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					The Canadian Tax System
               A Primer
Historical Milestones
                                    History and Statistical Snapshot


 1867
  Federal revenues mostly from excise taxes and duties
 1917
  Federal personal and corporate income taxes and sales
    taxes introduced
 1967
  Carter Commission Report: far-reaching review of the
    Canadian tax system



                                                                  2
Historical Milestones
                                     History and Statistical Snapshot

  1971
   Reform based on Carter Commission Report – introduction
    of taxation of capital gains
  1988
   Major personal income tax reform: ten rate structure
    reduced to three-rate with major reduction in tax rates,
    broadened base, and replacement of some deductions and
    exemptions with tax credits
  1991
   Goods and services tax replaces manufacturers’ sales tax



                                                                   3
Historical Milestones
                                         History and Statistical Snapshot

 2000
  Five-Year Tax Reduction Plan
    – provided significant personal income tax reductions through lower
      tax rates, restoration of full indexation, and Canada Child Tax
      Benefit (CCTB) enhancements;
    – strengthened the foundation for economic growth and created a
      Canadian tax advantage for investment by reducing the general
      corporate income tax rate from 28 per cent to 21 per cent; and,
    – stimulated entrepreneurship and risk-taking, notably by lowering
      the capital gains inclusion rate from three-quarters to one-half.


                                                                          4
Recent Initiatives
                                               History and Statistical Snapshot
• Budgets 2003 and 2004 built on the Five-Year Tax Reduction Plan,
  introducing a number of initiatives to improve the fairness, efficiency,
  and competitiveness of the tax system.
 Budget 2003
   – furthered support for families by enhancing the CCTB;
   – enhanced tax treatment of savings by increasing registered retirement
     savings plan (RRSP) and registered pension plan (RPP) limits;
   – supported entrepreneurship and small business through a number of
     measures including an increase in the small business deduction; and,
   – strengthened the Canadian tax advantage for investment by phasing out
     the corporate capital tax and eliminating it for small business with taxable
     capital under $50M, and by extending corporate income tax reductions to
     the resource sector while improving the tax structure.
                                                                                    5
Recent Initiatives
                                             History and Statistical Snapshot

 Budget 2004
   – enhanced tax fairness for persons with disabilities and caregivers;
   – improved capital cost allowance (CCA) rates for computer equipment and
     data network infrastructure equipment aligning rates with useful life of
     assets; and
   – Announced a range of tax fairness initiatives, including proposals
     respecting fines and penalties and tax relief for certain Canadian forces
     personnel in high risk operations.




                                                                                 6
Federal Revenues – 2003-04
                                                                                     History and Statistical Snapshot

                                  Federal Budgetary Revenues by Source, 2003-04

                                                                   46%
                                                                                                             Total Revenues = $186 billion
                                                        Personal Income Tax
                                                              ($85 billion)



                      6%
                                                                                                                          15%
              Other Rev enues
                                                                                                                     Corporate Tax
                 ($12 billion)
                                                                                                                       ($27 billion)
                                 1%
                                                                                         15%
                      Other Income Tax            10%                     7%
                                                                                      Net GST
                           ($3 billion)      EI Rev enues           Ex cise Tax es
                                                                                     ($28 billion)
                                              ($18 billion)          ($13 billion)

 Public Accounts Basis. Personal Income Taxes net of Canada Child Tax Benefit.                       Source: Fiscal Reference Tables, Finance Canada
 GST revenues net of GST credit.                                                                                                                       7
Provincial Revenues – 2003-04
                                                                              History and Statistical Snapshot

                                    Provincial Own-Source Revenues, 2003-04
                                                Total Own-Source Revenues = $170
                 40%                                                                                     30%
       Other Own-source                                                                      Personal Income Tax
             Revenue*                                                                              ($51 billion)
            ($69 billion)


                                                                                             11%
                                                                                       Corporate Tax
                                                                 19%                     ($18 billion)
                                                        Retail Sales and Value-
                                                            Added Taxes
  Public Accounts Basis.                                      ($32 billion)          Source: Fiscal Reference Tables, Finance Canada
  * Includes, lotteries, gaming, and liquor revenues.
                                                                                                                                       8
Total Tax Burden – G7
                                                                              History and Statistical Snapshot

                          Tax Burden Comparisons for Different Revenue Sources
                             as a Percentage of GDP, G-7 Countries, 2002-2003
                       Personal            Corporate             Social         Goods              Other                 Total
                        Income              Income              Security          &                 Tax1
                          Tax                 Tax                  &           Services
                                                               Payroll Tax       Tax

                                                                                                                    2002         20032
    Canada                      11.9                    3.4             5.9              8.9             3.8         33.9         33.9
    U.S.                       10.0                     1.8             6.9              4.6             3.1         26.4         25.4
    Japan                        4.7                    3.1             9.9              5.2             2.9         25.8              -
    France                       7.6                    2.9            17.4            11.2              4.9         44.0         44.2
    Germany                      9.0                    1.0            14.5            10.5              1.0         36.0         36.2
    Italy                      10.9                     3.2            12.5            11.4              4.6         42.6         43.4
    U.K.                       10.6                     2.9             6.1            11.7              4.5         35.8         35.3
1 Other tax include property tax revenues and other revenues                    Source: Revenue Statistics 1965-2003 (2004 Edition), OECD
  not attributable to any category.
2 Preliminary estimate. Estimates not available for Japan.
                                                                                                                                            9
Tax Policy Principles
                                                     Principles of Taxation


 •   The fundamental role of the tax system is to raise revenues
     necessary to fund government spending priorities, in a manner that
     balances:
         1) Economic Efficiency
         2) Fairness
         3) Simplicity




                                                                          10
Assessing Economic Costs of Taxation
                                                     Principles of Taxation

• All taxes impose economic costs, through their effects on incentives to
  work, save, and invest.
• The Tax Policy Branch has developed a model of the Canadian
  economy to examine the impact of changes in tax policy on standards
  of living.
• This model embodies the essential features of the tax system, along
  with standard economic principles.
• The model can therefore be used to assess how different taxes affect
  standards of living through their effects on incentives to work, save,
  and invest, as well as on the allocation of capital and labour among
  industries.
• Results from simulations of the model show the effect on long-run living
  standards per dollar of taxation.
                                                                             11
Reducing taxes on capital would have the greatest benefit
                                                                                                    Principles of Taxation

