Byrd and Chen's Canadian Tax Principles, 2024-2025 (Donell)
Chapter 1 Introduction to Federal Taxation in Canada
1.1 Online Exercises
1) The major source of federal revenues is the personal income tax. Indicate three other types of taxes that
contribute to federal revenues.
Answer: The other sources of federal revenues that are shown in Figure 1-1 of the textbook are:
• Corporate income tax.
• Non-resident income tax.
• GST.
• Customs and import duties.
• Other excise taxes.
• Employment Insurance premiums.
Type: ES
Topic: Federal revenue sources
2) What is the meaning of "person" when the term is used in the ITA?
Answer: In the ITA, the term "person" refers to an individual, a corporation, a trust, or an estate.
Type: ES
Topic: Definition - "Person" ITA 248(1)
3) Briefly describe the procedures used in calculating provincial or territorial income tax for individuals
other than for individuals residing in Quebec.
Answer: Provincial or territorial income tax for individuals is calculated by applying a provincial or
territorial income tax rates to taxable income for federal income tax purposes. Provincial or territorial
personal income tax credits are then applied to the resulting gross income tax. The provincial and
territorial income tax brackets may differ from the federal income tax brackets. In addition, provincial
and territorial personal tax credits may be different than the federal personal tax credits.
Type: ES
Topic: Income tax payable - federal income tax
4) The Canadian income tax system is often used to achieve various economic objectives. Give three
examples that illustrate this point.
Answer: There are many examples. The textbook divides them into resource allocation (e.g., public
health care), distribution effects (e.g., federal GST credit), stabilization effects (e.g., deficit reduction), and
fiscal federalism (e.g., allocations to various levels of government).
Type: ES
Topic: Canadian income tax system - objectives
5) Provide an example of how tax policy can be used to influence resource allocation.
Answer: Examples provided in the textbook are as follows:
• Tax revenues are used to provide public goods and services.
• Excise taxes are used to discourage the consumption of alcohol and tobacco products. There are many
other examples that could be cited.
Type: ES
Topic: Canadian income tax system - objectives
1
..
,6) The government pays a Canada Child Benefit to the parents of children who are under 18 years of age.
The payments are reduced where the income of the parents or supporting persons are above a certain
threshold amount. What objectives are achieved by this benefit?
Answer: The Canada Child Benefit is designed to assist low income families with the costs of
supporting and raising children. The government is also encouraging population growth.
Type: ES
Topic: Canadian income tax system - objectives
7) Indicate three disadvantages of a tax system that uses progressive rates.
Answer: Possibilities include that progressive rates:
• Increase the complexity of the system.
• Are unfair to individuals with highly variable levels of annual income.
• Are unfair to single income family units.
• Lead to pressure for various types of income tax concessions.
• Discourage high income individuals from making additional efforts.
• Encourage income tax evasion.
Type: ES
Topic: Canadian income tax system - objectives
8) A regressive tax is one that taxes high income individuals at lower effective rates. Explain why a sales
tax levied at a flat rate of 8% can be regressive.
Answer: While the sales tax rate is the same for all individuals without regard to their income level,
lower income individuals spend a higher percentage of their total income than high income taxpayers.
Since the sales tax is charged on the amounts spent, this means that the sales tax paid by lower income
individuals represents a larger percentage of their total income. As a consequence, they are generally
considered to be regressive in nature.
Type: ES
Topic: Canadian income tax system - regressive vs. progressive rates
9) Distinguish between horizontal equity and vertical equity as these terms are used in describing tax
systems.
Answer: Horizontal equity is achieved when taxpayers in similar economic circumstances are subject to
similar levels of income tax. Vertical equity is achieved when taxpayers in different economic
circumstances are not subject to similar levels of income tax.
Type: ES
Topic: Canadian income tax system - objectives
2
..
,10) What are some of the factors that have led to the entrenched use of tax expenditures as opposed to
program spending?
