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Law 345 - Tax > Midterm 1 - History, Policy, Constitution > Flashcards

Midterm 1 - History, Policy, Constitution Flashcards

1
Q

History: Constitutional Position

What is the constitutional source of FEDERAL power to tax? What does it include?

A

s. 122 of the BNA (now Constitution Act) - right to collect CUSTOMS and EXCISE taxes (most important at confederation was INDIRECT taxes (e.g. customs & excise taxes)
s. 91(3) gave power to raise funds “by any mode or system of taxation” –> very broad

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2
Q

History: Constitutional Position

What is the constitutional source of PROVINCIAL power to tax? What does it include?

A

s. 92(2) of BNA –> Power over DIRECT taxation and LICENSE fees
- BUT only able to tax WITHIN the province and for provincial purposes

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3
Q

History: Constitutional Position
Identify the definition of DIRECT and INDIRECT taxation that has been accepted and applied in Canadian Cases. Cite the case it’s from.

A

Bank of Toronto v Lambe (1887, Privy Council)

  • DIRECT tax = one demanded from the PERSON who is to pay it (e.g. income tax)
  • INDIRECT tax = one demanded from a person w/ intention that they will INDEMNIFY FROM ANOTHER (e.g. excise tax, customs tax)
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4
Q

History: Constitutional Position

What is a CRITIQUE of the definition of indirect and direct taxation?

A

Distinction is difficult to determine in practice b/c not easy to see who bears burden (E.g. corporate tax)

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5
Q

History: History of Tax in Canada

When did PROVINCIAL income taxation begin?

A

early 20th century: BC & PEI
1923-1939: Five more provinces
1962: remaining 3 provinces

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6
Q

History: History of Tax in Canada

What forms of DIRECT taxation did the provinces use?

A
  • provinces could only tax DIRECTLY

- e.g. PROPERTY tax; CORPORATION tax, INHERITANCE tax

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7
Q

History: History of Tax in Canada

When did FEDERAL INCOME TAXATION begin? What was the Act called? Why?

A

1917 (as a result of WWI)

Income War Tax Act

Intended as temporary measure to help fund the war effort

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8
Q

History: History of Tax in Canada

What happened to the Income War Tax Act of 1917 after WWI ended?

A

Not repealed, but continued with lower tax rate.

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9
Q

History: History of Tax in Canada

What were the Tax Rental Agreements? When were they put in place?

A

1941 - Provinces agreed to abandon income taxes and let FEDERAL gov collect it

  • Provinces compensated with grants
  • 1947 - Provinces except Ontario & Quebec agree to enter into 5-year agreements –> ON joined in 1952
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10
Q

History: History of Tax in Canada

What were the 1962 Tax Collection Agreements? What did they replace? Describe them.

A

1962 - Replaced tax rental agreements

  • provinces imposed own income taxes at own rates –> fed would CONTINUE TO COLLECT
  • provincial rate as PERCENTAGE of fed tax rate –> FEDERAL Act became basis of provincial tax
  • renewed every 5 years
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11
Q

History: History of Tax in Canada

Under the Tax Collection Agreements, what was the initial agreement (re corporate taxes) and what changed later?

A
  • Initially, all provinces except Quebec and ON agreed to Fed collecting both personal AND corporate income tax
    Later: AB opted out of corporate tax collection - ON signed on for JUST personal tax –> then entered into agreement in 2006 for corporate taxes (after 2008)
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12
Q

History: History of Tax in Canada

Under the Tax Collection Agreements, what change was made in 1997?

A

1997 –> Provinces entered into new agreements allowing them to COMPUTE PROVINCIAL TAX DIRECTLY on taxable income rather than as a percentage of federal tax

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13
Q

History: Tax Reform
What led to tax reform in Canada (what was the name of the report)? What was the general philosophy of the report? What Act changed taxation in Canada?

A

Carter Commission Report (in response to 1962 widespread agreement that revision was necessary) - led by Kenneth Carter-accountant
General philosophy: ALL gains should be taxed
Act: Income Tax Act (enacted 1971, in force 1972 )

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14
Q

History: Tax Reform

What were the recommendations of the Carter Report? What was the response to it? What was the end result for tax reform?

A

Recommendation: ALL gains should be taxed (with appropriate deductions to balance out) —–> Response: STRONG opposition –> government White Paper –> adopted only some recommendations (e.g. taxation of capital gains) —> Result: 1971 Act BROADENED tax base, RESTRUCTURED tax rates, partial INTEGRATION of corporate & personal income tax

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15
Q

History: Tax Reform

Explain how the 1971 Act broadened the tax base. How did it treat deductions?

