Accounting 20
Module 2
Lesson 9
TABLE OF CONTENTS
LESSON 9 - PERSONAL INCOME TAX.................................................................................................... 4
TOPICS: ............................................................................................................................................................4
INTRODUCTION ................................................................................................................................................6
WHAT ARE TAXES?..............................................................................................................................................
WHERE DO YOUR TAX DOLLARS GO? ...................................................................................................................
WHAT IS THE DEPARTMENT OF CANADA REVENUE AGENCY? ...........................................................................
KINDS OF TAXES ................................................................................................................................................
CHARACTERISTICS OF A GOOD INCOME TAX SYSTEM ..........................................................................................
HISTORY OF INCOME TAX ..................................................................................................................................
Before Confederation ...................................................................................................................................
Confederation ...............................................................................................................................................
The Provinces ...............................................................................................................................................
The Federal Government.............................................................................................................................
World War I ..................................................................................................................................................
Administration .............................................................................................................................................
The Depression .............................................................................................................................................
World War II ................................................................................................................................................
Income Tax Act.............................................................................................................................................
Conferences ..................................................................................................................................................
The Carter Commission ...............................................................................................................................
Bill C-259 ......................................................................................................................................................
Other Areas of Change ................................................................................................................................
1988 TAX REFORM .............................................................................................................................................
How Tax Reform Will Work ........................................................................................................................
New Tax Rates .............................................................................................................................................
A Broader Tax Base .....................................................................................................................................
The Conversion to Credits ...........................................................................................................................
THE 1990S FAIRNESS PACKAGE .........................................................................................................................
THE GOODS AND SERVICES TAX ........................................................................................................................
CHILD TAX BENEFIT PROGRAM .........................................................................................................................
HISTORY SUMMARY............................................................................................................................................
The 1970s and 1980s ....................................................................................................................................
The 1990s ......................................................................................................................................................
GENERAL INCOME TAX FORMULA FOR INDIVIDUALS.........................................................................................
Deductions ....................................................................................................................................................
Non-Refundable Tax Credits .......................................................................................................................
WHAT ARE THE TAXPAYER’S RIGHTS AND RESPONSIBILITIES? ...........................................................................
CLIENT SERVICES FOR INCOME TAX ..................................................................................................................
Bilingual Services ........................................................................................................................................
Visually Impaired Clients............................................................................................................................
Community Volunteer Income Tax Program .............................................................................................
Electronic Data Interchange (EDI) .............................................................................................................
TELEFILE ....................................................................................................................................................
T.I.P.S. (Tax Information Phone Services) .................................................................................................
Internet Access .............................................................................................................................................
TAXATION THAT APPLIES TO PERSONS OF ABORIGINAL ANCESTRY ..................................................................
THE TAXPAYER’S RESPONSIBILITIES..................................................................................................................
APPEALS.............................................................................................................................................................
CONCLUSION ......................................................................................................................................................
GLOSSARY OF TERMS .......................................................................................................................................8
Accounting 20
2
Lesson 9
Lesson 9 - Personal Income Tax
In order to ensure that you complete the most current
general income tax return, the following are included with
the Lesson:
1) personal income tax topics
2) personal income tax kit.
Topics:
$
What are Taxes?
$
Where do your tax dollars go?
$
What is the Department of Revenue?
$
Kinds of taxes
$
Characteristics of a Good Income
$
Taxation that applies to Aboriginals
$
Appeals
$
Glossary of Terms
Tax System
$
History of Income Tax
$
Client Services for Income Tax
$
How are income taxes administered
in Canada
$
1988 Tax Reform
$
The 1990’s Fairness Package
$
The Goods and Services Tax
$
Child Tax Benefit Program
$
History Summary
$
General Income Tax Formula for
Individuals
$
What are Taxpayers’ Rights and
Responsibilities
Accounting 20
4
Lesson 9
After studying Lesson 9, you will be able
to:
$
$
$
define terms related to an Individual
Income Tax Return
recognize the rights and
responsibilities of taxpayers when
filing an income tax return
$
discover a relationship between
income taxes, the cost of government
services, and the Income Tax Act
determine and calculate permissible
deductions from total personal
income
$
prepare simplified general income
tax returns
Introduction
A basic knowledge and understanding of
Canada's income taxes will allow you to
deal effectively with taxes throughout your
life. You will be able to comply with the
law and to ensure you receive all the
benefits to which you are entitled.
much as possible so as to apply the most
recent regulations.