Answer: The reasons that are listed in the textbook are as follows:
• It is less costly to administer tax expenditures than it is to administer government funding programs.
• More decisions are left to the private sector so that funds may be allocated more efficiently.
• Tax expenditures reduce the visibility of certain government actions. This is particularly beneficial if
some social stigma is attached to the programs. For example, a child tax benefit system is more acceptable
than increasing social assistance (welfare) payments.
• Tax expenditures reduce the progressivity of the tax system. As many of the tax expenditures, such as
tax shelters, are more available to higher income taxpayers, they serve to reduce effective income tax rates
in the higher rate brackets.
Type: ES
Topic: Canadian income tax system - objectives
11) While the Sections of the ITA are numbered 1 through 295, there are actually more than 295 Sections.
Explain why this is the case.
Answer: This situation reflects the fact that when a new Section is added, it has been more convenient to
attach a decimal designation to the new Section, as opposed to renumbering all of the Sections that follow
the new Section. As an example, over several years, the Department of Finance has added seven new
Sections after Section 12. They have been numbered Section 12.1 through Section 12.7. If they had used
whole numbers for these new Sections, it would have been necessary to renumber all of the remaining
Sections in the ITA each time a new Section was added.
Type: ES
Topic: The ITA & income tax reference materials
12) What purposes are served by Canada's international income tax treaties?
Answer: The purposes of these treaties are as follows:
• They impose measures on countries to avoid double taxation where a person is liable for income tax on
the same income in both countries
• They are used to create an exchange of information for the purposes of combatting income tax evasion.
Type: ES
Topic: International - income tax treaties
13) List four non-legislative sources of income tax information.
Answer: The four types of income tax information can be selected from the following:
• CRA Web Site
• Interpretation Bulletins
• Income Tax Folios
• Information Circulars
• CRA News Releases, Tax Tips, and Fact Sheets
• CRA Guides
• Advance Income Tax Rulings
• Technical Interpretations
Type: ES
Topic: The ITA & income tax reference materials
3
..
, 14) What is the meaning of "taxation year" as the expression is used in the ITA?
Answer: For individuals and trusts (except graduated rate estates (GRE)), the taxation year is the
calendar year of January 1 to December 31. In contrast, the taxation year for corporations is defined in
terms of a fiscal period which generally relates to a business. A fiscal period can generally end on any
date, with the only constraint being that it cannot exceed 53 weeks. Graduated rate estates (GRE) are the
only personal trust permitted to use a non-calendar taxation year.
Type: ES
Topic: Definition - "Taxation Year" ITA 249
15) Under what circumstances will a person who is not resident in Canada be liable for Canadian income
tax?
Answer:
• The non-resident person earns employment income in Canada.
• The non-resident person earns business income from carrying on a business in Canada.
• The non-resident person has a gain on the disposal of taxable Canadian property.
Type: ES
Topic: Non-resident liability for income tax
16) What is the importance of residence in Canadian income tax?
Answer: Residence is the cornerstone of Canadian income tax. If a person is considered a resident of
Canada in a given year, that person will be subject to Canadian income tax for that year on all income
regardless of whether it is earned inside or outside of Canada (e.g. worldwide income). Alternatively, if
the person is a non-resident, Canadian Part I tax will only apply to Canadian employment income,
Canadian business income, and gains on the disposition of Taxable Canadian Property.
Type: ES
Topic: Residency - general concepts
17) When an individual leaves Canada, the CRA may take the position that the individual remains a
resident of Canada. What are the three primary factors that the CRA considers in determining whether an
individual has, in fact, ceased to be a resident of Canada?
Answer: As stated in S5-F1-C1, the primary factors that will be considered by the CRA are:
• Whether the individual is continuing to maintain a dwelling in Canada.
• Whether the spouse or common-law partner of the individual remains in Canada.
• Whether the individual has dependants who remain in Canada.