         Long-Run Economic Well-Being Gain From Revenue-Neutral Tax Reductions*
        1.6
                                                                                                                                 1.4
        1.4       1.3           1.3
        1.2                                            Economic well-being gain
                                                       per dollar of tax reduction
         1                                      0.9
In $s




        0.8
        0.6
                                                             0.4          0.3
        0.4                                                                                                      0.3
                                                                                      0.2
        0.2                                                                                        0.1
         0
               Sales tax on   Personal       Capital Tax   Corporate      Average    Wage tax   Consumption    Weighted      Capital cost
              capital goods capital income                 income tax     personal                  tax       average gain    allowances
                                  tax                                   income tax

*The revenue loss is assumed to be recovered through lump-sum taxation                      Source: Tax Policy Branch, Finance Canada

                                                                                                                                            12
Fairness
                                                             Principles of Taxation

• A tax system that is fair shares the tax burden equally across taxpayers
  in similar circumstances and limits the incentives and opportunities for
  tax avoidance.
    – Fairness will generally align the tax burden with “ability to pay” – those in
      similar circumstances then face similar tax burdens (horizontal equity),
      while those with greater ability to pay have a higher tax burden (vertical
      equity).
    – A tax system that is generally perceived as fair will be more widely
      accepted by taxpayers.




                                                                                      13
Simplicity
                                                           Principles of Taxation

• The goal of simplicity is to minimize the compliance burden of
  taxpayers, facilitate ease of administration and to make the system
  transparent for taxpayers – I.e. certainty about what the tax rules are
  and equal application to all taxpayers.
    – In many cases simplicity requires trade-offs with efficiency and fairness,
      and so has proven difficult to both achieve and sustain.
    – For instance, the tax system is under constant pressure to accommodate
      particular circumstances of taxpayers or transactions. Addressing these
      situations may make the tax system fairer, but generally at the cost of
      greater complexity.




                                                                                   14
Personal Income Tax
Structure of Personal Income Tax
                                                   Personal Income Tax


     A.   Total Income
     B.   - Deductions from Total Income
          Net Income (basis for income-tested benefits)
     C.   - Deductions from Net Income
          Taxable Income
     D.   x Tax Rates
          Tax Liability
     E.   - Non-Refundable Credits
          Basic Federal Tax
     F.   - Refundable Credits
          Net Federal Tax
                                                                    16
Calculating Federal Taxes
                                                     Personal Income Tax


A. Total Income
   – Employment Income
   – Net Investment Income (e.g., investment income, grossed-up
     dividends, taxable capital gains)
   – Net Business Income
      • Income from self-employment and unincorporated businesses
   – Pension Income
   – Certain Government Transfers (e.g., provincial social
     assistance, worker’s compensation, and guaranteed income
     supplement)


                                                                      17
Calculating Federal Taxes
                                                   Personal Income Tax

 B. Deductions from Total Income
    – Recognize expenses to earn income:
        •   Child care expenses
        •   Attendant care expenses
        •   Interest expenses
        •   Union & professional dues
    – Allow tax deferral for retirement savings:
        • RPP contributions
        • RRSP contributions


            Total Income – Deductions = Net income
                                                                    18
Calculating Federal Taxes
                                                           Personal Income Tax

  Net Income
   – Measures income available to meet needs
   – Used to calculate income-tested credits and benefits
       • (e.g., CCTB, GSTC, the Guaranteed Income Supplement (GIS), Old
         Age Security (OAS), the spousal amount, etc.)
   – Net of expenses to earn income, but includes elements of income
     not subject to tax
       • (e.g., provincial social assistance, workers’ compensation benefits,
         GIS)




                                                                                19
Calculating Federal Taxes
                                                      Personal Income Tax

C. Deductions from net income
   – Social assistance
   – Workers’ compensation
   – GIS
   – Employee stock option benefits
   – Losses (e.g., non-capital losses, net capital losses, limited
     partnership losses)
   – Exempt capital gains (e.g., farm property and small business
     shares)
   – Northern residents’ deduction

           Net Income – Deductions = Taxable Income
                                                                       20
Calculating Federal Taxes
                                                          Personal Income Tax

   D. Federal Marginal Tax Rates - 2005
      –   16% up to $35,595
      –   22% from $35,596 to $71,190
      –   26% from $71,191 to $115,739
      –   29% over $115,740
      – Since the government restored full indexation in 2000, tax
        bracket thresholds will keep pace with inflation.
           • For 2005, the indexation factor is 1.7 per cent

      Tax Rates applied on Taxable income = Tax liability

                                                                           21
Calculating Federal Taxes
                                                         Personal Income Tax

E. Non-Refundable Credits
   – Generally reduce federal tax by 16% of amount
       • For example, in 2004, basic personal amount reduces federal tax
         by 16% of $8,148 (indexed amount)
       • Credit rate is higher (29%) on charitable donations over $200
   – Cannot reduce basic federal tax below zero
   – Primarily recognize differences in ability to pay tax. Examples
     include:
       • Disability amount of: $6,596 (indexed amount)
       • Age amount: up to $3,979 (indexed amount)


                                                                           22
Calculating Federal Taxes
                                                           Personal Income Tax

 E. Non-refundable Credits (continued)
    – Help to avoid double taxation
        • Dividend tax credit (13.33% of grossed-up dividends)
          compensates for tax paid at corporate level
        • Foreign tax credit (the lesser of 100% of foreign income tax
          paid and the share of Canadian federal tax paid attributable to
          foreign net income)


    Tax liability - Non-refundable credits = Basic federal tax



                                                                            23
Calculating Federal Taxes
                                                          Personal Income Tax


F. Refundable Credits
   – GST credit: Introduced in 1990 to offset impact of GST reform
     for low- and modest-income families
   – CCTB: Provides benefits to low- and middle-income families
     with children
       • Includes the CCTB base benefit, the National Child Benefit
         (NCB) supplement and the Child Disability Benefit