A

MAIN base broadening = tax one-half capital gains
Other broadening of income: adult training allowances, research grants, scholarships, EI benefits
Deductions: INCREASED –> incl. employment deduction, pension & savings plan contributions, capital losses, EI premiums, child care, moving expenses

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16
Q

History: History of Tax in Canada

Explain how the 1971 Act changed the rate structure.

A
  • Increased personal and spousal exemptions; creating tax-free bracket & reducing rates at top bracket
  • INCREASED rate overall b/c increased deductions & exemptions overcompensated for tax of capital gains
  • Capital Gains inclusion only really affected higher tax brackets
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17
Q

History: Tax Reform

Describe how the new Act INTEGRATED corporate and personal taxes

A
  • PARTIAL integration by TAXING DIVIDENDS through (dividend to sole-shareholder) gross-up and (dividend tax credit) deduction scheme.
  • INTENDED to achieve NEUTRALITY between income through corporation and income through person/sole proprietorship/partnership
  • But there ARE still differences due to imperfections in the scheme/exceptions and such.
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18
Q

History: Indexing

Describe the introduction of INDEXING. Explain what indexing is.

A

Indexing = increase to account for inflation

1971 - 88 - Many changes, particularly important was intro of INDEXING of deductions and tax brackets

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19
Q

History: Indexing

Explain what happened to indexing in 1986.

A

1986 - Partial de-indexing
Only indexed for inflation > 3% –> allowed gov revenue to increase w/o increasing tax rates
- inflation moved people to higher brackets

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20
Q

History: MacEachern Budget

Describe the initial intention, and the result, of the MacEachern Budget of 1981

A

INTENTION - close loopholes/preferences –> broaden tax base and reduce rates
Result - strong opposition so ONLY lowered tax rates

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21
Q

History: Tax Reform of 1988

Discuss the 1988 tax reforms.

A

1987 - PC Gov White Paper -> Recommended 1) FLATTENING of structure, 2) BROADENING of tax base, 3) conversion to TAX CREDITS, and 4) GENERAL ANTI-AVOIDANCE RULE

22
Q

History: Tax Reform of 1988

What tax reform was suggested in the 1987 but not implemented until 1990?

A

Introduction of GST –> enacted in Excise Tax Act (Part IX) in 1990

23
Q

History: Tax Reform of 1988

How did the 1988 tax reforms broaden the tax base?

A

1) got rid of many tax loopholes (aka preferences)

2) taxed MORE of capital gains (to 3/4)

24
Q

History: Tax Reform of 1988

How did the 1988 reforms change the rate structure?

A

1) REDUCED tax brackets –> flattening
2) bottom two rates HIGHER than before –> but CREDITS helped
3) TOP rate lowered –> to help competitiveness

25
Q

History: Tax Reform of 1988

Explain the shift from certain DEDUCTIONS to CREDITS.

A
  • pre-88 DEDUCTIONS shifted to CREDITS
  • POLICY: deductions helped HIGHER income more than lower income (b/c of tax rate) –> CREDITS more fair
  • EFFECT: same tax savings for all
26
Q

History: General Anti-Avoidance Rule

Briefly describe the intention/effect of the GAAR.

A
  • s. 245 (introduced 1988)
  • CODIFIED earlier case law
  • intended to deal w/ general anti-avoidance, but VAGUE and application UNCERTAIN
27
Q

History: Changes between 1988-2005

IDENTIFY three significant reforms between 1988 and 2005

A

1) Rate changes - lower existing brackets + add fourth bracket
2) Lowered capital gains tax
3) amended to cover same sex spouses
4) income-tested GST credit & child tax benefit
5) doubled penalties for repeated failure to file

28
Q

History: 2005 - Present

ID 3 significant reforms from 2005 to now

A

1) GST reduced
2) Lowest tax rate reduced
3) increased personal & spousal tax credits
4) higher depreciation rates (Capital Costs Allowace) for environmentally friendly energy gen equipment
5) increased tax relief for low income

29
Q

History: 2005 to Present

Explain what a Capital Costs Allowance is. How is it used to implement policy?

A

Policy - increase investment in certain areas (eg environmental tech)

CCA = increase depreciation rates on capital costs (reduces tax in current years)

30
Q

Policy: Objectives

ID and briefly describe 6 objectives of income tax system

A

1) raise revenue - large source for fed
2) redistribution of income
3) regulation of private activity
4) stabilize economy
5) correct market failures
6) promote activities

31
Q

Policy: Evaluative Criteria

Briefly list and describe the 3 evaluative criteria

A

1) Equity - fairness/equality for taxpayers
2) neutrality - avoiding distortion to market and decisions
3) simplicity - administrative practicality (ie ease to enforce and interpret, etc)

Problem: 3 criteria often conflict

32
Q

Policy: Evaluative Criteria

List and briefly describe the 2 principles of Equity

A

1) Benefit Principle - contribution proportional to benefits derived
2) Ability to pay principle - Carter Commission view - based on ability to pay -> b/c equitable
- consider horizontal and vertical equity

