Solutions for Byrd & Chen's Canadian Tax Principles 2024|2025 Edition by Gary Donell | Volume 1
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Taxation
Solutions for Byrd & Chen's Canadian Tax Principles 2024|2025 Edition by Gary Donell, Clarence Byrd, Ida Chen. This document includes Solutions for Volume one (Chapter 1 to 10) of this book however volume 2 is given in bundle product of this document.
1 Introduction to Federal Taxation in Canada...
Chapter 1 – Solutions to Assignment Problems
Solution to AP 1-1
Although there may not be one single solution to this problem, and student answers will be
limited to their preliminary understanding of income tax concepts and procedures, this
problem provides the basis for an interesting discussion of 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
amounts of 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 high-income individuals
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.) and to engage in complex income splitting transactions.
Flexibility With respect to flexibility, the rate can be changed at any time. However, as a
practical matter, such changes would need to be made 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 income tax 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. personal income tax rates, making Canada far less competitive with the U.S.
However, Canadian income tax rates are not out of line with income tax rates in other
industrialized countries.
Solution to AP 1-2
Instructor Note There is no definitive solution to this problem. What follows
represents possible comments that could be made.
For the Canadian income tax system to be more competitive with the U.S., both individual
and corporate income tax rates would have to be lowered. The most obvious conflict that
would arise would be with the ADEQUACY of revenues. Income 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 tax as opposed to corporate income tax. Lowering corporate
rates would further worsen this problem.
The question of NEUTRALITY could also be involved. Trying to match either U.S. individual
or U.S. corporate income tax rates could have an impact on economic decisions.
Depending on whether changes are made to corporate income tax rates or, alternatively,
individual income tax rates, this could have an impact on FAIRNESS or EQUITY.
Trying to match income tax rates in the U.S. reduces the FLEXIBILITY of the Canadian
income tax system.
Solution to AP 1-3
A. Diamonds, South Africa In a monopoly, the tax will likely be 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 increase in value, a
taxpayer will invest in a principal residence so that the gain on disposition is tax exempt.
It is also vertically inequitable because it benefits high-income families who can invest in
more expensive residences, which have the potential of generating higher gains.
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 income tax could be shifted to consumers,
employees, and/or shareholders. If it is shifted to consumers, it could be more
advantageous to raise personal income tax 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
decisions 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, pay the same amount. This tax serves the objectives of
certainty, simplicity, and ease of compliance.
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 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 be effective 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.
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 tax on worldwide income during the part of the year prior to his ceasing to
be a resident of Canada.
Folio S5-F1-C1 indicates that, in general, the CRA will administratively consider an individual
as becoming a non-resident 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 Canada in May 2024, he will be considered a Canadian resident
until his family’s departure on June 30, 2024, as a result of the CRA concession on
residency. The fact that his family remained in Canada would support this conclusion,
although since he had already established the requisite intention and taken active steps
consistent with that intention, the earlier date would represent a true indication of when he
severed residency. The fact that he did not sell his Canadian residence would not change
the result, particularly where market forces beyond his control were the cause of the delayed
sale.
His Canadian salary from January 1, 2024, to May 27, 2024, would be subject to Canadian
income tax. In addition, his U.S. salary for the period May 28, 2024, through June 30, 2024,
would be subject, first to U.S. income tax, and then subsequently to Canadian income tax. In
calculating his Canadian income tax, he will be entitled to a foreign tax credit for the U.S.
income tax that he has paid on this income. However, because Canadian income tax rates
are usually higher than U.S. income tax rates, it is likely that he will be required to pay some
Canadian income tax in addition to the U.S. tax on that income should he decide to accept
the CRA administrative position on residency. However, Folio 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 of departure from Canada, even if, for example, a 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.
Paragraph 1.22 recognizes that severing residency does not depend on one’s family and
dependants joining the departing individual at the same time. Mr. Valmont could choose to
ignore the CRA administrative concession and use his departure date of May 27, 2024. This
would avoid the difficulty of the U.S. employment income earned for the period from May 28,
2024, to June 30, 2024, being subject to income tax both in Canada and the U.S.
1-4
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