Introduction

• Author: Vern Krishna
• Pages: 1-23

CHAPTER

1

INTRODUCTION

Before

we

commence

our

study

of

Canadian income

tax

law,

it may be

helpful

to

take

a

broad overview

of the tax

system,

its

structure

and

policy

objectives.

In

this

chapter

we

commence with

a

review

of the

principles

of

tax law so we can

better understand

its

structure

and the

substantive

rules discussed

in

subsequent chapters.

We

also look

at the

division

of

taxing powers

and the

sources

of tax law and

administrative

informa-

tion. Since

the

Income

Tax Act

(ITA

or

Act)

is a

statutory instrument that

is

amended

and

litigated

frequently,

we

also examine

the

legislative,

administrative,

and

judicial processes involved

in its

development

and

administration.

A. TAX

POLICY

Tax

law is a

compromise

of

competing values.

A

"good"

tax

system should

generate

sufficient

revenues

in a

fair

and

efficient

manner that promotes

economic growth

and the

social values

of the

community.

A tax

system

is

concerned with more than

the

measurement

of

income

in an

accurate

and

fair

manner.

It

also promotes economic

and

social policies

for the

better-

ment

of

society. Thus,

a tax

system

reflects

the

values

of

society.

A

good

tax

system

should

embody

five

principles.

It

should

be

capable

of

generating

sufficient

revenues

to

finance

public sector needs,

fair

and

equitable,

neutral

and

efficient,

1

2

INCOME

TAX LAW

certain,

and

administratively simple

and

easy

to

comply with.

These

principles

often

conflict

with each other,

and a tax

system

inevitably

involves

compromise

among

these

values.

To

complicate

matters

further,

the

government also uses

the tax

system

to

achieve

other economic

and

social objectives,

often

by

creating

tax

expenditures

for

particular activities

or

groups.

A

tax

system needs

to

answer

five

basic questions:

Who is

taxable?

What

is

taxable?

At

what rate

is tax

payable?

When

is tax

payable?

What

are the

procedures

for

administrative compliance

and

judicial

review?

The

answers

to

these

five

questions

should

reflect

policy

decisions

designed

to

balance

the

competing values discussed above.

Tax

policy

is

concerned with evaluating

the

effectiveness

with

which

the

principles

are

implemented

in the

design

of the tax

structure. Figure

1.1

sets

out

the

uneasy compromise between competing values

in tax

law.

1)

Revenue Generation

It

is

trite

to say

that income taxes

are

levied

to

generate revenues.

A tax

system must raise

sufficient

revenues

to

finance

government operations.

The

amount

of

revenue raised

by a tax

system,

or

component thereof,

is

determined

by a

simple

mathematical

function:

Revenue

= Tax

base

x tax

rate

Thus, there

are

really only

two

variables that directly determine

the

amount

of

revenue raised through

a tax

system:

the tax

base

and the tax

rate.

The

interplay between these

two

variables, however, influences

the

manner

in

which

the

other non-revenue objectives

of the

system

are

achieved.

The

size

and

character

of the tax

base (what

is

taxed?)

and the

tax

rates

affect

the

fairness

of the

system,

its

economic

efficiency,

and its

certainty

and

administrative simplicity.

Revenue

can be

increased

or

decreased

by

enlarging

or

contracting

the

tax

base

or by

increasing

or

decreasing

the tax

rate.

The

smaller

the

base,

the

higher

the

rate required

to

generate

a

given amount

of

revenue. Conversely,

the

larger

the

base,

the

lower

the

rate needed

to

generate

a

predetermined

amount

of

revenue. Hence,

one

needs

to be

careful

in

international compar-

isons

and

look

at

both elements

of the

equation:

tax

base

and tax

rate.