Computation of Tax Payable

• Author: Vern Krishna
• Pages: 239-259

CHAPTER

12

COMPUTATION

OF

TAX

PAYABLE

A.

INTRODUCTION

We

come

now to the

second variable

in

determining

a

taxpayer's liabil-

ity for

income tax:

tax

rates.

The

setting

of an

appropriate

tax

rate

is a

complex matter that requires consideration

of

several

factors.

First,

and

most obvious,

the

rate must

be set at a

level that generates

sufficient

government

revenues.

Second,

individual,

trust,

and

corporate

rates

need

to be

"harmonized"

in

order that

the tax

system

is

reasonably neu-

tral

among

different

forms

of

organization.

For

example,

if the

corporate

tax

rate

is

substantially lower than individual rates, there

is an

incentive

to

incorporate

and

accumulate income

in the

corporation. Third, rates,

particularly

corporate

tax

rates, must

be

competitive

in the

international

marketplace.

For

example, Canadian corporate

tax

rates

must

take into

account

U.S. rates

or

risk losing business

and

investments

if our

rates

are

substantially higher. Fourth, rate setting

is

influenced

by

political

considerations.

It is not

entirely coincidental that rates

are

adjusted

up

or

down immediately

before

or

after

elections.

The

determination

of a tax

payable

is a

multi-step

process

that

involves more than

the

application

of a

rate

to

taxable income.

The

basic

tax

that

is

determined

by

applying

a tax

rate

to

taxable income

is

adjusted

by

various credits, surtaxes,

and

reductions.

In

this chapter

we

look

at the

computation

of tax

payable

by

individuals

and

corporations.

As

we

shall see,

the

computation takes into account several

tax

rates,

multiple surtaxes,

and tax

credits

in

balancing

the

competing needs

of

revenue

generation,

fairness

and

equity,

and

economic

efficiency.

239

240

INCOME

TAX LAW

B.

INDIVIDUALS

ITA,

s. 117

1)

Federal

Tax

Section

117

sets

out the

federal

tax

rates applicable

to

individuals.

The

general

basic

tax

rates

in

subsection

117(2)

are as

follows:

Taxable Income Rate

%

$1-27,500

17

$27,501

-

55,000

26

$55,001

+ 29

These

rates, however,

are

indexed

by a

formula

linked

to the

Consumer

Price

Index

(CPI).1

From 1974

to

1985

the

indexing formula was, with

two

exceptions,

directly linked

to

changes

in the

CPI.

The two

exceptions were

in

respect

of the

years

1983

and

1984, when

the

federal

government intro-

duced

a

restraint program

known

as "6 and 5." In

1983, notwithstand-

ing a

much higher inflation rate,

the

Minister

of

Finance capped

the

indexing

of

marginal

tax

brackets

and

personal exemptions

at 6

percent;

for

1984, indexing

was

capped

at 5

percent

in

accordance with

the

fed-

eral government's

"6 and 5

program." Although

full

indexing

was

resumed

in

1985, there

was no

provision

to

make

up for the

reductions

in

1983

and

1984.

In

1986

the

federal

government,

faced

with

an

ever-

increasing

deficit,

cut

back

on

indexation

of tax

rates

to

reflect

only that

portion

of the

increase

in CPI

over

3

percent. Thus, individuals

may be

bumped

up

into higher

tax

brackets

on the

basis

of

inflationary

income

gains

up to 3

percent.

The

indexed rate schedule

for

1996

is as

follows:

Taxable Income Rate

First $29,590

17%

Next

$29,590

$

5,030 plus

26% on

remainder

Over

$59,180

$12,724

plus

29% on

remainder

The

bumping-up

of

individuals into higher

tax

brackets

as a

result

of

"bracket creep" institutionalizes

a

hidden annual

tax

increase that

goes forward each year without parliamentary debate

or

public scrutiny.

Bracket

creep,

a

form

of

inflation

tax,

is

politically attractive

to

govern-

1

Income

Tax

Act,

R.S.C.

1985 (5th Supp.),

c. 1, s.

117.1

[ITA].