     Basic federal tax - Refundable credits = Net federal tax


                                                                           24
Selected Deductions and Credits
                                                           Personal Income Tax


  Charities ($1.6 billion in 2004) (non-indexed amounts)
      – Donations to charities reduce tax payable:
          • 16% federal tax credit for donations up to $200; 29% federal tax
            credit for donations over $200
          • One-half normal inclusion of capital gains for gifts to public
            charities of publicly-traded securities
      – Determination of charitable status and regulation of charities
        rests with CRA




                                                                               25
Selected Deductions and Credits
                                                         Personal Income Tax


Retirement Savings ($14.9 billion in 2004)
    – Tax deferral on income saved in registered savings plans
        • (e.g., RPPs, RRSPs)
    – Maximum limits:
        • RRSP Contributions: 18% of earnings to $16,500 for 2005
            – To increase to $18,000 by 2006 then indexed
        • Money purchase RPP contributions: 18% of earnings to $18,000 for
          2005 (indexed amount)
        • Pension Benefits for defined benefit RPPs: 2% of earnings up to
          $2,000 per year of service for 2005 (indexed amount)



                                                                             26
Selected Deductions and Credits
                                                          Personal Income Tax

  Seniors ($1.9 billion in 2004)
     – Pension Income Tax Credit ($0.4 billion in 2004)
         • Federal tax credit of 16% on the first $1,000 (not indexed) of
           pension income
         • Maximum federal tax reduction of $160
     – Age Tax Credit ($1.5 billion in 2004)
         • Federal tax credit of 16% of $3,979 (indexed amount) reduced
           by 15 per cent of net income over $29,619
         • Provided to Canadians age 65 and over
         • Maximum federal tax reduction of $637



                                                                            27
Selected Deductions and Credits
                                                       Personal Income Tax

  Families with Children ($9.2 billion in 2004)
      – Canada Child Tax Benefit ($8.7 billion in 2004)
         • Maximum benefit of $2,950 (indexed amount) for first
           child (July 2005 to June 2006)
              – Base benefit for low-and middle-income families (up to
                $97,000 in family income)
              – NCB supplement for low-income families (below $35,000
                in family income)
          • Additional NCB increases of $185 in July 2006 were
            announced in Budget 2003 and are legislated.




                                                                         28
Selected Deductions and Credits
                                                                                              Personal Income Tax

                                        Federal Child Benefits 2005 and 2007 1
       Benefits in current             Family with two children over the age of seven
             $000s
          7

          6

          5
                                                                                         2005 Benefits
          4
                                                                                         2007 Benefits
          3

          2

          1

          0
              0              15            30             45             60              75              90           105
                                                      Family Net Income in $000s
1   2007 rates as per Budget 2003 legislated increases.                            Source: Tax Policy Branch, Finance Canada

                                                                                                                               29
Selected Deductions and Credits
                                                           Personal Income Tax


  Families with Children (continued)
     – Child care expense deduction ($0.5 billion in 2004)
         • Deductible for work and education purposes
         • Deductible by lower-income spouse
         • Deduction Limits (not indexed):
             – $7,000 per child under age 7
             – $4,000 per child ages 7 to 16
             – $10,000 per disabled child (no age limit)




                                                                            30
Selected Deductions and Credits
                                                      Personal Income Tax

 Persons with Disabilities and Caregivers ($1.3 billion in 2004)
   (all indexed amounts)
 • Tax measures
    – Disability Tax Credit (DTC) (16% of $6,596)
        • For severe and prolonged mental or physical disability
        • Additional DTC Supplement for Children (16% of $3,848)
    – Medical Expense Tax Credit (METC) (16% of eligible expenses
      over the lesser of 3% of net income and $1,844)
    – Caregiver Tax Credit and Infirm Dependent Tax Credit
      (maximum of 16% of $3,848)
    – Disability Supports Deduction (proposed in Budget 2004)
    – Other measures have specific eligibility rules for person with
      disabilities (e.g., Child Care Expense Deduction).
                                                                       31
Selected Deductions and Credits
                                                   Personal Income Tax


Persons with Disabilities and Caregivers (continued)

• Benefits Delivered Through Tax System
   – Refundable Medical Expense Supplement (25% of allowable
     expenses up to $571)
   – Child Disability Benefit (maximum of $1,681), a supplement
     to CCTB




                                                                    32
Selected Deductions and Credits
                                                          Personal Income Tax
Education ($1.4 billion in 2004) (non-indexed amounts)
   – Tuition and education tax credits ($1.2 billion in 2004)
        • 16% federal tax credit for qualifying tuition fees
        • Education amount ($400/month full-time, $120/month part-time)
        • Unused amounts can be carried forward / transferred
    – Other measures ($0.2 billion in 2004)
        • First $3,000 PSE scholarships, bursaries, etc., excluded from income
          ($500 non-PSE)
        • Tax-free RRSP withdrawals for lifelong learning
        • 16% federal tax credit for student loan interest
        • Non-taxation of income earned in Registered Education Savings Plans
          (RESPs), complemented by related non-tax measures: Canada
          Education Savings Grant and Canada Learning Bond
                                                                                 33
Selected Deductions and Credits
                                                           Personal Income Tax


  Charities ($1.6 billion in 2004) (non-indexed amounts)
      – Donations to charities reduce tax payable:
          • 16% federal tax credit for donations up to $200; 29% federal tax
            credit for donations over $200
          • One-half normal inclusion of capital gains for gifts to public
            charities of publicly-traded securities
      – Determination of charitable status and regulation of charities
        rests with CRA




                                                                               34
Selected Deductions and Credits
                                                          Personal Income Tax

Goods & Services Tax Credit ($3.3 billion in 2004) (All indexed amounts)
   – Helps to offset the impact of the GST on low- and modest-income
     individuals and families
       • Maximum benefit of $227 per adult or spousal equivalent (July 2005 to
         June 2006)
       • Maximum benefit of $120 per dependent child
       • Single supplement of up to $120for singles and single parents
       • Maximum amounts are reduced by 5% of family net income over
         $29,618




                                                                                 35
Selected Deductions and Credits
                                                         Personal Income Tax


  Investment Income
  • Structural/Economic Measures
     – Capital gains: 50% of realised gains included in income
         • Provides some compensation for inflation and some reduction of
           double taxation of corporate income
     – Dividends: tax credit of 13.33% of the taxable amount of
       dividends from Canadian corporations subject to tax is
       provided
         • Compensates (fully for small business) for income tax paid at
           the corporate level
     – Interest: fully included in income as it is earned


                                                                            36
Selected Deductions and Credits
                                                    Personal Income Tax


  • Investment Incentive Measures
     – $500,000 lifetime capital gains exemption on qualified small
       business corporation shares and qualified farm property
     – Tax-free rollover for investments in qualifying small
       businesses
     – Tax credit of 15% for purchases of shares (maximum
       purchase of $5,000 per year) in Labour-Sponsored Venture
       Capital Corporations (LSVCCs) that invest in small
       businesses; matches a tax credit provided by most provinces.



