canadian tax preparation course 11 01-2015 -basics of individual tax return

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Canadian Income Tax Preparation Course-Basics of Individual Income Tax Return

PreparationInstructor

Bayezid Farooque

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Canadian TaxLesson 1

About The Course• This is an introductory course

• The target audience is the group of people looking to work as a tax preparer or start a tax preparation business or the residents of Ontario who intend to complete their own Tax Returns

• This course will only deal with “Individual Income Tax Returns” also known as “T1 Returns”

• More complex issues in “T1 Returns” will be covered in “Advanced Topics for Individual Tax Returns”

• This course only covers topics relevant for Federal and Provincial Income Tax Returns for people resident in Ontario

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Objective and Learning OutcomesIn each lesson I will lay out the objectives and outcome at the beginning of the lesson. For this

lesson you will find it in the next slide.However since this is the first lesson of the course, I would like to give an idea about what you

will learn after completing the full course. The objectives and outcomes are summarized below :

Learning Objective of the CourseYou are expected to have the following types of tax knowledge and skill set after completing

the course:1. Prepare Income Tax Returns(T1) for an Employed Person or a family with one or more T4

Statements, Interest Income (T5 Statements), dividend income (T5 or T3 Statements), claim the benefits/credits for the dependents and spouse, public transit passes, Ontario Trillium Benefits

2. Prepare Income Tax returns using the Benefits for Seniors by claiming the age amount, Canada Pension Plan(CPP),Old Age Security(OAS)

3. Learn how to claim the medical expenses through refundable and non refundable credits4. Prepare tax returns for self employed persons5. Prepare tax returns for rental income6. Prepare Income Tax for people on Employment Insurance and Social Benefit7. Know how to use working income tax credit (WTIB) for low income taxes8. Learn about using RRSP to reduce tax liability

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Introduction• The two words Income and Tax are so widely used that when we

combine these two together and frame the phrase Income Tax, it becomes very intuitive and does not require further explanation

• But it may not be so simple always, mainly for the reasons that governments levy so many different types of taxes from people

• We hear about Income Tax, Sales Tax, Property Tax and also tariffs, excise duty etc. that sometimes it may cause confusion

• We will therefore, start the course with a definition of Income Tax

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Definition of Income Tax

• “A tax that governments impose on financial income generated by all entities within their jurisdiction. By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund.

• Income tax is a key source of funds that the government uses to fund its activities and serve the public.”

• So Income Tax is the Tax imposed on “Income” only. Government may and usually impose taxes in many other financial transactions and assets.

• Those taxes are outside the scope of our course.

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History of Income Tax System in Canada

• There was no Income Tax in Canada before World War I• The wartime government introduced a temporary tax regime in

1917 to cover the expenses Income tax was officially implemented for the 1918 fiscal year

• However, when the war was over, the national debt reached to a point, where foregoing the “temporary measure” was not feasible

• The constitutional authority for the federal income tax was already in place in section 91 paragraph 3 of the Constitution Act, 1867, which assigns to the federal Parliament power over "The raising of Money by any Mode or System of Taxation".

• The “Income Tax Act” was legislated in 1948, which formed the basis of the current regime of taxation in Canada

• The course also includes a short tutorial on the use of the Tax Software “Profile”

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Library and Archives CanadaMG 30 A 100

One of the First Income Returns Filed in Canada

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Legislations Governing Canadian Income Tax

• The primary legislation that forms the basis of Canadian Income Tax Regime is Income Tax Act

• The Income Tax Act subordinates the Income Tax Regulations (C.R.C., c. 945) and these regulations provide the rules and requirements necessary for the application of the Income Tax Act with respect to the tax obligations of individuals and businesses and benefits paid to individuals. Responsibility for these regulations is shared between the Minister of Finance and the Minister of National Revenue.

• International tax treaties override ITA when there is a conflict.

• A few other legislations may become relevant in administering and regulating the income tax in Canada. E.g.. Canada Revenue Agency Act, Canada Pension Plan Act, Financial Administration Act

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Administration of Income Tax System

• The Tax Policy Branch of the Department of Finance is responsible for the development and evaluation of federal taxation policies and legislation.

• Income Taxes are levied by both Federal and Provincial Governments

• “Canada Revenue Agency” (CRA) is Responsible for administering the Federal Tax System in Canada

• The Agency also administers the Income Tax System for some provinces like Ontario and Alberta

• Quebec residents need to file two tax returns, one for the Federal Government(T1) and one for the Government of Quebec (TP1)

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Administration of Income Tax System

Canada Revenue Agency, Ottawa Ministry of Finance, 2nd Tower, Ottawa

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Canada Revenue AgencyHistory, Mandates and Responsibilities

• Prior to 1927 CRA was known “Department of Inland Revenue” and then for many years the agency operated under the name of Department of National Revenue.

• In 1999 the federal government reorganized the “Department of National Revenue”, it’s mandate was expanded and the agency adopted the new name “Canada Customs and Revenue Agency (CCRA).

