Tax Expenditures Report Released

The Finance Department released its 37th report on federal tax expenditures last week; it has published estimates of tax expenditures for personal and corporate income taxes, as well as for the Goods and Services Tax, since 1944. It’s an interesting read, especially in advance of the March 22, 2016, federal budget, when the government is expected to announce new tax expenditures.

Tax expenditures could include tax credits or rebates, deferrals of income from taxes, expense deductibility, income splitting, exemptions for certain types of taxpayers or on income or capital—any of these items that deviate from our “benchmark tax system,” which is well described in the document. 

This report is a great primer on tax basics for newcomers to our system, or those who finally want to take the time to better understand their tax obligations and the tax preferences available to them under our system of self-assessment.

Following are some key elements of the report:

• For the purposes of the personal tax system, the benchmark “unit of taxation” is the individual, while for corporate tax purposes, it is the single corporation that operates as a separate legal entity. Canada has put into place a system for the avoidance of double taxation between the personal and corporate tax regimes (although it’s not always perfect) and for situations where taxpayers pay taxes on the same income in two different countries (we have tax treaties with over 90 countries for this purpose).
• The taxation period for individuals in Canada is the calendar year; but for corporations it is a fiscal year. In addition, income is taxed as it is “earned,” on an accrual basis, not as it is paid or received.
• In Canada, the benchmark personal and corporate income-tax base for residents is made up of worldwide income from employment; pension income; profits from a business; and from investment, capital gains, and certain government transfers. Canada does tax non-residents, but only on their Canadian income sources. We tax income on a nominal basis and apply indexing to tax brackets and credits.
• We do not tax the giving of money, inheritances, or payments made to family members. The main reason for this is that taxes have already been paid on these sources. In addition, we don’t tax the value of labor in the home or the benefits that homeowners receive from occupying their tax-exempt principal residences.
• When it comes to claiming expenses, in general, those who earn employment income can’t claim expenses, although there are certain exceptions, all of which require a signed Declaration of Employment Conditions by the employer, stating that out-of-pocket expenses were a requirement of employment. Current expenses incurred to earn income from business or property, however, are deductible in the year incurred.
• Capital expenses are treated differently: A Capital Cost Allowance (CCA) rate accounts for the cost of using an income-producing asset over its useful life. Capital assets and rates are prescribed in the Income Tax Regulations. Certain accelerated rates can be applied to certain types of assets in some cases.
• As important, our benchmark tax system allows for business and capital losses to be carried over to prior and/or subsequent tax years, as opposed to being deducted when they arose, to allow for the cyclical nature of business activity and investment. They can be deducted against other income, except for capital losses, which can only be deducted against capital gains. There are a number of classifications of capital assets to which a variance of those loss deductibility rules applies.

A better understanding of the Canadian tax system, which is based on self-assessment, leads to the creation of more sustainable wealth and, therefore, financial independence.

ADDITIONAL EDUCATIONAL RESOURCES: T1 Professional Tax Preparation – Basic, Family Tax Essentials by Evelyn Jacks, DFA-Tax Services Specialist^TM program.

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