Type: ES
Topic: Residential ties
4
..
Chapter 1 Introduction to Federal Taxation in Canada
1.1 Online Exercises
1) The major source of federal revenues is the personal income tax. Indicate three other types of taxes that
contribute to federal revenues.
Answer: The other sources of federal revenues that are shown in Figure 1-1 of the textbook are:
• Corporate income tax.
• Non-resident income tax.
• GST.
• Customs and import duties.
• Other excise taxes.
• Employment Insurance premiums.
Type: ES
Topic: Federal revenue sources
2) What is the meaning of "person" when the term is used in the ITA?
Answer: In the ITA, the term "person" refers to an individual, a corporation, a trust, or an estate.
Type: ES
Topic: Definition - "Person" ITA 248(1)
3) Briefly describe the procedures used in calculating provincial or territorial income tax for individuals
other than for individuals residing in Quebec.
Answer: Provincial or territorial income tax for individuals is calculated by applying a provincial or
territorial income tax rates to taxable income for federal income tax purposes. Provincial or territorial
personal income tax credits are then applied to the resulting gross income tax. The provincial and
territorial income tax brackets may differ from the federal income tax brackets. In addition, provincial
and territorial personal tax credits may be different than the federal personal tax credits.
Type: ES
Topic: Income tax payable - federal income tax
4) The Canadian income tax system is often used to achieve various economic objectives. Give three
examples that illustrate this point.
Answer: There are many examples. The textbook divides them into resource allocation (e.g., public
health care), distribution effects (e.g., federal GST credit), stabilization effects (e.g., deficit reduction), and
fiscal federalism (e.g., allocations to various levels of government).
Type: ES
Topic: Canadian income tax system - objectives
5) Provide an example of how tax policy can be used to influence resource allocation.
Answer: Examples provided in the textbook are as follows:
• Tax revenues are used to provide public goods and services.
• Excise taxes are used to discourage the consumption of alcohol and tobacco products. There are many
other examples that could be cited.
Type: ES
Topic: Canadian income tax system - objectives
1
..
,6) The government pays a Canada Child Benefit to the parents of children who are under 18 years of age.
The payments are reduced where the income of the parents or supporting persons are above a certain
threshold amount. What objectives are achieved by this benefit?
Answer: The Canada Child Benefit is designed to assist low income families with the costs of
supporting and raising children. The government is also encouraging population growth.
Type: ES
Topic: Canadian income tax system - objectives
7) Indicate three disadvantages of a tax system that uses progressive rates.
Answer: Possibilities include that progressive rates:
• Increase the complexity of the system.
• Are unfair to individuals with highly variable levels of annual income.
• Are unfair to single income family units.
• Lead to pressure for various types of income tax concessions.
• Discourage high income individuals from making additional efforts.
• Encourage income tax evasion.
Type: ES
Topic: Canadian income tax system - objectives
8) A regressive tax is one that taxes high income individuals at lower effective rates. Explain why a sales
tax levied at a flat rate of 8% can be regressive.
Answer: While the sales tax rate is the same for all individuals without regard to their income level,
lower income individuals spend a higher percentage of their total income than high income taxpayers.
Since the sales tax is charged on the amounts spent, this means that the sales tax paid by lower income
individuals represents a larger percentage of their total income. As a consequence, they are generally
considered to be regressive in nature.
Type: ES
Topic: Canadian income tax system - regressive vs. progressive rates
9) Distinguish between horizontal equity and vertical equity as these terms are used in describing tax
systems.
Answer: Horizontal equity is achieved when taxpayers in similar economic circumstances are subject to
similar levels of income tax. Vertical equity is achieved when taxpayers in different economic
circumstances are not subject to similar levels of income tax.
Type: ES
Topic: Canadian income tax system - objectives
2
..
,10) What are some of the factors that have led to the entrenched use of tax expenditures as opposed to
program spending?