                                                                      37
              Personal Income Tax




Provincial Personal Income Tax




                               38
                                                 Personal Income Tax


• In addition to federal personal income tax, provinces levy
  their own personal income taxes.
• The federal government has agreements with all provinces
  and territories, with the exception of Québec, to administer
  provincial personal income tax
• Accordingly, these “agreeing provinces” use the federal
  definition of taxable income as the base on which to apply
  their own personal income tax rates




                                                                  39
                                                                                               Personal Income Tax
Provincial rates (%)                                       Average income                         Statutory Rates
November 2004                                                 tax rate1                             (low – high)
Newfoundland and Labrador                                        8.3                               10.57 – 18.02
Prince Edward Island                                             6.8                                 9.8 – 16.7
Nova Scotia                                                      7.2                                 8.79 – 17.5
New Brunswick                                                    7.0                                9.68 – 17.84
Quebec                                                           8.82                                  16 – 24
Ontario                                                          6.3                                6.05 – 11.16
Manitoba                                                         7.1                                10.9 – 17.40
Saskatchewan                                                     7.3                                   11 – 15
Alberta                                                          5.7                                      10
British Columbia                                                 5.5                                 6.05 – 14.7
Northwest Territories                                            6.0                                 7.2 – 13.05
Yukon                                                            5.6                                7.04 – 12.76
Nunavut                                                          4.1                                  4.0 – 11.5
1Average   tax rates calculated as personal income tax revenues divided by personal taxable income by province.
2 This rate is not directly comparable to the other provincial rates. Québec funds some programs that are otherwise funded
  for the provinces by the federal government. As such, Québec receives a federal tax abatement (16.5 per cent
  of basic federal tax). Therefore, Québec’s provincial rate will be higher, but its federal taxes will be lower, than the other
  provinces.                                                                                                                       40
Corporate Income Tax
           Business Taxes




Overview




                       42
Canadian Corporate Tax System - Overview
Overview … Direct and indirect taxes
Corporations pay a variety of direct and indirect
  taxes
Direct taxes:
   –   Corporate income taxes
   –   Capital and insurance premium taxes
   –   Payroll levies
   –   Property taxes

Indirect taxes:
   – Sales and excise taxes

                                                    43
FEDERAL DIRECT TAXES
Canadian Corporate Tax System - Federal

    Which Tax

     Income
     Payroll
     Capital




                                          45
Canadian Corporate Tax System – Federal
CANCO Corporation … Income Tax Base
Balance Sheet                            Income Statement

Assets                Liabilities        Gross Revenues
                                         Sales             $600


Equipment   $1,000    Loan      $500
                                         Expenditures
                                         Wages            ($200)
                      Equity             Depreciation     ($100)
                                         Interest         ($50)

                      Shares     $500    Other            ($50)
                                                        ________
Total       _______   Total    _______
            $1,000              $1,000   Net Income       $200




                                                                   46
Canadian Corporate Tax System – Federal

Role and Rationale

 Raise revenues.

 Fairness – pay fair share of the cost of providing government
  services that benefit corporations.

 Prepayment of personal income tax.

 Ensure that non-residents pay tax on Canadian corporate income.

 A vehicle to achieve government objectives by promoting certain
  activities – e.g., R&D incentives, assistance to small business.




                                                                     47
Canadian Corporate Tax System - Federal

Income Tax … Tax on Profits

 Corporate income tax is levied on taxable income.
 Differences between statement profits and taxable income:

        Specific rules to ensure consistent treatment
        Limitation of deductions
        Loss carryovers




                                                              48
Canadian Corporate Tax System – Federal
CANCO … Getting to Taxable Income
Income Statement             Tax Calculation

Revenues
Sales           $600                $600

Expenditures
Wages          ($200)               ($200)
Depreciation   ($100)               ($135)
Interest        ($50)                ($50)
Other           ($50)                ($25)

Net Income     ($200)                $190
Income tax                           ($55)
Capital tax                           ($3)

Total tax                        ______
                                   ($58)       49
Statutory Rates
                               Business Taxes – Income Tax Structure



                                                    2004    2008


Small business income – first $250 K                12%     12%

Small business income – $250 K - $300 K             21%     12%

Manufacturing and processing income                 21%     21%

Resource income                                     26%     21%

General business income                             21%     21%

          Surtax of 1.12% also applies across all sources
                                                                   50
Canadian Corporate Tax System – Federal

Income Tax … The Rates
     Federal corporate income tax rate
                    (%)
                           Statutory Surtax         Total
Small business income         12     1.12           13.12
General Income                21     1.12            22.12
Resource income *             25     1.12            26.12
Investment income of CCPCs   34.67    1.12           35.79

* Effective rate below 21% due to preferential treatment for
   exploration, development, and interest expense.



                                                               51
Canadian Corporate Tax System – Federal

Income Tax … Integration with personal tax

 Integration reduces double taxation of income.
 Integration achieved through:

      • A dividend gross-up and credit provision.
      • Refundable corporate tax provisions.




