Question

. Taxes in Canada are one of the undeniable truths about our society. There are different kinds of taxes, however, and they are all onerous for those who are paying them. There are numerous opinions about the fairness and the unfairness of the taxes that we bear and those are identified by your authors in Chapter 12. It is important to understand why they believe that taxes are in need of reform. Please, first of all identify the reforms that are being discussed and analyzed. Then please provide me with the basis for your prioritizing them. In other words, which are ‘better’ and which are ‘worse’, from the point of view of a participant in the economy. You should consider that participant to be either a person who is earning salary or wages and a person who is earning income from a business.

Answer 1

Canada’s tax system is largely governed by the federal Income Tax Act and its regulations, as well by the sales tax, corporate tax and other laws of the provinces and territories. Residents of Canada are subject to tax on their worldwide income, while non-residents of Canada are generally subject to tax only on their income from Canadian sources.A non-resident who, in a particular taxation year, was employed in Canada or carried on a business in Canada, is liable to pay income tax on the non-resident’s taxable income earned in Canada. Also, the disposition of “taxable Canadian property” may result in a non-resident being subject to tax in Canada. Provincial taxes are also payable by a non-resident on taxable income earned in a province where the non -resident carries on business through a permanent establishment located in that province.A corporation will generally be resident in Canada if its “central management and control” is located in Canada (e.g., if the corporation’s board of directors meets in Canada). In addition, generally a corporation that was incorporated in Canada after April 26, 1965 is deemed to be resident in Canada for the purposes of the Income Tax Act.Income earned by a non-resident that is not subject to ordinary income tax may still be subject to a withholding tax at a rate of 25% (unless reduced or eliminated by an applicable tax treaty) on certain Canadian source income. This includes management fees, interest, dividends, rent royalties and some distributions from trusts. An amendment to the Income Tax Act eliminates withholding tax on most interest payments paid to persons dealing at arm’s length with the payer.Canada has entered into over 85 income tax treaties with other jurisdictions. These tax treaties generally provide that the business profits of a non-resident of Canada that is a resident of the other jurisdiction are not subject to tax under the Income Tax Act, except to the extent that such profits are attributable to a permanent establishment (i.e., a fixed place of business) of the non-resident in Canada. These tax treaties also usually reduce both the withholding tax rate imposed under the Income Tax Act and the branch-profits tax rate.

small business tax rules to stop high-income Canadians from taking ‘unfair’ advantage of the tax system—all in the name of ‘fairness’ to the middle class.it actually about making up revenue lost to an eroding tax base as taxpayers seek legal ways to avoid what they see as punitive tax rates? Sadly, it seems more like the latter than the former. Too bad the Minister wasn’t serious about tax fairness.Fairness, like beauty, is in the eye of the beholder. Economists are loathe to make fairness comparisons except to say that people with the same income should be treated similarly by the government. The tax changes contemplated by the Minister are aimed mostly at incorporated small business owners, so any ‘unfairness’ will be in the comparison of salary earners and small business owners, not different income classes.Economic theory does not tell us anything about how much tax and transfer rates should vary as incomes rise. That is a political judgement. Unfortunately, few finance ministers are brave enough to talk plainly about what people actually pay in taxes and receive in government transfers or what they think is a ‘fair’ distribution of the tax/transfer burden we all share. The reason is that many people might be surprised and unhappy with the level of taxation and the amount of redistribution built into our system.total income, which includes wages and salaries, interest and dividends and government transfers to individuals. They look at statutory tax rates as well as the benefits individuals receive in government transfers to calculate net tax rates by income class that the incorporation of professionals like doctors, lawyers and consultants has risen significantly in recent years and that this has caused a significant erosion of the personal tax base. Incorporating a business costs money and there are additional costs associated with preparing corporate tax returns and filing reports to the government. So why is the incorporation of professionals rising? Perhaps because federal and provincial governments have increased taxes on high income earners to the point that those taxpayers no longer think the system is fair.

The stock option loophole may be the most unfair and regressive tax loophole of all. It allows those with stock options—mostly executives who receive this as compensation—to pay tax at half the rate everyone else pays on their employment income.his tax loophole isn’t just unfair, regressive and expensive, but it’s also economically damaging. It creates a lucrative incentive for those in the executive suite to put corporate profits into share buybacks, thereby boosting the value of their own compensation, instead of making real investments that grow the economy and create jobs.

The business meals and entertainment expense deduction allows businesses to deduct half the cost of private boxes and tickets to sports events, concerts, all manner of restaurant meals and drinks, entertaining business partners and clients at night clubs, country and golf clubs, cruises, vacations and much more. This perk for business costs the federal government almost $500 million in lower revenues annually.

The capital gains loophole is one of our most costly and unfair tax loopholes. There are a number of different ways capital gains (the increased value of investments) are taxed at lower rates or not at all, but the main one is the partial inclusion of capital gains in personal and corporate income. It allows both individuals and corporations to include only half the value of their capital gains in taxable income, while everyone else pays the full rate of tax on the income they earn from actually working.

