Taxation in Canada is a prerogative shared between the federal government and the various provincial and territorial legislatures. Under the Constitution Act, 1867, taxation powers are vested in the Parliament of Canada under s. 91(3) for:
The provincial legislatures have a more restricted authority under ss. 92(2) and 92(9) for:
In turn, the provincial legislatures have authorized municipal councils to levy specific types of direct tax, such as property tax.
The powers of taxation are circumscribed by ss. 53 and 54 (both extended to the provinces by s. 90), and 125, which state:
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Nature of the taxation power in Canada
Since the 1930 Supreme Court of Canada ruling in Lawson v. Interior Tree Fruit and Vegetables Committee of Direction, taxation is held to consist of the following characteristics:
- it is enforceable by law;
- imposed under the authority of the legislature;
- levied by a public body; and
- intended for a public purpose.
In order for a tax to be validly imposed, it must meet the requirements of s. 53 of the Constitution Act, 1867, but the authority for such imposition may be delegated within certain limits. Major J noted in Re Eurig Estate:
In my view, the rationale underlying s. 53 is somewhat broader. The provision codifies the principle of no taxation without representation, by requiring any bill that imposes a tax to originate with the legislature. My interpretation of s. 53 does not prohibit Parliament or the legislatures from vesting any control over the details and mechanism of taxation in statutory delegates such as the Lieutenant Governor in Council. Rather, it prohibits not only the Senate, but also any other body other than the directly elected legislature, from imposing a tax on its own accord.
This was endorsed by Iacobucci J in Ontario English Catholic Teachers' Assn. v. Ontario (Attorney General), and he further stated:
The delegation of the imposition of a tax is constitutional if express and unambiguous language is used in making the delegation. The animating principle is that only the legislature can impose a new tax ab initio. But if the legislature expressly and clearly authorizes the imposition of a tax by a delegated body or individual, then the requirements of the principle of "no taxation without representation" will be met. In such a situation, the delegated authority is not being used to impose a completely new tax, but only to impose a tax that has been approved by the legislature. The democratic principle is thereby preserved in two ways. First, the legislation expressly delegating the imposition of a tax must be approved by the legislature. Second, the government enacting the delegating legislation remains ultimately accountable to the electorate at the next general election.
Taxation vs regulatory charge
In Westbank First Nation v. British Columbia Hydro and Power Authority, the SCC declared that a government levy would be in pith and substance a tax if it was "unconnected to any form of a regulatory scheme." The test for a regulatory fee set out in Westbank requires:
- a complete, complex and detailed code of regulation;
- a regulatory purpose which seeks to affect some behaviour;
- the presence of actual or properly estimated costs of the regulation; and
- a relationship between the person being regulated and the regulation, where the person being regulated either benefits from, or causes the need for, the regulation.
In 620 Connaught Ltd. v. Canada (Attorney General), the Westbank framework was qualified to require "a relationship between the charge and the scheme itself." This has resulted in situations where an imposition can be characterized as neither a valid regulatory charge nor a valid tax. In Confédération des syndicats nationaux v. Canada (Attorney General), a funding scheme for employment insurance that was intended to be self-financing instead generated significant surpluses that were not used to reduce EI premiums in accordance with the legislation. It was therefore held to be contrary to the federal unemployment insurance power under s. 91(2A) and thus not a valid regulatory charge, and there was no clear authority in certain years for setting such excess rates, so it was not a valid tax.
Direct vs indirect taxation
The question of whether a tax is "direct taxation" (and thus falling within provincial jurisdiction) was summarized by the Judicial Committee of the Privy Council in The Attorney General for Quebec v Reed, where Lord Selborne stated:
The question whether it is a direct or indirect tax cannot depend on those special events which may vary in particular cases; but the best general rule is to look to the time of payment; and if at the time the ultimate incidence is uncertain, then, as it appears to their Lordships, it cannot, in this view, be called direct taxation within the meaning of [s. 92(2)]...