The study of personal income taxes involves
much more than is covered in this lesson.
It should be approached with the
knowledge that information has to be found
by searching the guide or phoning a source
of information such as the office of Canada
Revenue Agency. or going on Revenue
Canada website which is www.craarc.gc.ca/menu-e.html
The regulations and legislation on taxes
change frequently and any material written
today will likely be outdated within two or
three years. Consequently, the section on
personal income taxes was written with the
intent that the current tax guide be used as
Insert relevant information for Topics listed on page 4
Insert information that would be necessary for the kit.
The kit is everything a student would need to complete assignment 9.
1. Insert information and examples as to how to complete an
income tax return
2. Insert an outline of questions and list the two tax profile
examples that students will have to complete for this
assignment. These can be found in the following booklets.
3. Include the current year Teaching Taxes Program Student
Workbook
4. Include the current General Income Tax and Benefit Guide
5. Include the current Forms Booklet
Accounting 20
6
Lesson 9
The assignment for Lesson 9 ends when you have successfully completed
each question assigned in the student workbook
Submit the completed questions in the student workbook, two personal
income tax forms, two Federal Tax Schedule 1 forms, and two
Saskatchewan Income Tax and Credits forms for Profile Example 2 –
High School Student and Profile Example 5 – Employed Individual.
When you receive your corrections, study them carefully. You could have
income tax questions on your final exam!
Glossary of Terms
Taxpayers who use the accrual method of
accounting have to include a balance sheet with
their return.
Accounts payable - Debts you have as a result
of purchasing assets or services on an open
account or on credit. Accounts payable exist
when there is a period of time between when you
receive or acquire the assets or services, and
when you provide payment.
Bonds - Certificates that companies and
governments issue (e.g., Canada Savings
Bonds). Bonds show that the issuer has
borrowed a certain amount of money from the
holder and will pay it back by a certain date.
They also show how much interest the issuer will
pay for the loan. See "Investment."
Accounts receivable - Amount of money that a
debtor is owed. Generally, this amount is the
result of the sale of assets or for services
provided.
Canada Pension Plan (CPP) - An insurance
program designed to help Canadians provide
income for their retirement. It also gives them
income if they become disabled. Contributions
are directly related to annual earnings.
Accrual method of accounting - With this
method of reporting income and expenses,
income is reported in the fiscal period it is
earned, regardless of when it is received. The
expenses are also deducted in the fiscal period
they are incurred, whether they are paid or not.
This method is generally used by businesses or
professionals.
Working Canadians between the ages of 18 and
70 have to contribute to the Canada Pension
Plan (or the Quebec Pension Plan). Those
already receiving a pension from the plan do not
have to contribute.
Appeal - A process that occurs when you object
to the way that Canada Revenue Agency has
assessed your tax return. If Canada Revenue
Agency rejects your objection, you may appeal
this decision to the Tax Court of Canada and
then to the Federal Court of Appeal. You must
explain to the Tax Court of Canada, in writing,
the reasons for your appeal, and you must give
all the related facts.
Each year, the basic exemption, maximum
contribution limit, and benefits are adjusted
according to the cost of living. See "Quebec
Pension Plan."
Cash method of accounting - This method of
reporting income and expenses may be used by
farmers, fishermen, and certain salespeople who
work on commission. Income is included only
when it is actually received during the year.
Expenses are deducted in the year when they
are actually paid.
Assets - Generally, these are items of value that
you own. Assets include property such as
money, land, buildings, investments, rolling stock
investments (such as cars, trucks, or boats),
equipment, or other valuables that belong to a
person or business. Assets may include
intangibles like goodwill.
Child care expenses - The amount a parent
pays to a baby-sitter, day-care, or camp to look
after a child so that the parent is free to work,
carry on a business, or to undertake an
occupational training course for which the person
is receiving a training allowance paid under the
National Training Act.
Balance due - The amount of tax payable that is
left after all tax credits and amounts of tax
already paid have been subtracted. You usually
have to pay the balance due by April 30 of the
year following the tax year. If you don't, Canada
Revenue Agency may add interest.
