Canadian Tax Principles, 2021-2022 Edition, 1st edition BY Gary Donell Clarence Byrd Ida Chen
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Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2021/22 Edition
Instructor’s Solutions Manual Chapter 1 – Solutions to Assignment Problems Solution to AP 1-1 There is, of course, no one solution to this problem. Further, student answers will be limited as, at this point, their understanding of tax concepts and procedures is fairly limited. However, the problem should provide the basis of an interesting discussion. What we have provided here are some suggested comments related to the various qualitative characteristics. Equity Or Fairness The increase provides both horizontal and vertical equity. Individuals with the same income will receive the same treatment, while individuals with different income will be treated differently. Neutrality The increase is not neutral. It targets high-income individuals and is likely to influence their economic decisions. Adequacy While the increase was intended to create additional revenues, there is some evidence that the opposite has happened. This reflects the fact that individuals with high levels of income are sometimes in a position to move some, or all, of that income out of Canada (e.g., move their residence to the U.S.). Flexibility With respect to flexibility, the rate can be changed at any time. However, as a practical matter, such changes would need to be on an annual basis. Simplicity And Ease Of Compliance This change would not appear to present any compliance issues. Certainty The increase makes it clear to individual taxpayers the amount of taxes that they will be required to pay. Balance Between Sectors Unfortunately, this change will increase the imbalance in the Canadian tax system between corporate and individual taxpayers. Before the change, individuals were already paying a disproportionate share of tax revenues. The intent of this change was to further increase this imbalance. International Competitiveness This increase further widens the gap between Canadian and U.S. tax rates, making Canada far less competitive with the U.S. However, Canadian tax rates are not out of line with tax rates in other industrialized countries.
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Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2021/22 Edition
Solution to AP 1-2 Instructor Note There is obviously no definite solution to this problem. What follows represents only possible comments that could be made. For the Canadian tax system to be more competitive with the United States, both individual and corporate tax rates in this country would have to be lowered. The most obvious conflict that would arise would be with ADEQUACY of revenues. Tax rate reductions reduce revenues and would create additional problems with the large budget deficits that exist in Canada. Another issue is BALANCE BETWEEN SECTORS. The Canadian system is heavily dependent on individual income taxes as opposed to corporate income taxes. Lowering corporate rates would further exacerbate this problem. The question of NEUTRALITY could also be involved. Trying to match either U.S. individual or U.S. corporate rates could have an impact on economic decisions. Any change in tax rates has an impact on CERTAINTY. Depending on whether changes are made to corporate rates or, alternatively, individual rates, this could have an impact on FAIRNESS or EQUITY. Trying to match rates in the U.S. reduces the FLEXIBILITY of the Canadian tax system. As noted, other comments could be appropriate.
Solution to AP 1-3 A. Diamonds, South Africa In a monopoly, the tax will probably be entirely shifted to employees and/or consumers. The incidence shift will depend on competition in world markets and employment levels. If the international diamond market is price sensitive and there is high unemployment in South Africa, then the tax will be shifted almost entirely to employees. The shifting assumptions affect evaluation of the tax using the characteristics of a “good” tax system. A tax that is entirely shifted to employees is similar to one on wages and is non-neutral, as it affects the decisions of employees to continue working. Some employees will work less and thus increase the excess burden resulting from the imposition of the tax. B. Diamonds, Sierra Leone The taxing authorities will find it difficult to enforce the tax, due to their inability to track diamond movements. Records maintained by the mine will likely be inaccessible, and those presented will be incomplete. The tax will not be effective, and the tax revenue will be uncertain and inadequate. C. Principal Residences, Canada This exemption is non-neutral because investment decisions are affected by the tax preference. Given the choice of investing in real estate to hold for resale or a principal residence, both of which are likely to appreciate, a taxpayer will invest in a principal residence so that the gain on disposition is tax exempt.