"Indirect taxation" has been summarized by Rand J in Canadian Pacific Railway Co. v. Attorney General for Saskatchewan in these words:
In Esquimalt, Lord Greene ... speaks of the "fundamental difference" between the "economic tendency" of an owner to try to shift the incidence of a tax and the "passing on" of the tax regarded as the hallmark of an indirect tax. In relation to commodities in commerce, I take this to lie in the agreed conceptions of economists of charges which fall into the category of accumulating items: and the question is, what taxes, through intention and expectation, are to be included in those items? If the tax is related or relateable, directly or indirectly, to a unit of the commodity or its price, imposed when the commodity is in course of being manufactured or marketed, then the tax tends to cling as a burden to the unit or the transaction presented to the market. However much, in any case, these may be actually "intended" or "expected" to be passed on, it is now settled that they are to be so treated.
When the definition of "direct taxation" is read with s. 92(2)'s requirement that it be levied "within the Province", it has been held that:
- provincial taxes must fasten onto provincially located persons, property or transactions, or to extraprovincial persons conducting economic activity within the province
- they may not be levied on goods destined for export
- they must not impede the flow of interprovincial trade
Licensing fees and regulatory charges
Allard Contractors Ltd. v. Coquitlam (District) held that:
- provincial legislatures may charge a fee that is of an indirect nature, where it is supportable as ancillary or adhesive to a valid regulatory scheme under a provincial head of power.
- in obiter, La Forest J's observation was cited with approval that s. 92(9) (together with the provincial powers over property and civil rights and matters of a local or private nature) allows for the levying of license fees even if they constitute indirect taxation.
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Administration
Federal taxes are collected by the Canada Revenue Agency (CRA). Under tax collection agreements, the CRA collects and remits to the provinces:
- provincial personal income taxes on behalf of all provinces except Quebec, through a system of unified tax returns.
- corporate taxes on behalf of all provinces except Quebec and Alberta.
- that portion of the Harmonized Sales Tax that is in excess of the federal Goods and Services Tax (GST) rate, with respect to the provinces that have implemented it.
The Agence du Revenu du Québec collects the GST in Quebec on behalf of the federal government, and remits it to Ottawa.
Income taxes
The Parliament of Canada entered the field with the passage of the Business Profits War Tax Act, 1916 (essentially a tax on larger businesses, chargeable on any accounting periods ending after 1914 and before 1918). It was replaced in 1917 by the Income War Tax Act, 1917 (covering personal and corporate income earned from 1917 onwards). Similar taxes were imposed by the provinces in the following years.
Municipal income taxes existed as well in certain municipalities, but such taxation powers were gradually abolished as the provinces established their own collection régimes, and none survived the Second World War, as a consequence of the Wartime Tax Rental Agreements.
- From 1850, municipal councils in Ontario possessed authority to levy taxes on income, where such amount was greater than the value of a taxpayer's personal property. The personal property limitation was removed with the passage of the Assessment Act in 1904. By 1936, some 200 councils ranging in size from Toronto to Blenheim Township were collecting such taxes. Toronto levied personal income taxes until 1936, and corporate income taxes until 1944.
- From 1855 to 1870, and once more from 1939, income tax was imposed on residents of Quebec City. In 1935, a municipal income tax was imposed on the income of individuals resident or doing business in Montreal and the municipalities of the Montreal Metropolitan Commission. Similar income taxes were also imposed in Sherbrooke from 1886 to 1912, in Sorel from 1889, and Hull from 1893.
- In Prince Edward Island, Summerside had an income tax from 1870 to 1880, and Charlottetown imposed one from 1880 to 1888.
- While Nova Scotia permitted municipal income tax in 1835, Halifax was the first municipality to levy one in 1849.
- New Brunswick allowed the collection of income taxes in 1831. However, serious enforcement did not begin until 1849, but it was only in 1908 when all municipalities in the Province were required to collect it.
Personal income taxes
Both the federal and provincial governments have imposed income taxes on individuals, and these are the most significant sources of revenue for those levels of government accounting for over 45% of tax revenue. The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage, except in Quebec. Income taxes throughout Canada are progressive with the high income residents paying a higher percentage than the low income.
Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.
Settlements and legal damages are generally not taxable, even in circumstances where damages (other than unpaid wages) arise as a result of breach of contract in an employment relationship.
