Chapter 3:

The source of Canadian tax law :

1- Statute Law: Canadian federal income tax is developed in the legal statute known as the
Income Tax Act. The statute is lengthy, and its form is complex as the result of its
authors efforts to be precise and equitable. Regardless of the complex presentation,all
taxpayers are responsible for assessing their liability for tax on various type of income
earned.
2- Common Law : income tax act does not provide a definition of business income and
capital gains, but substantial jurisprudence has developed general guidelines for
distinguishing between the two, common law is, therefore an integral source of tax law.
3- International tax conventions

Federal and provincial income taxes are imposed on only three basic types of entities:
1- Individual
2- Corporations
3- Trusts
There are other forms of business organizations, such as proprietorships, partnership, joint
ventures, and limited partnerships. None of these entities is directly taxable, rather, they are
organizational structures whose profits are allocated the participating owners for tax purposes.
TI=Net income – Division C deductions
Residency:
Canadian residents, whether individuals or corporations, are subject to tax on their world
income, the scope of which is very broad.
Non-resident entities may also be subject to tax in Canada, but in such cases, the scope of the
income is limited to particular type of income earned only in Canada.
1- Individuals:
To be resident of Canada, an individual must maintain a continuing state of relationship with
the country.
Individuals who do not exhibit a continuing state of relationship but do spend time sojourning
in Canada are automatically deemed to Canadian residents if their presence exceeds 182 days
in the year.
Residency is determined on a year-to- year basis. The only exceptions to this occur when an
individual, at some time during , severs all previous ties with the country, or when a non-
resident establishes new ties with the country.
2- Corporations:
All corporations incorporated in Canada are considered residents of Canada and
consequently are subject tot ax on world income.
It s possible for a foreign corporation to be considered a Canadian resident. A company
may be resident of Canada if it can be established that the central management and
control over the major policy affairs of the entitys business is exercised from within
Canada.
 3- Dual Jurisdictions
As the corporation is a resident of Canada, the foreign-branch income is part of its world
income and is therefore taxable in Canada. The branch is also subject to taxation in the
united state. The Canada-US tax treaty permits the united states to tax the branch
profits at its applicable rates and according to its rules of income demetermination.
Cananda tax xan be reduced by the amount of tax paid in the us.
Taxation year:
Is defined differently for the two primary entities.
1- Corporation: it is regarded as its fiscal period, being any time period not exceeding
53weeks. It is meaning the corporate taxpayer can choose the annual period for which
tax will be assessed. One the corporation choose a fiscal period; it must continue with
the same period in future unless the CRA agrees to a change.
Exception:
A professional corporations required to have a fiscal period that coincides with the calendar
year if the professional corporation carries on business as a member of professional
partnership.

Individuals:
The taxation year for an individual is simply the calender year, and therefore includes the 12-
month period ending December 31 of every year.
The choice of 12 month period for individual and corporation to determine taxable income is
arbitrary and does not necessarily coincide with the timming of revenuses earned and expenses
incurred.
It is important to note hat income determination varies as a function of how the income is
reaned- whether the entity is an individual or a corporation is normally not a factor.
Type of income:
1- Employment income
2- Business income
3- Property income : income from property : interest, dividends, rents ,and royalties.
Income from property is often referred to as Passive income because the earning
process requires little effort or labour by the recipient.
4- Capital gains and losses : Realized on the sale of assests that were acquired for the
purpose of generating monetary retuurns or personal enjoyment over a long period of
time. It is not assest.
5- Other specific source

Be aware that only one -half of the actual capital gains ad losses are applicable for tax purposes.
3C: doses not permt theses deductions to exceed the total of income included to that point.If
the deductions in 3c are in excess of all other sources of income, such is lost and ,except in
limited circumstances, cannot be used in any other taxation year.

Withholding tax: the tax on an amount that originates in Canada but is paid directly to a non-
resident is referred to as a withholding tax because the payer must withholding a portion of the
obligated payment and remit directly to the Canadian tax authorities.
Filing of Return:
1- Corporations:
A corporation must file an annual income tax return within six months of its taxation year-end,
even if it has no income or has no financial activity.
When the corporations tax year ends on the last day of month, the tax return is due by the last
day of the sixth month after the end of the tax year.
2- Individual
Every taxpayer who is an individual must file an income tax return by April 30for the
most recent calendar year. This date extended to Jun 15 if the individual or their spouse
carries on a business.
Unlike a corporation an individual is usually not required to file a return in a year in
which no tax is payable.
Tax returns of a deceased taxpayer that were not due at the death of date are due the
later of six months from the date of death and the normal filing deadline (April30 or
June15). This due date also applies to the tax return of the surviving spouse.
3- Trusts and estates
Every trust must file an income tax return within 90 days of its taxation year. There is
one exception t the calender year rule: a testamentary trust that is designated a
graduated rate estate is permitted to choose a non calender year.
Withholding at source:
For employment income , the employer is required to withhold the appropriate amout of TAX
and remit it to CRA on the employees behalf. Tax must also be withhheled on anumber of other
type of income, such as
 Retiring allowances
 Employment insurance benefit
 Pension benefits
 Payments from a registered retirement saving plan (RRSP)

Instalments:
Income that is not subject to withholding taxes at source may be subject to quarterly tax
instalments.
This is required wenever the individual tax owningexceeds 3000 for both current year and
either of the past two years . due on the 15th day of March,June,September,and December.
a) One -quarter of the estimated tax payble that is not withhoeld at source
b) One-quarter of the previous years tax liability that was not withheled at source
c) For the March and Jun instalment, one -quarter of second preceding years tax liability
that was not withheld, and for the September and December instalment , one half of
the preceding years liability that was not withheld at source, in excess of the March and
Jun instalment payments.