ADMN 3710 taxation ch 3

Chapter 3: Liability for Tax, Income Determination, and Administration of the Income Tax System

I. Sources of Canadian Tax Law

• Three main sources that govern tax law in Canada:

  • Statute Law:

    • Federal income tax system governed by the Income Tax Act.

    • Separate provincial Income Tax Acts.

    • Goods and Services Tax/Harmonized Sales Tax (GST/HST) governed by the Excise Tax Act.

  • Common Law:

    • Established by legal precedents from cases decided by courts (e.g., Supreme Court of Canada, Federal Court of Appeal, Tax Court of Canada).

    • Jurisprudence defines and helps interpret tax laws.

  • International Tax Treaties:

    • Treaties help rationalize jurisdictional authority and avoid double taxation.

    • Treaties take precedence over the Income Tax Act.

II. Liability for Tax

• Tax liabilities arise for different entities:

  • Individuals

  • Corporations

  • Trusts

  • Other business forms (e.g., proprietorships, partnerships) are not directly taxed.

A. Corporations

• Corporations are treated as artificial persons with legal rights and responsibilities.

• For tax purposes, corporate profits and losses belong to the corporation, separate from shareholders.

• Shareholders receive profits through dividends or selling shares, making individuals and corporations distinct taxable entities, though taxation is ultimately integrated.

B. Tax Residency

• Residency determines tax obligations in Canada:

  • Residents taxed on worldwide income.

  • Non-residents taxed only on Canadian income.

• Factors determining residency for individuals include:

  • Time spent in Canada.

  • Maintenance of a dwelling in Canada.

  • Effects of social and financial connections.

  • A non-resident ("Sojourner") may be deemed a resident if present for over 182 days in a calendar year.

• Corporations incorporated in Canada are considered residents; foreign corporations may also be deemed residents based on management and control exercised from Canada.

C. Non-Resident Individuals and Corporations

• Non-residents are taxable on specific sources of income:

  • Taxed on net income in Canada if:

    • They carry on business through a Permanent Establishment.

    • They dispose of taxable Canadian property.

    • They are employed in Canada.

• Income subject to withholding tax typically includes:

  • Dividends, rents, royalties, and pensions with general withholding rates at 25%, often reduced by tax treaties.

III. Determination of Income

• Entities pay tax on taxable income derived within a taxation year.

• Taxable Income: Not singularly defined in the Act, more a framework, encompassing:

  • Tax Year: Corporations choose their tax year and it must not exceed 53 weeks.

  • Types of Income: Includes employment income, business income, property income, capital gains, and other specific sources.

  • Net Income for Tax Purposes is derived from summing various income sources and applying specific principles related to each category.

A. Formula for Net Income

• Basic formula for calculating net income for tax purposes includes:

  • Income sources + Taxable capital gains - Allowable losses - Deductible items across various categories.

  • Different deductions are applicable for individuals versus corporations.

IV. Administration of the Income Tax System

A. Tax Return Filing

• Corporations must file within 6 months post fiscal year; Individuals must file by April 30 (or June 15 if conducting business).

• Trusts also adhere to a 90-day filing deadline.

B. CRA Assessment

• The CRA must assess tax returns within a reasonable timeframe (typically 2 weeks to 4 months).

• The CRA retains the right to reassess returns within specified periods (generally 3 years for individuals and trusts, 4 years for others).

C. Objection and Appeal

• Taxpayers can object to assessments through a formal review process with the CRA within 90 days.

• Dissatisfied parties may escalate to the Tax Court of Canada and further up to the Federal Court or Supreme Court if necessary.

D. Payment of Tax

• Individuals and corporations pay tax based on income received:

  • Individuals pay when income is received and may require instalments based on prior year’s taxes or exceeding set thresholds.

  • Corporations remit monthly instalments based on prior year tax obligations.

E. Penalties and Offences

• Penalties apply for failure to file returns or for unreported income, with potential for significant fines.

• Retention of records is mandatory for six years following the taxation year.