33
Q

Policy: Evaluative Criteria

Briefly describe horizontal and vertical equity

A

a) Vertical Equity - greater ability to pay = greater tax

b) Horizontal Equity - similar circumstance = similar treatment (hence Carter Commission recommendation to tax FAMILIES)

34
Q

Policy: Evaluative Criteria

Briefly describe Neutrality and compare with Equity

A

Neutrality - neutral system designed to bring minimum change in allocation of resources
Distinction - neutral not necessarily EQUAL -> but violating neutrality usually = violating equity (eg deductions)

35
Q

Policy: Evaluative Criteria

Describe the simplicity criteria and the purpose.

A

Simplicity = comprehensible, certain, convenient, difficult to evade

Because - keeps costs low, more effective –> THEREFORE MOST IMPORTANT CRITERIA

36
Q

Policy: Progressivity

Describe the effectiveness of work incentives and investment incentives.

A

Work incentives - MINIMAL impact empirically

Investment incentives - SOME effect -> b/c shared risk of loss

Overal effect - distortion of allocation of resources

37
Q

Policy: Progressivity

Explain the relationship between tax rates and avoidance

A

Higher tax rate = increased diversion of resources to AVOIDANCE efforts

38
Q

Policy: Progressivity

Explain the effect of taxation on distribution of income

A
  • Ginni Coefficient IMPROVED as a result of taxation

- MAJORITY of change due to TRANSFERS, rather than tax

39
Q

Policy: Flat Rates and Dual Rates

Note: Not important learning objective –> just briefly describe

A

Flat rate = same rate for everyone regardless of income (advantage - simplicity, disadvantage - not truly flat)
Dual rate = progressive rate for labour, flat rate for capital (advantage - competitive)

40
Q

Tax Expenditures: Public Scrutiny

Explain the accountability problem with tax expenditures,

A

Tax expenditures = revenue foregone via tax concessions

Not accounted for in fed budget until 1979 -> made it hard to determine their impact (and cost)

41
Q

Tax Expenditures: Public Scrutiny

Explain how the accountability problem w/ tax expenditures was aaddressed

A

1979 - no attempt to measure COST of benefits –> but did begin to identify them –> saw the large number of concessions and their cost –> led to ENVELOPE budgeting system (ie includ. tax expenditures)

42
Q

Tax Expenditures: Public Scrutiny

Explain how tax expenditures were intended to be addressed in 1981 budget –> were they successful? Why?

A

1981 Budget - intended to reduce tax concessions and allow reduction in tax rates –> strongly opposed so only reduced rates –> STOPPED PUBLISHING tax expenditures

43
Q

Tax Expenditures: Public Scrutiny

Describe the reintroduction of tax expenditure accounts publication and changes to preferences in 1985-1988

A
  • 1985 - tax expenditure publication (only one-time)
  • 1988 - many tax prefs eliminated + rates lowered
  • 1992-Present - tax expenditure reporting resumed and continued
44
Q

Tax Expenditures: Difficulties of Description

Identify the bases on which tax expenditures should probably be assessed

A

1) Identification –> could include deductions and credits, whereas some might not be –> need BENCHMARK structure that defines non-pref allowances

45
Q

Tax Expenditures: Difficulties of Description

What are Negative Tax Expenditures? How are they noted in the reports?

A

measures that discourage behavior -> lead to MORE tax revenue

  • noted as offset against positive tax expenditures
  • included as memorandum items separate from positive expenditures
46
Q

Tax Expenditures: Difficulties of Description

How are tax expenditure costs estimated?

A
  • by simulating the CHANGE IN FEDERAL REVENUE if that provision alone was eliminated
  • PROBLEM - removing concession –> affects behavior –> difficult to account for impact
47
Q

Tax Expenditures: Alternatives

Explain how tax expenditures should be analyzed. How do they impact tax neutrality and equity?

A

Neutrality and Equity - violate equity and neutrality –> need to be assessed based on ACHIEVEMENT of their OBJECTIVE(s)

48
Q

Tax Expenditures: Alternatives

Identify problems with tax expenditures compared to direct subsidies.

A

Problems

  • upside-down effect of deductions + can’t help no income
  • difficulty measuring + limiting size
  • administrative problem + complexity
49
Q

Tax Expenditures: Alternatives

Describe the problem with direct subsidy programs

A

1) hard to control and target
2) administratively costly (different transfer, different staff)
3) discretionary - risk of vulnerability to pressure

50
Q

Tax Expenditures: Alternatives

Describe what a negative income tax would do

A

negative income tax system –> replace variety of programs w/ single income-tested basis for programs

Law 345 - Tax (9 decks)

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