Taxable Income

• Author: Vern Krishna
• Pages: 221-238

CHAPTER

11

h

A

taxpayer pays

tax on her

taxable income. Thus, taxable income

is the

base

on

which

tax is

calculated. Canadian

residents

are

subject

to tax on

their worldwide taxable income

for the

year.1

Subject

to

treaty provi-

sions,

non-residents

are

taxable only

on

taxable income earned

in

Can-

ada

during

a

taxation

year.2

A

resident's "taxable income"

is his net

income plus

or

minus

the

adjustments

and

deductions

in

Division

C.

Thus, "taxable income"

is

the

mathematical residue

of net

income

adjusted

by

various items con-

tained

in

Division

C.

We saw in

chapter

3

that income

is the

measure

of a

taxpayer's

net

realized

gains attributable

to a

source recognized

in

law. Income, which

for

tax

purposes represents

the net

realized increment

to

wealth,

is

not,

however,

always

the

most appropriate measure

of a

taxpayer's ability

to

pay

tax

because

it

does

not

take into account personal

and

individual

circumstances.

In

this chapter

we

look

at

some

of the

adjustments that

the tax

system makes

for

individual circumstances.

We

also see, once

again,

how the

system

is

used

to

engineer behaviour

by

providing incen-

tives

for

charitable giving.

1

Income

Tax

Act, R.S.C. 1985 (5th

Supp.)

c. 1,

subs

2(1)

[ITA];

see

also

chapter

2

"Taxable Persons."

2

Ibid.,

subs. 2(3).

A

non-resident's taxable income

is

determined

by

reference

to the

rules

in

Div.

D

(ss.

115-16).

221

A.

INTRODUCTION

E

222

INCOME

TAX

LAW

Taxable income

is

generally

a

better

and

fairer

measure

of a

tax-

payer's ability

to pay

tax.

In the

case

of

individuals,

for

example,

it is

easy

to see

that taxpayers

who

have

the

same amount

of net

income

do

not

necessarily have equal amounts

of

disposable income with

which

to

pay

their tax.

For

example, consider

two

individuals, each

of

whom

earns $50,000:

an

unmarried person with

no

dependants

and a

married

person

with

a

family

of

six,

one of

whom

is

seriously

ill and

requires

expensive medication.

It is

clear that these

two

individuals have

differ-

ent

abilities

to pay

tax. Should

the

individual with substantial

financial

responsibilities

be

allowed

a

measure

of tax

relief

to

ease

the

burden

of

her

responsibilities? Should

the

amount

of

relief

be

related

to the

tax-

payer's income

or

should

it be

determined

as a

blanket amount regard-

less

of the

particular circumstances?

If

relief

is

income tested, should

it

be

tested

by

reference

to the

individual's income

or his

family

income?

How do we

determine

"family"

for the

purposes

of

income testing?

The

more controversial issue

is

whether

relief

for

persons

in

differ-

ent

financial

circumstances should

be

provided through

tax

deductions

or tax

credits.

A tax

deduction

is a

deduction

from

income

in

computing

taxable

income.

The

saving that results

from

a

deduction

is

measured

by

multiplying

the

deduction

by the

taxpayer's marginal

tax

rate.

For

example,

a

deduction

of

$1000

reduces

tax by

$450

if the

taxpayer's

marginal rate

is 45

percent,

and by

$300

if the tax

rate

is 30

percent.

Thus,

the

higher

the

marginal

tax

rate,

the

more valuable

the

deduction

to

the

taxpayer

and the

greater

the

revenue

loss

to the

public treasury.

We use

deductions

in the

measurement

of

income

to

determine

the net

increment

to

wealth.

A

tax

credit

is a

reduction

of the tax

that would otherwise

be

pay-

able.

The

savings

from

a tax

credit

are

constant, regardless

of the

tax-

payer's marginal

tax

rate.

For

example,

a tax

credit

of

$500 reduces

tax

by

that amount, whether

the

taxpayer's marginal

tax

rate

is 45

percent

or

30

percent. Hence,

tax

credits have

a

more equal distributive impact.

But

a tax

credit

is of

value only

to

those taxpayers

who

would otherwise

have

to pay

tax.

It

does

not

assist

a

taxpayer

who

does

not

have

any tax

payable.

We

tend

to use tax

credits

to

accommodate personal circum-

stances that might

affect

a

taxpayer's ability

to pay

tax.

B.

CHARITABLE

DONATIONS

ITA,

s.

110.1

The tax

system

has

financial

incentives

for

taxpayers

who

contribute

to

charitable, philanthropic,

and

other public service organizations. These