Canadian Tax System Vicki LingleyTaxpayer Services Division

Today’s agenda• History of taxes in Canada• How does the tax system work in Canada?• Why do we pay tax?• How do we pay tax?• Basics of T1 form and guide• Filing your tax return• Underground Economy• Consequences of tax evasion• Voluntary Disclosure Program• Credits• Electronic Filing

History of Taxes in Canada

In 1650 Louis XIV of France imposed the first tax in Canadian history - an export tax of 50% on beaver pelts and 10% on moose hides leaving his colonies

History of Taxes in Canada

• 1867 – Confederation – The British North America Act was passed, giving the newly formed Canadian Government the power to raise money by taxation

• From 1867 to 1917 – The provinces raised money mainly through fees, licenses and rents from public lands. They also taxed horses, dogs, cars, gasoline, salmon and other items

History of Taxes in Canada

• 1914 – World War I begins

• 1917 – The federal government introduces the Income War Tax Act. This act was enacted to raise extra money for the government to fund the war effort.

History of Taxes in Canada

1949 – The federal government introduces the Income Tax Act, which replaces the Income War Tax Act.

The Income Tax Act is still used today to administer Canada’s tax laws.

History of Taxes in Canada

How does the tax system work in Canada?

• The Department of Finance is the federal department primarily responsible for providing the Government of Canada with analysis and advice on the broad economic and financial affairs of Canada.

• The department establishes and introduces the “Federal Budget” to Parliament.

• The Canada Revenue Agency (CRA) is the agency responsible for administering the tax laws for the Government of Canada

How does the tax system work in Canada?

• Just like the systems in the United States, Australia and New Zealand, Canada uses a self-assessing system of taxation.

• We are relying on the citizens of Canada to file their annual income tax return to report their income and deductions.

• However, we reserve the right to review any tax return information to maintain the integrity of the system.

Why do we pay taxes?• Canada’s tax system pays for roads, public utilities,

schools, health care, economic development, cultural activities, defence and law enforcement.

Why do we pay taxes?• Tax revenue helps redistribute wealth to such

beneficiaries as lower-income families, charities, students, retirees and people with disabilities.

• Tax money provides social services such as Old Age Security benefits, Employment Insurance benefits and the Canada Child Tax Benefit.

The Federal Government:• Collects income tax, GST/HST, excise taxes• Provides:

• Employment Insurance (EI)• Canada Pension Plan (CPP)• Airports (TC)• Food Inspection (CFIA)• Foreign Aid • National Defence (DND)• RCMP• Immigration and border patrol (CIC & CBSA)• Space Agency (CSA)• National Parks (Parks Canada)• Transfer payments, etc…

Provincial Governments:• Collect income taxes, PST, Lotteries

• Provide:• Hospitals• Schools• Roads• Provincial Police, etc…

Municipal Governments:• Collect property taxes on homes and businesses, parking

meter fees, parking fines, licenses

• Provides:• Roads, sewers, traffic lights• Police, fire• Parks and Recreation• Garbage collection, etc…

How do we pay taxes?• There are many different types of taxes and

different ways to pay and identify them.

• Direct taxes – personal income taxes, gift taxes, corporate taxes and succession duties. They are usually levied against the taxpayer who is responsible for paying them.

How do we pay taxes?• Indirect taxes – These usually consist of sales

taxes, excise taxes, land taxes and customs duties. They are taxes that have initially been paid by someone, who in turn, passes on the cost.

Paying Your Personal Income Taxes

• The most common form of paying personal income tax is through payroll source deductions.

• Your employer will calculate and withhold from your pay the minimum required amount of income tax required by law. You can ask them to withhold more if you wish.

• The employer then remits these taxes to us. At the end of the year, the employer prepares a T4 Information slip showing the gross earnings and cumulative totals of income taxes, Employment Insurance premiums and Canada Pension Plan deductions (for 18 years or older only)

T4 Information Slip

Back view of T4 slip

Basics of the T1 Form and Guide• The income tax return is divided into 6 sections:

• Identification• Total Income• Net Income• Taxable Income• Non-refundable tax credits• Refund or Balance owing

Identification

Total Income

Net income and Taxable income

Non-refundable tax credits

Refund or Balance owing

Filing your return with taxes owing• Deadline for filing your return: April 30

• Deadline for paying any taxes owing: April 30

• Possible penalties:• 5% of taxes owing for a return filed late plus 1% for

every month it is late. • If you had a late return in the previous 3 years, the

late-filing penalty doubles to 10% of amount owing plus 2% per late month.

• Daily-compound interest charged on any outstanding amount effective May 1.

Filing your return with refund• Deadlines remain the same for filing your tax

return: April 30

• No penalties if filed late if you are entitled to a refund

• Time to receive refund:• Paper file: 4 to 6 weeks• Electronic file: 8 to 10 business days

• We recommend you still file on time to keep a good compliance history

What is the “Underground Economy”?

The Underground Economy is defined as income and sales that are unreported or under-reported for Income Tax, Goods and Services Tax and undeclared or undervalued for Customs purposes.

It largely covers that portion of business activity that is associated with the supply of goods and services for cash.

How does the Underground Economy affect You?

• continued revenue losses put social programs at risk• reduction in services• creates unfair competition/ uneven playing field• pushes deficits higher than otherwise would be the

case• puts an unfair burden on honest Canadians who pay

a disproportionate share of tax

Consequences of Tax Evasion• Every year, thousands of

taxpayers either fail to file their returns or try to avoid paying taxes.

• This puts an unfair burden on honest Canadians who end up paying a disproportionate share of tax.

• Tax Evasion and/or Fraud are serious crimes and CRA dedicates a huge amount of resources to try and reduce it.

Consequences of Tax Evasion• In 2008-2009 CRA

initiated action to collect over 787,000 tax returns that had not filed, resulting in an extra $2.3 billion in tax revenue.

• In the same period, CRA performed over 374,000 audits of various sizes.

• Over 1,100 charges were filed for failing to file a tax return or tax evasion with a 98% conviction rate.

Voluntary Disclosure• The Voluntary Disclosures Program (VDP) allows

taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not reported during previous dealings with the CRA, without penalty or prosecution.

• A valid disclosure must meet four conditions.

They require that the disclosure be voluntary, complete, involve the application or potential application of a penalty, and generally include information that is more than one year overdue.

Voluntary Disclosure• If CRA accepts the

voluntary disclosure, the taxpayer will not face prosecution or penalties. They will only have to pay the unpaid taxes and interest.

• In 2008-2009, 11,400 individuals and businesses filed Voluntary Disclosures, resulting in an extra $575 million in tax revenue.

• Bottom line…come to us before we go after you.

Credits and Benefits• Starting at the age of 19, you might be

entitled to receive the Goods and Services Tax Credit (GSTC), which is paid on a quarterly basis.

• If you have a child under the age of 18, you may also qualify for the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB). These are monthly payments to help parents raise their children.

• These credits are based on the amount of income earned in a year so filing your income tax return is very important.

Electronic Filing• In 2008, over 24,206,320 tax returns were filed

with a little over 62.6% in an electronic format.

• Breakdown:• Paper – 9,042,040 (37.4%)• Efile – 10,118,930 (41.8%)• Telefile – 442,930 (1.8%)• Netfile – 4,602,420 (19%)

• Efile – Used by tax preparation businesses• Telefile – File your tax return over the phone• Netfile – File your tax return online

FOR MORE INFORMATION

• Online: www.cra.gc.ca

• Phone: 1-800-959-8281

Feedback• We welcome your

feedback.

• Please take the time to fill out the questionnaire.

• All answers are kept confidential.