• The Canada Revenue Agency Act was also legislated in 1999• The reorganization was short lived and in 2003 the agency was

given the present name “Canada Revenue Agency (CRA).• The act was last amended on 2014-12-31 and it is current to 2015-

09-27

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Principles of Taxation

The criteria by which a tax system is judged include equity, efficiency, economic growth, stabilization and ease of administration and compliance.Fairness• View OneTaxes, to be fair, should be paid in accordance with the benefits received. The difficulty of assigning the benefits of certain government expenditures — such as defense — restricts the application of this principle. • View TwoIndividuals should be taxed on the basis of their ability to pay (typically indicated by income). The personal income tax is in part a reflection of this principle. Horizontal equity (individuals with equal incomes should be treated equally) is not easily achieved because income alone is an imperfect measure of an individual's ability to pay. Vertical equity (higher incomes should be taxed at higher rates than lower incomes — a principle not at odds with horizontal equity goal) forms the basis of progressive tax rates.

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Basic Principles• Self Assessment

• Canada's tax system is based on self-assessment. In fact voluntary compliance is the cornerstone of Canada's self-assessment taxation system. The system expects that individuals will voluntarily complete an income tax return to report their annual income and claim all deductions or credits that apply to their situation. In this way, the taxpayer is able to calculate the amount owing or the refund to be received.

• This approach does not imply that the law cannot be enforced if necessary. The Income Tax Act and other laws provide a range of penalties for offences such as tax evasion, failure to pay taxes, failure to disclose income, or refusing to file a tax return. These penalties can include fines, third-party claims, seizures, and criminal prosecution.

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Basic Principles (continued)

• Residency• Income Tax obligations to Canada are based on a person’s residency status.

Residency Status must be determined to know what an individual’s tax responsibilities and filing requirements to Canada are.

• The residency status for the purpose of filing income tax is not subject to the requirements set out for immigration in Canada.

• The methods for determining the residency will be discussed in detail later in this course

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Basic Principles (continued)

• Income tax is levied on all Canadian residents regardless of citizenship.

• Income tax is levied on employment and business incomes earned by non-residents in Canada as well as gains and losses incurred by the non-resident on disposition of a taxable Canadian property.

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Basic Principles (continued)• The Canadian Federal Income Tax System uses a progressive rate to

calculate income tax and so do the provinces

• Each province can ONLY levy tax on income earned in the province and income of persons living in the province at the last day of the taxation year.

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Tax Payers Bill of Rights

• “The Taxpayer Bill of Rights describes and defines 16 rights and builds upon the CRA's corporate values of professionalism, respect, integrity, and cooperation. It describes the treatment you are entitled to when you deal with the CRA. You can expect that the CRA will serve you with high standards of accuracy, professionalism, courteousness, and fairness. The Taxpayer Bill of Rights also sets out the CRA Commitment to Small Business to ensure their interactions with the CRA are conducted as efficiently and effectively as possible.”

• “To make sure the interactions of small business with us are as effective and efficient as possible, the Taxpayer Bill of Rights includes the Commitment to Small Business.”

• term taxpayer is used simply for ease of reference. For the Taxpayer Bill of Rights, a taxpayer is defined as every person or organization who is required to comply with the legislation administered by the CRA, including individuals, businesses, benefit recipients, charities, etc.

This slide has been copied from CRA website.

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Tax Payers Bill of Rights (continued)

Taxpayer Bill of Rights

RC 44171.You have the right to receive entitlements and to pay no more and no less than what is required by law.

Income Tax Act and Rules

2. You have the right to service in both official languages.

English and French

3.You have the right to privacy and confidentiality.

Applicable legislatures under which this right is protected are Income Tax Act, the Excise Tax Act, the Excise Act, 2001, and the Privacy Act.

To expand a little more on this right, the CRA employees only access your personal information only when there is genuine need to do so. The CRA under normal circumstances will not disclose your personal information to any other person or agency. Usually a court order is required for a third party to access your personal information.

The rights have been presented exactly as laid down under RC 4417. The clarifications in lighter colour and smaller letters are rendered in a way as the author understands these rights

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4. You have the right to a formal review and a subsequent appeal.We will elaborate this right in later lessons

5. You have the right to be treated professionally, courteously, and fairly.If you think you have not been treated professionally or courteously, there is a formal process of complaint and resolution in place that you may follow. If you think you have not been treated fairly, your rights are protected under 4 above.

6. You have the right to complete, accurate, clear, and timely information.You should expect all correspondences from CRA whether individual (to you) or public are correct, contain the required information they are intended for and provided in a timely manner. This include the assessments and reassessment of your tax returns and filings.

7. You have the right, unless otherwise provided by law, not to pay income tax amounts in dispute before you have had an impartial review.Interest charges will continue to accrue during this period. There are certain situations as delineated under Income Tax Act (especially when the amount payable is in jeopardy, CRA may start a collection effort even at the time of a review, however if the decision of the review goes in favour of the tax payer, this amount will be refunded.

