Midterm 1 - History, Policy, Constitution Flashcards Preview

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1

History: Constitutional Position

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

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

2

History: Constitutional Position

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

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

3

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.

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)

4

History: Constitutional Position
What is a CRITIQUE of the definition of indirect and direct taxation?

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

5

History: History of Tax in Canada
When did PROVINCIAL income taxation begin?

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

6

History: History of Tax in Canada
What forms of DIRECT taxation did the provinces use?

- provinces could only tax DIRECTLY
- e.g. PROPERTY tax; CORPORATION tax, INHERITANCE tax

7

History: History of Tax in Canada
When did FEDERAL INCOME TAXATION begin? What was the Act called? Why?

1917 (as a result of WWI)

Income War Tax Act

Intended as temporary measure to help fund the war effort

8

History: History of Tax in Canada
What happened to the Income War Tax Act of 1917 after WWI ended?

Not repealed, but continued with lower tax rate.

9

History: History of Tax in Canada
What were the Tax Rental Agreements? When were they put in place?

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

10

History: History of Tax in Canada
What were the 1962 Tax Collection Agreements? What did they replace? Describe them.

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

11

History: History of Tax in Canada
Under the Tax Collection Agreements, what was the initial agreement (re corporate taxes) and what changed later?

- 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)

12

History: History of Tax in Canada
Under the Tax Collection Agreements, what change was made in 1997?

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

13

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?

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 )

14

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?

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

15

History: Tax Reform
Explain how the 1971 Act broadened the tax base. How did it treat deductions?

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

16

History: History of Tax in Canada
Explain how the 1971 Act changed the rate structure.

- 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

17

History: Tax Reform
Describe how the new Act INTEGRATED corporate and personal taxes

- 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.

18

History: Indexing
Describe the introduction of INDEXING. Explain what indexing is.

Indexing = increase to account for inflation
1971 - 88 - Many changes, particularly important was intro of INDEXING of deductions and tax brackets

19

History: Indexing
Explain what happened to indexing in 1986.

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

20

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

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

21

History: Tax Reform of 1988
Discuss the 1988 tax reforms.

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

History: Tax Reform of 1988
What tax reform was suggested in the 1987 but not implemented until 1990?

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

23

History: Tax Reform of 1988
How did the 1988 tax reforms broaden the tax base?

1) got rid of many tax loopholes (aka preferences)
2) taxed MORE of capital gains (to 3/4)

24

History: Tax Reform of 1988

How did the 1988 reforms change the rate structure?

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

25

History: Tax Reform of 1988

Explain the shift from certain DEDUCTIONS to CREDITS.

- 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

History: General Anti-Avoidance Rule
Briefly describe the intention/effect of the GAAR.

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

27

History: Changes between 1988-2005

IDENTIFY three significant reforms between 1988 and 2005

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

History: 2005 - Present

ID 3 significant reforms from 2005 to now

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

History: 2005 to Present
Explain what a Capital Costs Allowance is. How is it used to implement policy?

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

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

30

Policy: Objectives

ID and briefly describe 6 objectives of income tax system

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