Federal and provincial income tax rates are shown at Canada Revenue Agency's website.
Personal income tax can be deferred in a Registered Retirement Savings Plan (RRSP) (which may include mutual funds and other financial instruments) that are intended to help individuals save for their retirement. Tax-Free Savings Accounts allow people to hold financial instruments without taxation on the income earned.
Corporate taxes
Companies and corporations pay tax on profit income and on capital. These make up a relatively small portion of total tax revenue. Tax is paid on corporate income at the corporate level before it is distributed to individual shareholders as dividends. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corporate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income. (Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.)
Corporations may deduct the cost of capital following capital cost allowance regulations. The Supreme Court of Canada has interpreted the Capital Cost Allowance in a fairly broad manner, allowing deductions on property which was owned for a very brief period of time, and property which is leased back to the vendor from which it originated.
Starting in 2002, several large companies converted into "income trusts" in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada as of 2005. Conversions were largely halted on October 31, 2006, when Finance Minister Jim Flaherty announced that new income trusts would be subject to a tax system similar to that of corporations, and that these rules would apply to existing income trusts after 2011.
Capital tax is a tax charged on a corporation's taxable capital. Taxable capital is the amount determined under Part 1.3 of the Income Tax Act (Canada) plus accumulated other comprehensive income.
On January 1, 2006, capital tax was eliminated at the federal level. Some provinces continued to charge corporate capital taxes, but effective July 1, 2012, provinces have stopped levying corporation capital taxes. In Ontario the corporate capital tax was eliminated July 1, 2010 for all corporations, although it was eliminated effective January 1, 2007, for Ontario corporations primarily engaged in manufacturing or resource activities. In British Columbia the corporate capital tax was eliminated as of April 1, 2010.
From 1932 until 1951, Canadian companies were able to file consolidated tax returns, but this was repealed with the introduction of the business loss carryover rules. In 2010, the Department of Finance launched consultations to investigate whether corporate taxation on a group basis should be reintroduced. As no consensus was reached in such consultations, it was announced in the 2013 Budget that moving to a formal system of corporate group taxation was not a priority at this time.
International taxation
Canadian residents and corporations pay income taxes based on their world-wide income. Canadians are in principle protected against double taxation receiving income from certain countries which gave agreements with Canada through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable from the income tax paid in other countries. A citizen who is currently not a resident of Canada may petition the CRA to change her or his status so that income from outside Canada is not taxed.
If you are a non-resident of Canada and you have taxable earnings in Canada (e.g. rental income and property disposition income) you will be required to pay Canadian income tax on these amounts. Rents paid to non-residents are subject to a 25% withholding tax on the "gross rents", which is required to be withheld and remitted to Canada Revenue Agency ("CRA") by the payer (i.e. the Canadian agent of the non-resident, or if there is no agent, the renter of the property) each time rental receipts are paid or credited to the account of the non-resident by the payer. If the payer does not remit the required withholding taxes by the 15th day following the month of payment to the non-resident, the payer will be subject to penalties and interest on the unpaid amounts.
Payroll taxes
Employers are required to remit various types of payroll taxes to the different jurisdictions they operate in:
Consumption taxes
Sales taxes
The federal government levies a value-added tax of 5%, called the Goods and Services Tax (GST), and, in five provinces, the Harmonized Sales Tax (HST). The provinces of British Columbia, Saskatchewan, and Manitoba levy a retail sales tax, and Quebec levies its own value-added tax, which is called the Quebec Sales Tax. The province of Alberta and the territories of Nunavut, Yukon, and Northwest Territories do not levy sales taxes of their own.
Retail sales taxes were introduced in the various provinces on these dates:
Current sales tax rates
Excise taxes
Both the federal and provincial governments impose excise taxes on inelastic goods such as cigarettes, gasoline, alcohol, and for vehicle air conditioners. Canada has some of the highest rates of taxes on cigarettes and alcohol in the world, constituting a substantial share of the retail total price of cigarettes and alcohol paid by consumers. These are sometimes referred to as sin taxes. It is generally accepted that higher prices deter consumption of these items which have been deemed to increase health care costs stemming from those who use them, even though this is a myth.[source?]