The rights have been presented exactly as laid down under RC 4417. The clarifications in lighter colour and smaller letters are rendered in a way as the author understands these rights

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8. You have the right to have the law applied consistently.If there is a precedence that a particular section of the Income Tax Act or a Rule under the Act has been applied in another case or to another person(s), you have the right to claim the same treatment under the law, the remedy of the situation is again protected by (4) as described in the previous page.9. You have the right to lodge a service complaint and to be provided with an explanation of our findings.As described under (5) in the previous page.10. You have the right to have the costs of compliance taken into account when administering tax legislation.One of CRAs main mandates is to maintain highest level of compliance with Canada’s Tax Laws, however while discharging this responsibility, CRA will also make every effort to reduce the cost of compliance for the tax payer. If a taxpayer has a suggestion or recommendation that will result in reduction of cost for the taxpayer, the taxpayer is always encouraged to send such suggestions and recommendations to CRA.11. You have the right to expect us to be accountable.CRA is accountable to the Canadians. Whenever a tax decision is made by CRA, the agency is obligated to present the decision with complete explanation, if the taxpayer does not agree with the decision CRA must disclose the next step in the process, the taxpayers right is protected as described in (4) in the previous page. CRA is also accountable to the Parliament and must submit the annual report and a three year business plan to the Parliament. The Auditor General may audit CRAs activity at any time.The rights have been presented exactly as laid down under RC 4417. The clarifications in lighter colour and smaller letters are rendered in

a way as the author understands these rights

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12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances.Extraordinary Circumstances include natural disaster, illness, death in the family etc.

13. You have the right to expect us to publish our service standards and report annually.14. You have the right to expect us to warn you about questionable tax schemes in a timely manner.15. You have the right to be represented by a person of your choice.16.You have the right to lodge a service complaint and request a formal review without fear of reprisal. As described in (4) and (5) in the Previous PagesThe rights have been presented exactly as laid down under RC 4417. The clarifications in lighter colour and smaller letters are rendered in a way as the author understands these rights

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Commitment to Small Business

The Government of Canada recognizes the importance of small business as the engine of growth in the Canadian economy. It acknowledges that the CRA can minimize the compliance burden on small business by reducing, where possible, the amount of paperwork involved in complying with the tax system. Therefore, the Commitment to Small Business was developed to complement the Government's pledge to create a competitive, dynamic business environment in which all Canadian businesses will thrive.• The Canada Revenue Agency (CRA) is committed to administering the tax system in a

way that minimizes the costs of compliance for small businesses.• The CRA is committed to working with all governments to streamline service, minimize

cost, and reduce the compliance burden.• The CRA is committed to providing service offerings that meet the needs of small

businesses.• The CRA is committed to conducting outreach activities that help small businesses

comply with the legislation we administer.• The CRA is committed to explaining how we conduct our business with small

businesses.This slide has been copied from CRA website.

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Who is required to File a Tax Return and When is the Return Due

• Filing a tax return is mandatory:• If a person pays or required to pay income tax in Canada• If Canada Revenue Agency sends a request to file a Tax Return

• Payments many Government Benefits are contingent upon filing an Income Tax Return, and the recipients file tax returns to be eligible for receiving the benefits

• There are other situations when filing a tax return is necessary. We will discuss those situations in the later part of the course

• An Income Tax Return is usually due by April 30th following the Tax Year (the year income is earned or taxes are paid)

• For Self Employed Persons the Income Tax Return is due by June 15 following the tax year, however if any tax is due on the return, the amount must be remitted by April 30th

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Types of Tax Returns in Canada There are three major types of Income Tax Returns filed in Canada:

• Individual Tax Returns (T1)• Corporate Tax Returns (T2)• Trust Tax Returns (T3)

Each type of Income Tax Return has many different variations depending on the situations of the tax payer during a tax year

Also non-profit organizations are required to file either a T2 or T3 or a T1044 depending on their constitutions

Registered Charities file T4033 returns In addition province of Quebec requires a provincial return(TP1)

filed separately There other types of return filed with CRA e.g. Harmonized Sale Tax

Returns (HST Returns), General Sales Tax Returns, Payroll Tax Returns, however these returns do not fall under the Category of “Income Tax Returns” and are not topics for this course

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Wrapping up the first lesson

• As I mentioned in the beginning of the lesson, the objective for this lesson was not to teach tax preparation, rather I prepared the lesson to give a general idea of income tax, the tax administration, the laws that govern the taxation in general in Canada. I also included the tax payers bills of rights, directly from the publication of cra and tried to clarify some of the rights as I understand those. The last two pages of the lesson explain when filing of tax returns are mandatory and necessary and the types of tax returns filed by different entities in Canada.

canadian tax preparation course 11 01-2015 -basics of individual tax return

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