                                                    52
Canadian Corporate Tax System - Federal
Income Tax … Integration … an example
                                       Earned by    Earned through
                                       individual    corporation
Corporation
   Business income earned                n/a             1,000
   Federal and provincial income tax     n/a               200
   Income distributed as a dividend      n/a               800


Individual
   Business income earned                1,000            n/a
   Dividend received                     n/a              800
   Dividend gross-up
    (25% of dividend received)           n/a               200
   Taxable income                        1,000           1,000




                                                                     53
Canadian Corporate Tax System – Federal
Income Tax … Integration … an example (cont.)

                                      Earned by    Earned through
                                      Individual    corporation


  Taxable income                         1,000         1,000

  Federal and provincial income tax       400            400
  Dividend tax credit
       (equal to dividend gross-up)      __n/a         (200)
  Net personal income                      400          200
  Cash retained after taxes                600         _600




                                                                    54
Canadian Corporate Tax System – Federal

Tax Preferences … summary
 Main remaining tax preferences are:

      Lower small business rate
      Earned R&D tax credits
      Exclusion of 25% of capital gains

      Earned Atlantic investment tax credit
      Some accelerated depreciation




                                              55
Canadian Corporate Tax System – Federal

                Which Tax



    • Income
    • Payroll
    • Capital




                                          56
Canadian Corporate Tax System – Federal

Payroll Tax, role and rationale

 Widely used internationally as a method of
  financing social programs.
 Two payroll levies:

       Canada Pension Plan (joint federal-provincial)
       Employment Insurance




                                                         57
Canadian Corporate Tax System – Federal


                 Which Tax

     • Income
     • Payroll
     • Capital




                                          58
Canadian Corporate Tax System – Federal
CANCO … Capital tax base
Balance Sheet                        Income Statement

Assets             Liabilities       Revenues

Equipment $1,000   Loan     $500     Sales          $600


                   Equity            Expenditures
                   Shares   $500
                                     Wages          ($200)
Total    $1,000    Total    $1,000   Depreciation   ($100)
                                     Interest        ($50)
                                     Other           ($50)

                                     Net Income     $200



                                                             59
Federal Capital Tax
                                          Business Taxes – Capital Taxes

  • Current rate (2004): 0.200%
  • Applies to taxable capital in excess of $50M
  • Corporations pay the greater of CIT surtax and federal capital tax
  • Most corporations pay the federal capital tax in excess of the
    surtax
  • The federal capital tax will generate approximately $1.1B in 2004
    (net of surtax) phasing out to 0 in 2008.




                                                                         60
Federal Capital Tax
                                              Business Taxes – Capital Taxes

  • The 2003 federal budget proposed the elimination of the federal
    capital tax over five years, starting January 1, 2004
      – First, the threshold was increased from $10 million to $50 million for
        taxation years ending after 2003, thus eliminating all federal capital
        tax liability for smaller corporations
      – Second, the federal capital tax rate is being reduced in stages so
        that by 2008, the tax will be completely eliminated


                  2003      2004      2005     2006       2007     2008

       Rate      0.225%    0.200%    0.175%   0.125%    0.0625%     0%




                                                                                 61
Part VI Tax
                                               Business Taxes – Capital Taxes

 • The Part VI tax is a tax on the capital of certain financial
   institutions
     – It operates a minimum tax -- Part I tax is credited against Part VI
 • It applies to banks, mortgage companies, trust companies and
   life insurers with more than $200M in capital
 • The rate is 1.25% on capital in excess of $300M and 1% on
   capital between $200M and $300M




                                                                             62
Provincial Capital Taxes
                                         Business Taxes – Capital Taxes

  • All provinces except Alberta impose taxes on the capital of banks
    and trust and loan companies
  • Six provinces impose general capital taxes across all
    corporations (Nova Scotia, New Brunswick, Quebec, Ontario,
    Manitoba and Saskatchewan)




                                                                        63
Provincial Direct Taxes
Provincial Income Tax … overview
                          Canadian Corporate Tax System - Provincial

 • All provinces impose corporate taxes.
 • Québec, Ontario and Alberta have their own corporate
   tax systems.
 • Remaining provinces are in the Tax Collection
   Agreements.




                                                                  65
                            Business Taxes – Provincial Income Taxes

• Provincial statutory corporate income tax rates vary by province
  and type of income
• Provincial weighted average rates:


                                                2002      2004
    Small business                               6.2       5.7

    Manufacturing and processing                11.1      11.4

    General                                     12.1      12.6



                                                                     66
                            Business Taxes – Provincial Income Taxes

Provincial rates (%)                                   Small
September 2004                    General    M&P      business
Newfoundland and Labrador           14       5.0        5.0
Prince Edward Island                16       7.5        7.5
Nova Scotia                         16        16        5.0
New Brunswick                       13        13        2.5
Quebec                              8.9      8.9        8.9
Ontario                             14        12        5.5
Manitoba                           15.5      15.5       5.0
Saskatchewan                        17        10        5.5
Alberta                            11.5      11.5       4.0
British Columbia                   13.5      13.5       4.5
Nunavut                             12        12        4.0
Northwest Territories               14        14        4.0
Yukon                               15       2.5        6.0
Weighted average                   12.6      11.4       5.7

                                                                  67
                                                                                               Personal Income Tax
Provincial rates (%)                                       Average income                         Statutory Rates
November 2004                                                 tax rate1                             (low – high)
Newfoundland and Labrador                                        8.3                               10.57 – 18.02
Prince Edward Island                                             6.8                                 9.8 – 16.7
Nova Scotia                                                      7.2                                 8.79 – 17.5
New Brunswick                                                    7.0                                9.68 – 17.84
Quebec                                                           8.82                                  16 – 24
Ontario                                                          6.3                                6.05 – 11.16
Manitoba                                                         7.1                                10.9 – 17.40
Saskatchewan                                                     7.3                                   11 – 15
Alberta                                                          5.7                                      10
British Columbia                                                 5.5                                 6.05 – 14.7
Northwest Territories                                            6.0                                 7.2 – 13.05
Yukon                                                            5.6                                7.04 – 12.76
Nunavut                                                          4.1                                  4.0 – 11.5
1Average   tax rates calculated as personal income tax revenues divided by personal taxable income by province.
2 This rate is not directly comparable to the other provincial rates. Québec funds some programs that are otherwise funded
  for the provinces by the federal government. As such, Québec receives a federal tax abatement (16.5 per cent
  of basic federal tax). Therefore, Québec’s provincial rate will be higher, but its federal taxes will be lower, than the other
  provinces.                                                                                                                       68
Canada in the middle of the G7
                                                            Business Taxes – Corporate Tax Statistics

                             2004 Income and Capital Tax Rates
50.0%
             Weighted Average = 38.8%
45.0%                                                                                               42.1%
                                                                                       40.0%
40.0%                                              37.3%         37.7%     38.3%
                                34.3%
35.0%
            30.0%
30.0%
25.0%
20.0%
15.0%
10.0%
 5.0%
 0.0%
           United              France               Italy        Canada   Germany   United States   Japan
          Kingdom
    Includes all levels of government.
    Canadian and U.S. figures include capital tax equivalents.


