Taxation For Managers

Introduction and Overview

_________________________________________________________
Intaxication: Euphoria at getting a tax refund, which lasts until you
realize it was your money to start with.

— A winner from the Washington Post Style Invitational

for 2001, asking readers to alter any word by changing one letter and supply a new
definition
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Business 4479 Topics in Income Taxation

Course Evaluation
Component Weight
• Mid-term exam 30%
• Hand-in (beginning of Class 8) 10%
• Class contribution
– Classes 1-10 10%
– Classes 11-20 10%
• Final exam 40%
100%

Business 4479 Taxation For Managers

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 Historical Background

• In 1917 income tax first imposed federally to finance

WW1 – Income War Tax Act
• In 1948 the Income Tax Act was passed
• Effective January 1, 1972 the Income Tax Act received a
major overhaul and capital gains became taxable
• Last major overhaul was in 1994
• The Act tends to be amended annually for federal budget
changes and periodically for technical amendments

Business 4479 Taxation For Managers

Required Characteristics of a
Tax Act

• Who pays the tax

• The base to be taxed
• The rates to be applied to the base
• General exemptions
• General deductions
• Other selective measures, [i.e. how and when
tax is paid]

Business 4479 Topics in Income Taxation

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 Desirable Characteristics of an
Income Tax Act
Minister of Finance Guidelines for 1986 Tax
Reform:
– Fairness
– Simplicity and Compliance
– Balance
– Stability
– International Competitiveness
– Economic Growth
– Canadian Priorities
– Transitional Implementation
– Consultation
Business 4479 Taxation For Managers

Defining Income
• No statutory definition, ITA defines income
from sources
• If not defined look to ordinary meaning of the
word
• Issues:
– Barter transactions
– Timing of receipt
– Use of GAAP vs. well-accepted business principles
– Income vs. capital
– Sourcing or tracing of income (Sec. 4)

Business 4479 Taxation For Managers

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Administration and Enforcement

Onus of Proof:
• Onus is on the taxpayer to prove an
assessment is incorrect
• Onus is on CCRA with respect to
justifying the assessment of penalties
• Standard of proof is the “balance of
probabilities” not “beyond reasonable
doubt”

Business 4479 Topics in Income Taxation

Administration and Enforcement

• Appeals
– Notice of Objection
– Tax Court of Canada
– Federal Court of Appeal
– Supreme Court of Canada

Business 4479 Topics in Income Taxation

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 Tax Planning
• Tax Planning
– Tax reduction that is provided for or not specifically
prohibited within the framework of the law.
– Planning objectives include tax minimization, tax
deferral, and income splitting.
• Tax Avoidance
– Legally circumvented the law in the reduction of tax
through a series of transactions that do not truly
reflect the real facts
• Tax Evasion
– Knowingly reporting tax that is less than tax payable
under the law

Business 4479 Topics in Income Taxation

Tax Planning
• Compliance vs. planning
• Planning considerations:
– Should enhance a sound business proposal
– Alternative should consider:
• shifting income between periods;
• transferring income between entities; and
• converting income from one type to another
– Must conform with the manner in which business will
be carried on
– Must consider legal, business, personnel and family
considerations
Business 4479 Taxation For Managers

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 Restrictions on Tax Planning
• The General Anti-Avoidance Rule - GAAR
– will not apply if a specific avoidance provision
otherwise applies to the plan
– Applies to deny tax benefit of a plan if:
• no business purpose to plan; and
• there is a misuse or abuse of the Income Tax Act provisions
– guidance may be found in:
• Department of Finance technical notes
• CRA interpretations and rulings
• Court decisions
– interpretation is subjective and taxpayer/CRA
disagreements are ultimately decided by courts
Business 4479 Taxation For Managers

Personal Tax Rates

2016 Top Interest &
Marginal Regular Capital Gains Eligible Non-eligible
Rates Income Dividends Dividends
B.C. 47.7% 23.85% 31.3% 40.61%
Alberta 48.0% 24.1% 31.7% 40.2%
Sask. 48.0% 24.0% 30.3% 39.9%
Manitoba 50.4% 25.2% 37.8% 45.7%
Ontario 53.5% 26.8% 39.3% 45.3%
Quebec 53.3% 26.7% 39.8% 43.8%
New Brunswick 53.3% 26.7% 34.2% 45.8%
Nova Scotia 54.0% 27.0% 41.6% 47.0%
P.E.I. 51.4% 25.7% 34.2% 43.9%
Nfd. & Labrador 49.8% 24.9% 40.5% 41.9%

