposed of a taxable Canadian property,

Professor Loomer at any time in the year or a previous year, an income tax shall be paid, as required by this Act, on the person’s taxable income earned in Canada for the year determined in accordance with Division D. Section 117(2) o Defines the last element, Tax Rate o 15% under 40,726 o 22% - 40,726-81,452 o 26% - 81,452-126,264 o 29% - over 126,264 o 117.1- indexes inflation for years after 2009

Tax Unit S.2(1) – Every person resident in Canada at any time in the year o Therefore, the definition of person is central to determining the Tax Unit A “person” is either a corporation or an individual o “Person” s 248(1): o Note that section 248(1) has a bunch of definitions that apply overall, this is an older style of drafting with definitions at the end o “Corporation” 248(1): o Legal entity separate from shareholders  Solomon v. Solomon o corporation = company o flat rate 38% o “Individual” 248(1): o Means a person other than a corporation o Income Tax Act that applies to human beings (courts have made this very clear) o Taxpayer and individual are two words that are essentially interchangeable o Taxpayer is any person whether they have to pay tax or not  they are all taxpayers, some person or entity might just be exempt o A trust is also treated as an individual  flat rate 29% o whether or not they are liable to tax  so even though a charity pays 0 tax they are still an individual Choice of Unit o Canadian Tax law has always treated individual (not family) as the tax unit o o o o o o o

Consistent with the lega...