The vehicle air conditioner tax is currently set at $100 per air conditioning unit.
At the federal level, Canada has imposed other excise taxes in the past:
- From 1915 to 1953, on the issue of cheques and other commercial paper.
- From 1920 to 1927, on advances of money
- From 1920 to 1953, on the transfer of securities. Initially applying to shares, it was extended to cover bonds and related items in 1922.
- From 1923 to 1926, on the issue of receipts.
Wealth taxes
Property taxes
The municipal level of government is funded largely by property taxes on residential, industrial and commercial properties. These account for about ten percent of total taxation in Canada. There are two types. The first is an annual tax levied on the value of the property (land plus buildings). The second is a land transfer tax levied on the sale price of properties everywhere except Alberta, Saskatchewan and rural Nova Scotia.
Gift tax
Gift tax was first imposed by the Parliament of Canada in 1935 as part of the Income War Tax Act. It was repealed at the end of 1971, but rules governing the tax on capital gains that then came into effect include gifts as deemed dispositions made at fair market value, that come within their scope.
Estate tax
Estate taxes have been held to be valid "direct taxation within the province," but they cannot be charged where property is left outside the province to beneficiaries who are neither resident nor domiciled in the province. Succession duties were in effect in the various provinces at the following times:
Estate taxes, which were not subject to the territorial limitations that affected provincial taxation, were first introduced at the federal level under the Dominion Succession Duty Act in 1941, which was later replaced by the Estate Tax Act in 1958. The latter was repealed at the end of 1971. From 1947 to 1971, there was a complicated set of federal-provincial revenue-sharing arrangements, where:
- In Newfoundland, Prince Edward Island, Nova Scotia, New Brunswick, and Manitoba, the federal government collected estate taxes at full rates, but remitted 75% of the revenues derived from each of those provinces;
- In Alberta and Saskatchewan, the federal government collected estate taxes at full rates, but remitted 75% of the revenues derived from each of those provinces, which was rebated back to the estate;
- In British Columbia, the federal government collected estate taxes at only 25% of the full rate, and the province continued to levy its own succession duty;
- In Ontario and Quebec, the federal government collected estate taxes at only 50% of the full rate, and remitted 50% of such collections to such provinces, and the provinces continued to levy their own succession duties.
Upon the repeal of the federal estate tax in 1972, the income tax régime was altered to incorporate consequences arising from the death of a taxpayer, which may result in tax being owed:
- the property of an estate is said to have incurred a "deemed disposition" at fair market value, thus triggering liability for capital gains and other inclusions into income
- certain deductions and deferrals are available with respect to capital gains
- several options are available for applying any outstanding net capital losses
- income earned or accrued up to the date of death is taxed on the final tax return of the deceased at normal tax rates, but there are several additional optional tax returns that may be filed as well for certain types of income
- income earned after the date of death is to be declared on a separate return filed by the trust for the estate
- beneficiaries are taxed on amounts paid from Registered Retirement Savings Plans and Registered Retirement Income Funds, but certain rollover reliefs are available
See also
- Dividend tax
- Fiscal neutrality
- Goods and Services Tax (Canada) (GST)
- Registered Retirement Savings Plan (RRSP)
- Surrogatum Principle
- Canadian federal budget
Further reading
- Gillespie, Irwin (1995). Tax, Borrow and Spend: Financing Federal Spending in Canada, 1867-1990. Carleton University Press. p. 263. ISBN 0-88629-153-4.
- Lewis, David (1972). Louder Voices: The Corporate Welfare Bums. Introduction by Eric Kierans. Toronto: James Lewis & Samuel. ISBN 0-88862-031-4. (Largely concerns corporate taxation, including income taxes, and subsidies in Canada.)
- Magnet, Joseph Eliot (1978). "The Constitutional Distribution of Taxation Powers in Canada". Ottawa Law Review. University of Ottawa. 10 (3): 473-534. Retrieved 8 April 2013.
References
External links
- The Department of Finance, Canada
- Canada Revenue Agency
Source of article : Wikipedia
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