Basic Lesson on Canadian Individual Tax Preparation Lesson 1 for beginners

1. Canadian IncomeTax Preparation Course-Basics of
Individual IncomeTax Return Preparation
Instructor
Bayezid Farooque
1

2. CanadianTax
Lesson 1
AboutThe 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 ownTax Returns
• This course will only deal with “Individual IncomeTax Returns” also
known as “T1 Returns”
• More complex issues in “T1 Returns” will be covered in “Advanced
Topics for IndividualTax Returns”
• This course only covers topics relevant for Federal and Provincial
IncomeTax Returns for people resident inOntario
2

3. CanadianTax
Lesson 1
Objective and LearningOutcomes
In 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 Course
You 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 credits
4. Prepare tax returns for self employed persons
5. Prepare tax returns for rental income
6. Prepare Income Tax for people on Employment Insurance and Social Benefit
7. Know how to use working income tax credit (WTIB) for low income taxes
8. Learn about using RRSP to reduce tax liability
3

4. Canadian Tax
Lesson 1
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
4

5. Canadian Tax
Lesson 1
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.
5

6. Canadian Tax
Lesson 1
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” 6

7. Canadian Tax
Lesson 1
7
Library and Archives Canada
MG 30 A 100

8. Canadian Tax
Lesson 1
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
8

9. Canadian Tax
Lesson 1
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)
9

10. Canadian Tax
Lesson 1
Administration of Income Tax System
10

11. Canadian Tax
Lesson 1
Canada Revenue Agency
History, 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
11

12. Canadian Tax
Lesson 1
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 One
Taxes, 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.
• ViewTwo
Individuals 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.
12

13. Canadian Tax
Lesson 1
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.
13

14. Canadian Tax
Lesson 1
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
14

15. Canadian Tax
Lesson 1
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.
15

16. Canadian Tax
Lesson 1
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.
16

17. Canadian Tax
Lesson 1
Tax Payers Bill of Rights
• “TheTaxpayer 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.TheTaxpayer 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, theTaxpayer 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.
17

18. Canadian Tax
Lesson 1
Tax Payers Bill of Rights (continued)
Taxpayer Bill of Rights
RC 4417
1.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, andthe
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 personalinformation.
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
18

19. Canadian Tax
Lesson 1
Tax Payers Bill of Rights (continued)
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
19

20. Canadian Tax
Lesson 1
Tax Payers Bill of Rights (continued)
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
20

21. Canadian Tax
Lesson 1
Tax Payers Bill of Rights (continued)
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 Pages
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
21

22. 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.
22

23. Canadian Tax
Lesson 1
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
23

24. Canadian Tax
Lesson 1
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
24

25. 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.
25