                                                                                                            69
Corporate tax statistics
                              Business Taxes – Corporate Tax Statistics

• Federal and Provincial corporate tax revenues in 2002-03
  (including capital taxes):

                                  $ billions      % of GDP
          Federal
           Income tax                  20.7              1.8
           Capital taxes                1.5              0.1
                                       22.2              1.9
          Provincial
           Income tax                  11.7             1.0
           Capital taxes                3.2              0.3
                                       15.0              1.3

          Total                        37.2              3.2




                                                                     70
Example: $100 of Active Business Income
                                          Personal and Corporate Tax Integration
                                                             Capital
   Distribution Method       Salary        Dividends                         Interest
                                                              Gains
  Corporate Level
  Income                         100.00           100.00         100.00           100.00
  Corporate Income Tax             -               20.00          20.00             -
  Distributed Income             100.00            80.00          80.00           100.00
  Personal Level
  Income Inclusion               100.00           100.00           40.00          100.00
  Fed/Prov Tax Pre-DTC            45.36            45.36           18.14           45.36
  Fed/Prov DTC                     -               21.15            -               -
  Personal Income Tax             45.36            24.21           18.14           45.36
  Total Tax Paid                  45.36            44.21           38.14           45.36
  Net Retained                    54.64            55.79           61.86           54.64
                 Notes: 1. Assumes a combined small business income tax rate of 20%.
                        2. The w eighted average top federal-provincial marginal PIT rate
                        and average federal-provincial dividend tax credit (13.33%
                        federal, 7.82% provincial) applied to dividend income.
                        3. The Dividend Tax Credit reduces personal taxes given that
                        corporate taxes have already been paid on the dividend income.
                         4. All rates are for 2004.
                                                                                            71
Consumption Taxes
Consumption Tax Framework
                                                       Consumption Taxes

  • Current federal consumption tax regime can be separated into
    two components:
     – GST/HST, a value-added sales tax that applies to most goods and
       services
     – Various excise taxes, duties and charges that apply to specific
       goods and services
        • E.g., tobacco, alcohol and motive fuels




                                                                         73
Federal Excise System
                                                           Consumption Taxes

  Two elements to federal excise tax system:
  • Excise taxes: sales levies imposed at time of delivery
      – Gasoline, air conditioners, heavy vehicles and jewellery
  • Excise duties: production levies imposed at time of manufacture
      – Spirits, beer, wine and tobacco




                                                                          74
Federal Excise Revenue Sources
                                                            Consumption Taxes

                   Excise Duties and Taxes (2002-2003)


                           Other           Alcohol
                        ($275 million)   ($1.1 billion)
                            3%               12%




                                                              33%
       53%
                                                            Tobacco
   Motive Fuels
                                                          ($3.1 billion)
    ($5 billion)




                                                                           75
Consumption Tax Framework
                                                       Consumption Taxes

  • Current federal consumption tax regime can be separated into
    two components:
     – GST/HST, a value-added sales tax that applies to most goods and
       services
     – Various excise taxes, duties and charges that apply to specific
       goods and services
        • E.g., tobacco, alcohol and motive fuels




                                                                         76
GST/HST System
                                                         Consumption Taxes

  • Imposed at 7% across Canada, except in the three harmonized
    provinces (NS, NB, and NFLD) where the rate is 15%.
     – In April 1997, NS, NB, and NFLD replaced their provincial retail
       sales taxes with an 8% provincial value-added tax structure
       modeled on the GST.
     – The HST is a federal tax and is administered by the CRA at no cost
       to the HST provinces.
  • Broad tax base, low rate
  • Multi-stage tax
     – Businesses collect and remit tax on sales
  • Tax credits for most purchases
     – Businesses who charge the tax can recover the tax paid on inputs


                                                                            77
International Tax and Tax Treaties
Taxing cross-border income
                                                            International Tax

Outline
• Canadian income tax is based on residence, not (like US) citizenship.
    – Residents of Canada are taxed on worldwide income.
    – Non-residents are taxed on Canadian-source income.
• Potential double taxation:
    – Canada taxes resident on income from Country X
    – Country X, as source country, also taxes
• Foreign tax credits and tax treaties resolve double taxation.




                                                                           79
Non-residents’ Canadian income
                                                            International Tax

 Principle
 • Non-residents are taxed on Canadian-source income.

 Details
 • Fixed-rate withholding on dividends, interest, royalties paid to non-
   residents
 • Employment income, capital gains taxed at graduated rates
 • Real estate rents: option of fixed-rate withholding on gross amount
   or graduated rates on net income.



                                                                           80
Foreign income of residents of Canada
                                                            International Tax

 Principle
 • Residents are taxed on worldwide income, with allowance (credit or
    exemption) for foreign tax..
  Details
 • Obligation to report all income.
 • Enforcement tools include: Foreign property reporting rules;
    information exchange with other countries.
 • Credits for foreign tax: $1 of foreign tax paid on foreign-source income
    reduces Canadian tax by $1.
 • For corporations: exemption for business income earned by subsidiary
    in treaty country (“exempt surplus”).

                                                                              81
Role of Tax Treaties
                                                         International Tax

 Role of Tax Treaties
 • remove tax barriers to cross-border trade and investment
 • prevent tax evasion and avoidance

 How?
 • eliminate double taxation
 • provide tax certainty and stability
 • prevent discrimination
 • exchange of information and other cooperation



                                                                        82
Role of Tax Treaties
                                                                Tax Treaties
Canada has treaties with over 80 countries
• Includes all major trading partners, many developing countries
• Treaties follow an accepted OECD model, adapted to Canada’s
  specific needs

Treaties are regularly updated
• Updating reflects changes in international business practices as well as
   tax policy developments
• Negotiations currently underway with US, Mexico, China, etc.