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Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2021/22 Edition
It is also vertically inequitable because it benefits high-income families who can invest in more expensive residences, which have the potential of earning greater returns. This tax expenditure is spread among all taxpayers, and general tax revenue must be larger to compensate for the reduced revenue. D. Business Meals, Canada This restriction adds complexity to accounting for deductible expenses, as all business meals have to be accounted for and accumulated separately from other promotion expenses. The tax could be shifted to consumers, employees, and/or shareholders. If it is shifted to consumers, it could be more advantageous to raise personal taxes so that incidence is more certain. If it is shifted to shareholders or employees, then it would be non-neutral as it could affect investment decision making and willingness to work. E. Head Tax A head tax is neutral as it does not affect economic choices. However, it is vertically inequitable, based on the ability to pay concept of equity, as all taxpayers, regardless of their income levels, are taxed the same. This tax serves the objectives of certainty, simplicity, and ease of compliance. It could promote stability in the economy.
Solution to AP 1-4 While there is not one “correct” solution to this problem, the following solution contains comments on each of the listed qualitative characteristics. Equity Or Fairness The toll is clearly regressive in nature in that it is assessed almost exclusively on lower-income individuals. In general, regressive taxes are viewed as being less fair. While the toll has horizontal equity (individuals with the same Taxable Income would pay the same amounts), it lacks vertical equity (the higher-income residents of the island would not normally be subject to the tolls). Neutrality The concept of neutrality calls for a tax system that interferes as little as possible with decision making. The toll may influence employment decisions. If the non-residents have off-island employment opportunities, they may choose not to work on the island. Adequacy While we do not have any information on this, it would be safe to assume that the toll was established at a level that would be adequate for the funding requirements related to the bridge. Flexibility This refers to the ease with which the tax system can be adjusted to meet changing economic or social conditions. The tolls can be easily adjusted and therefore get high marks for this characteristic. Simplicity And Ease of Compliance A good tax system is easy to comply with and does not present significant administrative problems for the people enforcing the system. The toll would receive high marks in this regard. Certainty Individual taxpayers should know how much tax they have to pay, the basis for payments, and the due date. There is no uncertainty associated with a clearly posted toll rate.
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Instructor’s Solutions Manual, Byrd & Chen’s Canadian Tax Principles 2021/22 Edition
Balance Between Sectors A good tax system should not be overly reliant on either corporate or individual taxation. The toll is totally reliant on the taxation of individuals. International Competitiveness If a country’s tax system has rates that are out of line with those in comparable countries, the result will be an outflow of both business and skilled individuals to those countries that have more favourable tax rates. Although international competitiveness would not appear to be an issue with the toll, it would affect the ability of the city to maintain and attract workers.
Solution to AP 1-5 Mr. Valmont would be considered a part year resident and would only be assessed for Canadian income taxes on worldwide income during the portion of the year prior to his ceasing to be a resident of Canada. S5-F1-C1 indicates that, in general, the CRA will view an individual as becoming a nonresident on the latest of three dates: • • •
The date the individual leaves Canada. The date the individual’s spouse or common-law partner and dependants leave Canada. The date the individual becomes a resident of another country.
While Mr. Valmont departed from Canada in May 2021, he will be considered a Canadian resident until his family’s departure on June 30, 2021. The fact that his family remained in Canada would lead to this conclusion. While not essential to this conclusion, the fact that he did not sell his Canadian residence until after that date would provide additional support. His Canadian salary from January 1, 2021, to May 27, 2021, would be subject to Canadian taxes. In addition, his U.S. salary for the period May 28, 2021, through June 30, 2021, will be subject, first to U.S. taxes, and then subsequently to Canadian taxes. In calculating his Canadian taxes payable, he will receive a credit for the U.S. taxes that he has paid on this income. However, because Canadian tax rates at a given income level are usually higher than those that prevail in the U.S., it is likely that he will be required to pay some Canadian income taxes in addition to the U.S. taxes on that income. Note to Instructors The preceding solution reflects the content of the text with respect to departures from Canada and students should be evaluated on that basis. However, S5-F1-C1 qualifies the general departure rules as follows: Paragraph 1.22 An exception to this will occur where the individual was resident in another country prior to entering Canada and is leaving to re-establish his or her residence in that country. In this case, the individual will generally become a non-resident on the date he or she leaves Canada, even if, for example, his or her spouse or common-law partner remains temporarily behind in Canada to dispose of their dwelling place in Canada or so that their dependants may complete a school year already in progress. On the assumption that Mr. Valmont was a resident of the U.S. prior to his working years in Canada, this exception would mean that he would cease to be a resident of Canada on May 27, 2021, the date that he departs from Canada.
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