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
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?
1
,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
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?
1
,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