                                                                             83
THE TAX TREATMENT OF
  FARMERS IN CANADA
THE TAX TREATMENT OF FARMERS IN CANADA


  •   Cash-basis accounting. This method of accounting can
      be used by farmers (and fishermen) to compute farming
      (or fishing) income for income tax purposes. Unlike
      accrual accounting, which is required to be used to
      compute all other types of business income for income
      tax purposes, cash-basis accounting can provide
      significant tax benefits. For example, it allows for the
      deferral of income until revenue is received despite the
      income having been earned, and it allows for the
      deduction of pre-paid expenses. In the case of inventory
      purchased in the course of farming, the cost of such
      inventory may be deducted in computing farm income
      under cost-basis accounting – even though the inventory
      remains on hand and has retained its value. Under
      accrual accounting, such costs would in general be
      deducted only at the time the inventory is disposed of.
                                                                 85
THE TAX TREATMENT OF FARMERS IN CANADA


  •   Flexible Inventory Adjustment Rule. The flexible
      inventory adjustment rule permits a farmer to add an
      amount to the farmer’s income for a taxation year not
      exceeding the fair market value of inventory on hand at
      the end of the taxation year. To the extent that such an
      amount is added to income in a taxation year, the farmer
      may deduct an equal amount from income in the following
      taxation year. Essentially, this mechanism provides a
      farmer with the flexibility to average income over two
      taxation years.




                                                                 86
THE TAX TREATMENT OF FARMERS IN CANADA


  •   10-Year Capital Gain Reserve. In general, the capital gain
      realized by a taxpayer from the disposition of capital
      property in a taxation year may be reduced by a
      reasonable reserve in respect of the proceeds of
      disposition that are not due until after the end of the
      taxation year. In the case of farmers who realize capital
      gains from disposing of farm property, the reserve period
      is a maximum of 10 years while for other taxpayers the
      reserve period is a maximum of 5 years.




                                                                   87
THE TAX TREATMENT OF FARMERS IN CANADA



  • Deferral of Income from Sale of Breeding Livestock due to
    Drought. This mechanism permits farmers who dispose of
    breeding animals due to drought conditions existing in a
    prescribed drought region in a year to exclude a portion of
    the sale proceeds from their taxable income until the year in
    which the region is no longer in drought. As a result,
    proceeds eligible for the deferral will be available to
    replenish their breeding livestock.




                                                                    88
THE TAX TREATMENT OF FARMERS IN CANADA


  •   Deferral of Income from Forced Destruction of Livestock.
      In cases where a farmer is required to destroy livestock
      because of an order made under statutory authority, the
      compensation received by the farmer for the destroyed
      livestock is eligible for a one-year deferral. Essentially,
      this mechanism ensures that the compensation received
      by the farmer is not reduced by income tax in the year it is
      received, and will not be subject to tax in the following
      year so long as the farmer purchases replacement
      livestock by the end of that taxation year at a cost that is
      equal to or exceeds the amount received.




                                                                     89
THE TAX TREATMENT OF FARMERS IN CANADA


  •   Payment of Income Tax Liability. In general, taxpayers
      who earn income in respect of which income tax is not
      withheld (e.g., business income) are required to pay the
      related income tax liability on an instalment basis. In the
      case of individuals, they are required to remit the related
      income tax over the course of the year (i.e., quarterly
      instalments are required). However, in the case of
      farmers (and fishermen), this instalment system for
      remitting income tax liabilities generally requires only one
      instalment payment of two-thirds of the tax, which is
      required to be made by December 31 of the taxation year.
      The individual’s actual tax liability (as distinguished from
      an instalment liability) is assessed generally on or before
      April 30 of the calendar year following the taxation year.


                                                                     90
THE TAX TREATMENT OF FARMERS IN CANADA


  • Lifetime $500,000 Capital Gains Deduction for Dispositions
    of Qualified Farm Property. This mechanism eliminates the
    income tax that would otherwise be payable by a farmer on
    up to $500,000 of capital gains from the disposition of
    qualified farm property. This exemption is available with
    respect to arm’s length sales, and to transfers to a non-
    arm’s length person (for example, to a family member).




                                                                 91
THE TAX TREATMENT OF FARMERS IN CANADA


  • Intergenerational Rollover for Family Farms. On death or
    during their lifetime, farmers may transfer capital property
    used in farming on a tax-deferred basis to their children and
    grandchildren. A full tax-deferral is achieved where the
    farmer transfers the property for an amount equal to its tax
    cost. A partial tax-deferral results in cases where a farmer
    transfers the property for proceeds that exceed the tax cost
    of the transferred property if the proceeds are less than the
    fair market value of the property. Any resulting capital gain
    may be eligible for a deduction (within the limits provided
    for under the $500,000 capital gain reserve mechanism
    mentioned above) or may be eligible for a reserve of up to
    ten years (as mentioned above).



                                                                    92
THE TAX TREATMENT OF FARMERS IN CANADA


  Other Special tax Advantages:
  •   Deferral of income on the forced destruction of livestock;
  •   Full deductibility of land improvement costs and the deduction
      of the cost of replanting of orchards or vineyards.
  •   Mandatory Inventory Adjustment (reduce loss to extent of value
      of purchased inventory on hand at year-end, except horses
      where the reduction is 70% of the purchased cost on a declining
      balance basis).
  •   Deferred cash tickets for grain sales.
  •   Higher CCA rates for farm buildings (e.g., instead of 4% - 20%
      for vegetable and fruit storage buildings and 10% for
      greenhouses and other farm buildings).




                                                                        93
Data for Agricultural Sector in Canada
     Agricultural Gross Domestic Production (GDP) and Government Expenditures at a
     Glance




                                                          Government
                                                           Support in       Support as
                                   GDP in 2004             2003-04 1        a % of GDP
Agri-Food sector                   $38.5 billion          $9.3 billion         24%
 Agriculture sector                $14.2 billion          $7.4 billion         52%

1Federal and provincial government expenditures for the Agri-Food sector and Budget of all
provincial and federal departments of agriculture (for the agriculture sector).