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 Corporate Tax Rates - CCPC
2016 Tax Small Active
Rates Business Business Investment Dividends
Income Income Income
B.C. 13.0% 26.0% 49.7% 0% or 38.3%
Alberta 13.5% 27.0% 50.7% 0% or 38.3%
Sask. 12.5% 27.0% 50.7% 0% or 38.3%
Manitoba 10.5% 27.0% 50.7% 0% or 38.3%
Ontario 15.0% 26.5% 50.2% 0% or 38.3%
Quebec 18.5% 26.9% 50.6% 0% or 38.3%
New Brunswick 14.5% 29.0% 52.7% 0% or 38.3%
Nova Scotia 13.5% 31.0% 54.7% 0% or 38.3%
P.E.I. 15.0% 31.0% 54.7% 0% or 38.3%
Nfd. & Labrador 13.5% 29.0% 53.7% 0% or 33.3%

Corporate Tax Rates - General

2016 Tax Active
Rates M&P Business Investment Dividends
Income Income Income
B.C. 26.0% 26.0% 26.0% 0%
Alberta 27.0% 27.0% 27.0% 0%
Sask. 25.0% 27.0% 27.0% 0%
Manitoba 27.0% 27.0% 27.0% 0%
Ontario 25.0% 26.5% 26.5% 0%
Quebec 26.9% 26.9% 26.9% 0%
New Brunswick 29.0% 29.0% 29.0% 0%
Nova Scotia 31.0% 31.0% 31.0% 0%
P.E.I. 31.0% 31.0% 31.0% 0%
Nfd. & Labrador 20.0% 30.0% 30.0% 0%

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 Integration

Theory of Integration
Theoretically, the Canadian tax system is
designed so that income earned in a corporation
and distributed to a shareholder as a dividend
should attract the same amount of income tax,
both corporate and personal, as if the income
was earned directly by an individual.

Business 4479 Topics in Income Taxation

Integration
Unincorporated Incorporated
Business (ON) Business (ON)

Business Income
$100,000
Proprietorship OPCO
Income Tax

$0 Corporate $15,000

$53,500 Personal $38,505

Mr. A Mr. B

$46,500 Total Tax $46,495

Business 4479 Topics in Income Taxation

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 Integration Tax Rates – SBD Income

Dividends 2016 2016

vs. Tax Deferral Tax Rate
Salary Advantage (Dis)-advantage

B.C. 34.7% (0.6%)

Alberta 34.5% (0.3%)
Sask. 35.5% 0.6%
Manitoba 39.9% (1.0%)
Ontario 38.5% 0%
Quebec 34.8% (0.9%)
New Brunswick 39.3% (0.1%)
Nova Scotia 40.5% (0.1%)
P.E.I. 36.4% (0.9%)
Nfd. & Labrador 29.3% 0.1%

Integration Tax Rates – General Rate Income

Dividends 2016 2016

vs. Tax Deferral Tax Rate
Salary Advantage (Dis)-advantage

B.C. 21.7% (1.5%)

Alberta 21.0% (2.2%)
Sask. 21.0% (1.1%)
Manitoba 23.4% (4.2%)
Ontario 27.0% (1.9%)
Quebec 26.4% (2.7%)
New Brunswick 24.3% 0%
Nova Scotia 23.0% (5.7%)
P.E.I. 20.4% (3.2%)
Nfd. & Labrador 19.8% (8.6%)

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 Integration
Unincorporated Incorporated
Investments Investments

Interest Income
$100,000
INVESTCO
Income Tax
Corporate
- in yr. earned $50,200
$0
- in yr. distr. (30,667)

$53,500 Personal $36,452

Mr. A Mr. B

$46,500 Total Tax $44,015

Business 4479 Topics in Income Taxation

Integration
Unincorporated Incorporated
Investments Investments

Cdn. Dividend Income

$100,000
INVESTCO
Income Tax
Corporate
- in yr. earned $38,333
$0
- in yr. distr. (38,333)

$39,300 Personal $39,300

Mr. A Mr. B

$38,300 Total Tax $39,300

Business 4479 Topics in Income Taxation

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 What’s Next
• Sept 14/16 Read: Chapter 4 – pages 68-85
Complete: Key Concept Questions 2, 4, 5, 6 & 7
Problem 1

• Sept 19/16 Read: Chapter 4 – pages 86-106

Complete: Key Concept Questions 9, 10 &11
Problem 6

• Sept 21/15 Complete: Problems 7, 9 & 12 in Chapter 4

Business 4479 Topics in Income Taxation

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