The dividend gross-up and credit tax break provides a credit to those receiving corporate dividends. It’s supposed to compensate shareholders for the corporate taxes that businesses pay, but many don’t pay any corporate income taxes and most pay tax at a lower rate than the dividend tax credit provides shareholders for. This tax break costs the federal government over $5 billion annually, with over 90% of its value going to the top 10% and almost half to the top 1%. More than two-thirds goes to men, with less than a third going to women.

Tax havens: Canadian governments lose an estimated $8 billion in annual revenues from corporations and wealthy individuals shifting their wealth and profits through tax havens through illegal and legal means. As a result of public pressure, the federal government has put some additional resources into fighting international tax evasion, and will have new tools at its disposal as a result of international action to share information. But much more needs to be done. Wealthy perpetrators and promoters of tax evasion schemes are getting off lightly. Not a single Canadian has been charged yetfor international tax evasion. Canada also must take steps to close the loopholes that allow large corporations and wealthy individuals to pay very little tax through what is now perfectly legal international tax avoidance.

Major tax reform is needed and possible when three conditions are met. First, the existing tax code has become so cumbersome and complex that its operation is excessively expensive. Second, changes in the economic environment have made obsolete policies that were designed to deal with once pressing economic and political issues. Third, new theoretical and empirical knowledge has accumulated and shows that the costs of the existing tax structure are unnecessarily high relative to available alternatives. Canada’s tax system is in dire need of reform, says a new study by the Canadian Centre for Policy Alternatives (CCPA).According to the study, by CCPA economists Marc Lee and Iglika Ivanova, ad-hoc tax changes over the last two decades have seriously weakened the redistributive role of Canada’s tax system at a time when market inequalities call for more, not less, redistribution.At a time of rising income inequality and unprecedented concentration of wealth in the hands of a few, restoring fairness should be the primary objective of the Canadian tax system,” says Ivanova. “Instead, the past twenty years of tax cuts have disproportionately lined the pockets of Canada’s wealthy.The study presents a framework for a progressive tax reform strategy that includes:broadening the income tax base to ensure that all forms of income are subject to the same progressive tax rates,raising marginal income tax rates on top incomes,eliminating tax credits and deductions that disproportionately benefit the richest Canadians, introducing a single, streamlined, income-tested transfer for low- and modest-income families, and implementing inheritance and/or wealth taxes to prevent the concentration of wealth across generations and to improve social mobility.

Opponents of corporate tax reform point out that a country’s tax regime is just one of several factors that businesses consider when deciding where to set up operations. This is true. Wage rates, a skilled workforce, transportation and infrastructure networks, market size (and growth potential), and political stability/property rights are among the other important considerations that can sway investment decisions.Canada may have a skilled workforce, a stable political and legal system and adequate infrastructure networks, but these features are common to literally every other advanced industrialized economy in the world; in no way do they constitute a uniquely Canadian advantage .In fact, Canada has historically used its business tax advantage over the US to compensate for two major shortcomings: we are a smaller and less attractive market; and the overall business cost structure in Canada is higher than in the US.This challenge was highlighted by the results of CME’s Tax Competitiveness Survey. Businesses were given a list of 15 cost factors or investment considerations and asked where they thought Canada had an advantage over the US.In not a single instance did a majority of respondents believe Canada had an advantage. The best results were for labour force quality and the cost of employee benefits, where, respectively, 46 per cent and 43 per cent of respondents thought Canada compared favourably to the US.w a cost disadvantage to operating in Canada. At the extreme end, not a single individual thought that Canada had an advantage in the cost of air travel. Similarly, only four per cent thought that Canada had better tax incentives for adopting new machinery, equipment and technologies; and about the same share thought that our construction costs were competitive

small business is structured as a corporation, the situation is more complex. RRSP contribution levels are based on earned income from salary, so if you choose to receive some or all of your income in the form of dividends, this will reduce or eliminate your RRSP contribution.As a Canadian business owner, you can decrease your actual income by hiring your spouse or children as employees and passing along some of your business income to them in the form of salary or wages.ppose, for instance, your business's net income is $75,000. But your spouse has been working in the business all that year, and you paid them a salary of $30,000. Your net income drops to $45,000, a considerable tax savings for you. And, because your spouse's income of $30,000 is taxed at an even lower income tax rate.Canadian income tax savings are not the only benefits to this tax strategy. Because your spouse now has an income, they will be contributing to the Canada Pension Plan and able to contribute to a Registered Retirement Savings Plan, helping you both build a more comfortable retirement.

If your business is incorporated, another method of income splitting is to pay dividends to your spouse and children. The great thing about this tax strategy is its flexibility—the amount of dividends and their recipients can vary from year to year depending on how much income you want to distribute to lower your tax bracket.o split your income using dividends, you must set up your corporation so that your spouse and children are shareholders; then you can distribute dividends between family members to reduce your tax burden. Note that, since dividends are paid to shareholders, the family members do not have to be employees of the business to receive dividends (although they can also be employees of the business and receive a salary as well as shareholder dividendsYour corporation can be structured so that there are additional nonvoting share classes for family members. This is especially useful for children, as nonvoting shareholders can receive dividends but do not have the right to participate in decisions relating to company policy.