                                                                                             95
    Source: Statistics Canada and Agriculture and Agri-Food Canada
The agricultural sector’s contribution to the Gross Domestic
Production (GDP) is small and cyclical

                                                        Gross Domestic Product (Constant 1997 $)



                             1200                                                                                                                   20


                             1000
                                                                                                                                                    18
                                                                                                                                                                                           Over the last 18 years:




                                                                                                                                                         Agricultural sector ($ billion)
                                                                                                                                                                                           • Average annual
                                                                                                                                                    16
All industries ($ billion)




                                                                                                                                                    14
                                                                                                                                                                                             growth of 2.8% for all
                             800
                                                                                                                                                    12
                             600                                                                                                                    10
                                                                                                                                                                                             industries.
                                                                                                                                                                                           • Average annual
                                                                                                                                                    8
                             400
                                                                                                                                                    6

                             200
                                                                                                                                                    4                                        growth of 1.6% for
                                                                                                                                                    2
                                                                                                                                                                                             agriculture.
                               0                                                                                                                    0
                                86

                                      87

                                            88

                                                  89

                                                        90

                                                              91

                                                                    92

                                                                          93

                                                                                 94

                                                                                       95

                                                                                               96

                                                                                                     97

                                                                                                           98

                                                                                                                 99

                                                                                                                       00

                                                                                                                             01

                                                                                                                                   02

                                                                                                                                         03

                                                                                                                                               04
                              19

                                     19

                                           19

                                                 19

                                                       19

                                                             19

                                                                   19

                                                                         19

                                                                               19

                                                                                      19

                                                                                            19

                                                                                                    19

                                                                                                          19

                                                                                                                19

                                                                                                                      20

                                                                                                                            20

                                                                                                                                  20

                                                                                                                                        20

                                                                                                                                              20
                                                                              All industries         Agriculture




                                                                                                                                                                                            The share of
                                                                                                                                                                                            agricultural GDP
                                                                                                                                                                                            fluctuated between
                                                                                                                                                                                            1.2% to 1.8% of the
                                                                                                                                                                                            total GDP over the
                                                                                                                                                                                            last 18 years.



                                                                                                                                                                                                                      96
Source: Statistics Canada
In dollar terms, Ontario, Quebec and Alberta have the greatest
contribution to the agricultural production.

           Provincial Agricultural GDP as a % of
         Provincial GDP for All Industries for 2003

     7
                                                                         6.1                                  • Ontario, Quebec and
     6                                                                                                          Alberta contribute to 61%
                                                                   4.8
     5                                                                                                          of the national
     4          3.4                                                                                             agricultural GDP. However
 %




     3                                                                                                          it represents less than
                                     1.7                                          1.8                           2% of their respective
     2                                             1.1
                         0.8                                0.8                                  0.9            total GDP.
     1   0.3
                                                                                                              • Saskatchewan and
     0
                                                                                                                Manitoba still have an
         NFLD    PEI     NS            NB              QC   ON     MAN   SASK    ALTA             BC
                                                                                                                important share of the
                                                                                                                national agricultural
  Provincial Share of National GDP for                       Provincial Share of National                       production (14% and
        All Industries for 2003                               Agricultural GDP for 2003                         12% respectively) and it
                                                                                                                represents a greater
                                                                    BC             A t la nt ic &               share of their total
   BC                                                                              T e rrit o rie s
                                                                    8%                                          provincial production
  12%                         A t la nt ic &                                             5%
                              T e rrit o rie s
                                    6%
                                                                                                                (6.1% and 4.8% of their
                                                            ALTA                                       QC       total GDP) than any other
ALTA
                                                            17%
12%                                                                                                   19%       provinces.
                                                                                                              • The provincial agricultural
                                                  QC
                                                                                                                GDP as a % of provincial
SASK                                             21%
                                                                                                                total GDP is above the
 3%
                                                            SASK                                                average for
                                                            14%                                                 Saskatchewan, Manitoba
 MAN                                                                                   ON
 3%                                  ON                                                                         and PEI.
                                                                   MAN                25%
                                    43%                                                                                                       97
                                                                   12%                                      Source: Statistics Canada
 Number and size of farms
 Despite a decline of 22% in the number of farms since 1981, the land in crops increased by
 18%, the total number of cattle and calves increased by 15% and the total number of pigs
 increased by 41%.




The latest census of agriculture, in 2001, reported 246,923 farms.




                                                                                                         Average production (hectares or
                      340,000                                                                     1000




                                                                                                            heads per farm reporting)
                                                                                                  900
                      320,000
                                                                                                  800
    Number of farms




                      300,000                                                                     700
                      280,000                                                                     600
                                                                                                  500
                      260,000                                                                     400
                      240,000                                                                     300
                                                                                                  200
                      220,000
                                                                                                  100
                      200,000                                                                     0
                                1981     1986             1991           1996           2001
                                       Total number of farms
                                         Average area in hectares per farm reporting
                                         Average number of cattle and calves per farm reporting
                                         Average number of pigs per farm reporting
                                                                                                                                           98
   Market receipts by commodity



                                 Market Receipts by Sector (2003)

                       Poultry and
                           Egg                                       Grain &
                           8%                                        oilseed
                   Other
                                                                      27%
                 Livestock
                    2%

                      Hogs
                                                                               Potatoes
                      12%
                                                                                 3%
                                                                                  Other
                               Dairy                                            vegetables
                               15%                                                 2%

                                                                         Greenhouse,
                                                                          floriculture
                                                                         and nursery
                                            Cattle                             9%
                                                                Other Crops
                                            17%
                                                                    5%



Market receipts measure the sales of crops and livestock products (except sales between farms in the same province). Receipts are
recorded when the money is paid to farmers before any expenses are paid.


                                                                                                                                    99
Farm income
There has been a large decline in farm incomes since the 1970s despite high subsidy levels




                                  12.0
               Billions ($1992)




                                  10.0
                                   8.0
                                   6.0
                                   4.0
                                   2.0
                                   0.0
                                                                                                                           Farm
                                      71

                                      73

                                      75

                                      77

                                      79

                                      81

                                      83

                                      85

                                      87

                                      89

                                      91

                                      93

                                      95

                                      97

                                      99

                                      01

                                      03
                                                                                                                        Income in
                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    19

                                    20

                                    20
                                                                                                                        2003 was
                                                                                                                          -$28M
                                         Farm Income*                   Program Payments

              *Realized Net Income is Farm Cash Receipts (including program payments minus operating expenses and capital cost   100
              allowance, plus income-in-kind. Source: Statistics Canada: CANSIM Data
Trade


• Agri-food exports for 2004 : $26.5 Billion.
• Agri-food imports for 2004: $20.4 Billion.




                                                101

				
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