Balance sheets - Statements of the financial
position of a business. They state the assets,
liabilities, and owners' equity at a particular time.
Accounting 20
8
Lesson 9
Child Tax Benefit - The Child Tax Benefit is a
monthly payment to help families with the cost of
raising children under age 18. To direct the
benefit on the basis of need, it is based on family
income. The value of the benefit decreases as
salaries increase beyond a certain base amount.
It is not taxable, but individuals must have filed a
tax return to receive it.
Confidentiality - The privacy of income tax
returns and other related tax information. The
only people with access to this information are
those who are authorized by law or those to
whom the taxpayer has given permission in
writing.
Deductions - Amounts of money that you can
subtract from your income to determine taxable
income.
Dependant - A spouse, child, or other relative
(subject to certain restrictions) who depends on
someone else for support.
(EFILE) Electronic filing system - A means of
filing an income tax return electronically.
Employment Income - See 'Salary" and
"Gratuities and tips."
Employment Insurance premiums Employees who receive a salary must pay these
premiums to their employer. When an employee
becomes unemployed, he or she is entitled to
Employment Insurance benefits. Self-employed
people are usually not covered under the
Employment Insurance Act.
Excise Taxes - Taxes on the manufacture, sale,
or use of goods and items.
Exemptions from tax - Free from tax. Certain
types of income, such as lottery winnings,
veterans' allowances, and Child Tax Benefit
payments, are exempt from tax.
Financial year - See "Tax year."
Fiscal year - This is the time period of a
business or profession from the day the business
starts its business year to the
day it ends its business year. The fiscal year
may or may not coincide with the calendar year.
A fiscal year cannot, however, be longer than 12
months.
Forms - These are documents that Canada
Revenue Agency publishes and makes available
to the public. Some of the forms have to be filed
with the return; others are optional. The General
Income Tax Guide and the other supplementary
guides list the different forms available. They
explain which ones are optional and which are
mandatory.
Goods and services tax/harmonized sales tax
(GST/HST) credit - A credit to help families and
individuals with low incomes to offset the effects
of all or part of the GST/HST. Eligible families
and individuals receive the credit in four
installments each year. They have to file an
income tax return to receive the credit. The
GST/HST credit is not considered to be income.
Gratuities and tips - Gifts given in return for a
service connected with a person's job. They are
usually given to waiters, porters, and taxi drivers.
These amounts are taxable.
Guaranteed Income Supplement - A payment
made by Human Resources Development
Canada. It is paid along with Old Age Security to
give more money to senior citizens who have
little or no other income. It is not taxable.
However, the supplement must be included in
the net income of the taxpayer or the taxpayer's
spouse when the spousal amount or the goods
and services tax/harmonized sales tax
(GST/HST) credit is being calculated.
Income - The sum of revenues earned in a
specific period of time. It includes revenues from
salaries, wages, benefits, tips, and commissions,
profits from operating a business or profession,
and investments earned. It also includes
sources of revenue specifically listed in the
Income Tax Act.
simplified return designed for people who have
no taxes to pay but who must file a return to
establish their entitlements to credits or other
benefits. There are also returns for corporations
and for trusts.
Income tax deductions - These amounts are
deducted by most employers from the salary or
wages paid to their employees. The amount to
be deducted is found in the income tax
deductions tables. These tables are calculated
according to each province's tax rates. In
Quebec, employers use provincial tax deduction
tables as well as federal tables.
Information circulars - Publications that
Canada Revenue Agency issues to give detailed
explanations on a variety of tax subjects.
First, the employer has to calculate the
employee's salary or wages. Salary and wages
must include the value of free board and lodging
plus any other taxable allowances or benefits.
The employer then deducts the employee's
contribution to a registered pension plan, CPP or
QPP contributions, and El premiums.
Information slips - Forms that employers,
trusts, and businesses use to tell Canada
Revenue Agency and taxpayers how much
income was earned, and how much tax was
deducted. They include forms such as the T3,
T4, T5, and T600.
The employer gets the net claim code from Form
TD1, Personal Tax Credits Return. The
employer finds the amount of tax payable for the
appropriate pay period in the tables and then
deducts the amount under the net claim code.
