Introduction to Taxation
Investment and Finance 12
Ms. Stewart
What is tax?
 Tax is defined as a compulsory contribution
levied on persons, property, or businesses for
the support of government for economic and
social operations. In other words, it is money
paid to a government to fund its programs
and services.
Why do we need taxes?
 Sometimes, different levels of government
collect tax. For example, in Canada
individuals will pay federal taxes to the
Government of Canada to run the country.
They may pay provincial, territorial, or
municipal taxes as well.
 Without a tax system, a government would
not have any money to provide services.
 Citizens support the tax system by paying
their fair share of taxes. In turn, they receive
services and benefits from their government.
Benefits to Taxation
 Many of the benefits Canadians enjoy are
made possible through taxes. Canada's tax
systems pay for such things as roads, public
utilities, education, health care, economic
development, cultural activities, defence, law
enforcement, and other programs and
services.
Benefits to Taxation
 Tax revenue helps redistribute wealth to such
beneficiaries as lower-income families, charities,
students, retirees, and people with disabilities. Tax
revenue provides social services such as Old Age
Security benefits, Employment Insurance benefits,
Canada Child Tax Benefit payments, etc.
Distribution of Tax Revenue 2009
Factors that Define a Tax System
 There are various characteristics that define a
tax system, such as:
1) Who pays the tax
2) The base to be taxed
3) The rates of tax to be applied to the base
4) General exemptions
5) General deductions
6) Other selective measures such as how to
pay tax
Putting the Factors into Practice
 The value and nature of these characteristics
determine how much revenue is generated,
how fair the tax system is, and the tax
system's ability to generate growth.
 A tax system needs to be structured so that
everyone at a specific economic level gets
the same tax treatment, no matter how they
earn their income.
Putting the Factors into Practice
 The system must be arranged so that people
at a higher economic level pay a larger share
of taxes than those at a lower level.
 As well, a tax system needs to be neutral so
that the tax does not affect the government's
economic decisions (including where it
spends its budget every year).
Self Assessment
 The Canadian tax system is based on self-
assessment. Self-assessment is considered the most
economical and efficient way to collect income tax.
 Under the self-assessment system, non-residents
with Canadian income and Canadian residents are
responsible for making sure they have paid their
taxes according to the Income Tax Act.
 Based on this approach, the fairness and efficiency of
the federal income tax system depend on both the
CRA and the taxpayer.
Tax Deductions
 Income tax is an annual tax collected from
individuals and businesses by the CRA for
the federal government and the provinces
and territories. The amount of income tax that
an individual must pay is based on the
amount of his or her taxable income (money
earned minus allowed deductions) for the tax
year.
Tax Deductions
 Employment Insurance (EI) is a deduction
from your salary or wages. If you become
unemployed, you may be entitled to EI
benefits.
 The Canada Pension Plan (CPP) is a
pension plan that will provide you with some
income when you retire. Employers may also
deduct contributions for the CPP.
Tax Deductions
 Provincial sales tax (PST) is a tax that is
collected in most provinces when something
is sold.
 Goods and services tax (GST) is a federal
tax collected by the CRA and it is charged on
the sale of most goods and services in
Canada at a consistent rate of 5%.
 In some provinces, the GST is combined with
the provincial sales tax and the two are
collected together. This is known as
harmonized sales tax (HST).