Introduction to Taxation Investment and Finance 12 Mrs. Stanley

What is tax? Tax is defined as a compulsory contribution levied on persons, property, or businesses for the support of government for economic and social operations. In other words, it is money paid to a government to fund its programs and services.

Why do we need taxes? Sometimes, different levels of government collect tax. For example, in Canada individuals will pay federal taxes to the Government of Canada to run the country. They may pay provincial, territorial, or municipal taxes as well. Without a tax system, a government would not have any money to provide services. Citizens support the tax system by paying their fair share of taxes. In turn, they receive services and benefits from their government.

Benefits to Taxation Many of the benefits Canadians enjoy are made possible through taxes. Canada's tax systems pay for such things as roads, public utilities, education, health care, economic development, cultural activities, defence, law enforcement, and other programs and services.

Benefits to Taxation Tax revenue helps redistribute wealth to such beneficiaries as lower-income families, charities, students, retirees, and people with disabilities. Tax revenue provides social services such as Old Age Security benefits, Employment Insurance benefits, Canada Child Tax Benefit payments, etc.

Factors that Define a Tax System There are various characteristics that define a tax system, such as: 1) Who pays the tax 2) The base to be taxed 3) The rates of tax to be applied to the base 4) General exemptions 5) General deductions 6) Other selective measures such as how to pay tax

Putting the Factors into Practice The value and nature of these characteristics determine how much revenue is generated, how fair the tax system is, and the tax system's ability to generate growth. A tax system needs to be structured so that everyone at a specific economic level gets the same tax treatment, no matter how they earn their income.

Putting the Factors into Practice The system must be arranged so that people at a higher economic level pay a larger share of taxes than those at a lower level. As well, a tax system needs to be neutral so that the tax does not affect the government's economic decisions (including where it spends its budget every year).

Self Assessment The Canadian tax system is based on self-assessment. Self-assessment is considered the most economical and efficient way to collect income tax. Under the self-assessment system, non-residents with Canadian income and Canadian residents are responsible for making sure they have paid their taxes according to the Income Tax Act. Based on this approach, the fairness and efficiency of the federal income tax system depend on both the CRA (Canadian Revenue Agency) and the taxpayer.

Tax Deductions Income tax is an annual tax collected from individuals and businesses by the CRA for the federal government and the provinces and territories. The amount of income tax that an individual must pay is based on the amount of his or her taxable income (money earned minus allowed deductions) for the tax year.

Tax Deductions Employment Insurance (EI) is a deduction from your salary or wages. If you become unemployed, you may be entitled to EI benefits. The Canada Pension Plan (CPP) is a pension plan that will provide you with some income when you retire (full benefits available at age 65). Employers may also deduct contributions for the CPP.

Tax Deductions Provincial sales tax (PST) is a tax that is collected in most provinces when something is sold. Goods and services tax (GST) is a federal tax collected by the CRA and it is charged on the sale of most goods and services in Canada at a consistent rate of 5%. In some provinces, the GST is combined with the provincial sales tax and the two are collected together. This is known as harmonized sales tax (HST).