See "Payroll deductions" and "Remittance."
Installment - A partial payment of a tax debt.
The debt is divided into parts that are paid at
different times within a certain period.
Interpretation bulletins - Publications that give
Canada Revenue Agency's interpretation of parts
of the Income Tax Act.
Income tax guides - Publications that are
available to help taxpayers complete their
personal income tax returns. The following
guides are also available to individuals who need
detailed information on a specific topic,:
Loss - The amount by which expenses are more
than revenues. A loss also occurs when the
selling price of an item is lower than its purchase
price.
Business and Professional Income
Capital Gains
Employment Expenses
Farming Income
Fishing Income
Preparing Returns for Deceased Persons
Rental Income
RRSPs and Other Registered Plans for
Retirement
Net File - tax-filing option lets individuals file
income tax and benefit returns over the Internet
using NETFILE – certified tax preparation
software.
Net Income - The amount left after all
deductions have been subtracted from the total
income calculated on a tax return.
Non-refundable tax credits - Credits used to
reduce federal income tax. However, if these
credits are more than your federal income tax,
the difference is not refundable to you.
These guides are available at any tax services
office or tax centre.
Income tax returns - The T1 General return is
sent to individuals who have a number of
sources of income and deductions. The T1
Special return is sent to those with relatively
simple tax situations. The T1S-A is a simplified
return with larger print to better serve individuals
who are 65 years of age or older. The T1S-B is a
simplified return for taxpayers with mainly
employment income, and the T1S-C is a
Accounting 20
Notice of Assessment - A form that
Canada Revenue Agency sends to all taxfilers
after it processes their returns. It tells taxfilers if
the Department made any corrections to the
returns and what they were. It also tells
taxpayers if they owe more tax, what the amount
of their refund will be, and what their contribution
limit for registered retirement savings plans will
be.
10
Lesson 9
Objection form - A form that taxpayers can file if
they believe the Department has not assessed
their return correctly. This form can be a letter
written to the Chief of Appeals at the tax services
office.
Old Age Security (OAS) - A pension plan for all
Canadians 65 years of age or older. The federal
government pays for it out of tax revenues.
Human Resources Development Canada
administers the plan.
Pamphlets - Canada Revenue Agency
publications that explain various tax subjects to
taxfilers. They are available from tax services
offices.
Part-time jobs - Jobs which have less than
regular working hours. The jobs may be on a
casual or permanent basis. No matter how small
the amount, you must include part-time income in
employment income, even if you do not receive a
T4 slip.
Penalties - Amounts taxpayers must pay if they
fail to file returns on time or if they try to evade
paying tax by not filing returns. Penalties must
also be paid by those people who make false
statements or omissions in their returns, and by
those who do not provide the information
required on a prescribed form.
Pensions - Regular payments made to people
over a certain age. Pension plans are usually set
up through employment to allow individuals to set
aside part of their income for retirement. People
who retire and receive pensions, superannuation
benefits, annuity income, or lump-sum payments,
including those from foreign sources, have to
report them as income.
The T4A slip shows the amount of pension
income received and the tax deducted at source.
Personal expenses - Expenses which include
property, stock, or expenses used for one's daily
living. Examples include furniture, a home,
jewellery, food supplies, and a car used for
pleasure trips.
Personal tax credits return (Form TD I) - The
first income tax form a person has to complete
when starting a new job. It tells an employer how
much income tax to deduct from the employee's
pay.
Rates of tax - Percentages of income that must
be paid as tax. The Department of Finance sets
the basic income tax rates which vary
progressively with the amount of income
received. Provincial and territorial governments
set their rates as a percentage of the federal tax.
Receipts - Statements that indicate that an
amount has been paid.
Records - Documents that include account
books, sales and purchase invoices, contracts,
bank statements, and cancelled cheques. You
must keep them in an orderly manner at your
business or residence in Canada for at least six
years. You must make these books and other
documents available to officers of
Canada Revenue Agency for audit purposes.
Refund - The overpayment of tax returned to
taxpayers after they have filed a return.
Refundable tax credits - These tax credits are
called refundable because certain amounts may
be refunded to the taxpayer. If the total credits
are more than the total tax payable calculated on
an income tax return, the difference can be
refunded to the taxpayer.