Answer: The reasons that are listed in the textbook are as follows:
• It is less costly to administer tax expenditures than it is to administer government funding programs.
• More decisions are left to the private sector so that funds may be allocated more efficiently.
• Tax expenditures reduce the visibility of certain government actions. This is particularly beneficial if
some social stigma is attached to the programs. For example, a child tax benefit system is more acceptable
than increasing social assistance (welfare) payments.
• Tax expenditures reduce the progressivity of the tax system. As many of the tax expenditures, such as
tax shelters, are more available to higher income taxpayers, they serve to reduce effective income tax rates
in the higher rate brackets.
Type: ES
Topic: Canadian income tax system - objectives
11) While the Sections of the ITA are numbered 1 through 295, there are actually more than 295 Sections.
Explain why this is the case.
Answer: This situation reflects the fact that when a new Section is added, it has been more convenient to
attach a decimal designation to the new Section, as opposed to renumbering all of the Sections that follow
the new Section. As an example, over several years, the Department of Finance has added seven new
Sections after Section 12. They have been numbered Section 12.1 through Section 12.7. If they had used
whole numbers for these new Sections, it would have been necessary to renumber all of the remaining
Sections in the ITA each time a new Section was added.
Type: ES
Topic: The ITA & income tax reference materials
12) What purposes are served by Canada's international income tax treaties?
Answer: The purposes of these treaties are as follows:
• They impose measures on countries to avoid double taxation where a person is liable for income tax on
the same income in both countries
• They are used to create an exchange of information for the purposes of combatting income tax evasion.
Type: ES
Topic: International - income tax treaties
13) List four non-legislative sources of income tax information.
Answer: The four types of income tax information can be selected from the following:
• CRA Web Site
• Interpretation Bulletins
• Income Tax Folios
• Information Circulars
• CRA News Releases, Tax Tips, and Fact Sheets
• CRA Guides
• Advance Income Tax Rulings
• Technical Interpretations
Type: ES
Topic: The ITA & income tax reference materials
3
..
, 14) What is the meaning of "taxation year" as the expression is used in the ITA?
Answer: For individuals and trusts (except graduated rate estates (GRE)), the taxation year is the
calendar year of January 1 to December 31. In contrast, the taxation year for corporations is defined in
terms of a fiscal period which generally relates to a business. A fiscal period can generally end on any
date, with the only constraint being that it cannot exceed 53 weeks. Graduated rate estates (GRE) are the
only personal trust permitted to use a non-calendar taxation year.
Type: ES
Topic: Definition - "Taxation Year" ITA 249
15) Under what circumstances will a person who is not resident in Canada be liable for Canadian income
tax?
Answer:
• The non-resident person earns employment income in Canada.
• The non-resident person earns business income from carrying on a business in Canada.
• The non-resident person has a gain on the disposal of taxable Canadian property.
Type: ES
Topic: Non-resident liability for income tax
16) What is the importance of residence in Canadian income tax?
Answer: Residence is the cornerstone of Canadian income tax. If a person is considered a resident of
Canada in a given year, that person will be subject to Canadian income tax for that year on all income
regardless of whether it is earned inside or outside of Canada (e.g. worldwide income). Alternatively, if
the person is a non-resident, Canadian Part I tax will only apply to Canadian employment income,
Canadian business income, and gains on the disposition of Taxable Canadian Property.
Type: ES
Topic: Residency - general concepts
17) When an individual leaves Canada, the CRA may take the position that the individual remains a
resident of Canada. What are the three primary factors that the CRA considers in determining whether an
individual has, in fact, ceased to be a resident of Canada?
Answer: As stated in S5-F1-C1, the primary factors that will be considered by the CRA are:
• Whether the individual is continuing to maintain a dwelling in Canada.
• Whether the spouse or common-law partner of the individual remains in Canada.
• Whether the individual has dependants who remain in Canada.
Type: ES
Topic: Residential ties
4
..