Registered education savings plans - Plans
which can help save money for a child's postsecondary education. Contributions to the plan
are not tax-deductible, but a beneficiary receiving
educational assistance payments has to include
these amounts in income.
Registered pension plan - This is usually a
formal insurance plan set up through an
employer to provide money for the employees'
retirement. Employees can contribute a
percentage of their salary to this plan for each
year of current employment. Sometimes they
can contribute extra amounts to make up for
contributions they could have made in previous
years.
Registered retirement savings plans - These
are special plans that banks, insurance
companies, and trust companies usually offer.
The plans allow taxpayers to put money away for
their retirement without having to pay income tax
on it now. There are maximum limits for annual
contributions.
Adjustments may also include the deduction of
other allowable expenses from a person's share
of partnership income.
Remittance - An amount that is paid to Canada
Revenue Agency through a financial institution,
or that an individual sends directly to Canada
Revenue Agency. This payment represents the
money deducted from employees' pay for CPP or
QPP, El, and income tax. It also includes the
employer's share of CPP or QPP contributions
and El premiums.
Statements of remuneration paid (T4 slip) These are forms that show the income that an
employer pays to an employee. Taxable
allowances and benefits, such as payments
made on the employee's behalf to a provincial
health care plan, are included as income. A T4
slip also shows how much the employer
deducted for income tax, CPP or QPP
contributions, Employment Insurance premiums,
and contributions to the employer's pension plan.
Salary - The amount an employer pays an
employee for work done. Each employer records
this type of employment income on T4 slips.
Scholarships, fellowships, and bursaries Amounts of money given to students. These
amounts are usually given for post-secondary
education and are usually associated with an
academic achievement. The first $500 is taxfree, but students must include the rest in
income.
Tax centres - Tax offices in different regions of
Canada where Canada Revenue Agency
processes tax returns.
Tax Court of Canada - A court that hears
appeals about income tax assessments. There
are tax courts in most major cities across the
country.
Social Insurance number (SIN) - A number
given to each contributor to the Canada Pension
Plan, Quebec Pension Plan, and Employment
Insurance Program. It helps record the
contributions and premiums paid into and the
benefits paid out of the plans. Since these social
insurance programs are connected to the tax
system, the SIN is also used as an identifier for
federal income tax purposes.
Tax credits - Amounts of money considered to
have been paid towards an individual's tax
payable. Governments give them to reduce or
redistribute taxes, or to encourage certain types
of activity or investment. Examples of this are
provincial tax credits or the dividend tax credit.
Everyone who files an income tax return must
provide a SIN.
Tax evasion - Committing an act, or omitting an
act, with intent to deceive so that the tax
represented to have been paid or payable is less
than the tax that must be paid by law. It is also
the conspiracy to commit such an act.
Application forms for SINs are available at
Human Resource Centres of Canada and at
some Canada Post outlets.
Tax payable - The amount of income tax that
you must pay on taxable income for the tax year.
See 'Balance due."
Statements of Income and expenses - Forms
that summarize revenue, income, and expenses
for a specific period. A taxpayer often has to
make adjustments to calculate the net income
from a business or from commissions.
Adjustments may include the following additions:

the taxpayer's own salary or wages;

interest on capital;

the cost of goods taken from the
business for personal use; and

the personal part of automobile, rent, or
other expenses.
Accounting 20
Tax services offices - Local tax offices found all
across the country. The offices provide inquiries
services.
Tax year - The calendar or fiscal year for which
tax is to be paid.
12
Lesson 9
Taxable benefits - Amounts of money, or the
value of goods or services, that an employer
pays in addition to salary. For example, the part
of a health insurance plan that the employer pays
is a taxable benefit.
Taxable Income - The amount of income left
after all allowable deductions have been
subtracted from net income. This amount is
used to calculate the tax payable.
TELEFILE - TELEFILE is Canada Revenue
Agency's newest way to file an income tax return.
It is an automated system used to file a return by
telephone.
Tuition - The cost of fees paid to a school for
courses. It includes the fees for laboratories and
activities but not for books or living expenses.
Union dues - Fees that are paid to maintain
membership in a trade union (as defined under
the Canada Labour Code or provincial statutes)
or certain public service associations.